Keeping your business and personal finances in order can seem like it's all about the math--how much income comes in versus what expenses go out. But, while addition and subtraction (plus, a little multiplication, by interest rates) is certainly essential when it comes to keeping your financial house in order, it's hardly sufficient.
That's because math isn't enough. Psychology also counts.
Humans are irrational creatures in all areas of our lives and the same biases, fears, and unexamined assumptions that drive us to less-than-optimal decisions in our personal lives can wreak havoc on our budgets. What's the way to deal with these issues if they're messing with your relationships or holding you back from success? Generally, the trick is to uncover and air them--once you know what crazy things are going on in your head, you're better prepared to counteract them or channel them differently.
The same goes for your deepest held convictions about money, according to a fascinating post on personal finance blog Wise Bread. In it, Emily Guy Birken talks about her own beliefs about money, established since childhood and still affecting how she spends, saves, and invests now.
"This unconscious money belief--which financial planners and psychologists refer to as a 'money script'--informs every aspect of my dealings with money," she writes. "My money script is a relatively common one, and for the most part it serves me well. Other money scripts can not only do a whammy on your psyche, but they can also lead to self-defeating and self-destructive behaviors."
So what are these "money scripts" and how can they impact your finances? Guy Birken points the curious to the work of two financial psychology experts, Bradley Klontz and Sonya Britt, who lay out the four most common ways of viewing money.
"Money avoiders believe that money is bad or that they do not deserve money. For the money avoider, money is often seen as a force that stirs up fear, anxiety, or disgust. People with money avoider scripts may be worried about abusing credit cards or over-drafting their checking account; they may self-sabotage their financial success, may avoid spending money on even reasonable or necessary purchases," Klontz and Britt write.
Who are these folks? Money avoiders are more likely to have low incomes. Unsurprisingly, rich people tend not to think of money as bad. Younger people are also more likely to be money avoiders, but their aversion to money declines as they age.
"Individuals who subscribe to this notion believe that an increase in income and/or financial windfall would solve their problems," the experts say. This is despite the fact that, above a basic level of comfort, there is little evidence that wealth and happiness are connected. "There is no significant correlation between happiness and money once household incomes are above $75,000 per year," Klontz and Britt note, and windfalls have no lasting impact on our happiness. This money script is associated with--no shock here!--higher levels of credit card and other debt.
"This is the money belief pattern that afflicts the majority of Americans," Klontz told the New York Times.
This one is pretty much what you'd expect from the name. The money status script "can lock individuals into the competitive stance of acquiring more than those around them. Individuals who believe that money is status see a clear distinction between socio-economic classes," they write, adding that "research has shown that being overly concerned with financial success, and being materialistic has been associated with lower ratings of well-being, lower levels of self-actualization, vitality, and happiness, and higher levels of anxiety, physical symptoms, and unhappiness."
Klontz and Britt suggest that those with this script may be "at risk for disordered money behaviors such as overspending or excessive risk-taking, with the goal of rapid wealth attainment in an attempt to raise one's perceived social status."
Those with this script are secretive about their finances. Those with this approach to money are generally exceptionally watchful and worried about their finances. That's not always a good thing, the authors note: "While such an approach to money may encourage saving and frugality, excessive wariness or anxiety regarding pending financial danger keeps someone from enjoying the benefits and sense of security that money can provide."
Which Script Do You Follow?
All of which is a fascinating look at all the different ways we approach money, but why is it worth pondering which one of these scripts sounds most like you?
"Without understanding the particular scripts that inform your money choices, you will never be able to pinpoint the beliefs that are holding you back from your goals," Guy Birken points out, before suggesting you "take the time to think about your most deeply held money beliefs and figure out if they are helping or hurting your financial future." She also offers suggestions for how to cope constructively with each money script.
Which money script do you follow?