Financial Situation Affect Mindsets and Vice Versa

Finance is the management of large amounts of money, whether by governments, large companies, or personal money. The state of (corporate or personal) finances is referred to as financial condition. Financial conditions are so crucial in our lives that different financial conditions may determine how we live, especially how much we spend. Without any financial sense, our finances would crumble and eventually make us homeless, or even starve us to death if we were unable to feed ourselves in the worst-case scenario. Financial situations affect mindsets, and the opposite applies.

 

How does your mindset affect your financial condition? The truth is that proper money management is less about intelligence and more about behavior.And behavior is difficult to teach, even to very intelligent people. A genius who loses control of their emotions has a huge chance of experiencing financial disaster. Conversely, an average person without any formal financial education can be rich if they have some skills related to behaviors that aren't related to formal intelligence measures. Why does this happen? We were taught that money, investments, and other financial decisions are all about math, with data or formulas telling us what we should do. However, people don't make financial decisions with Microsoft Excel in real life. Their own experiences, egos, ideas, etc. affect their financial decisions way more than rational calculations. So, financial decisions are actually a lot more psychological than mathematical, and that is why your mindset affects your financial condition.

So, how do different financial conditions affect mindsets? Let's compare the poor and the rich. For the poor in America, for example, they live paycheck to paycheck, which is actually enough to feed them. They usually have some spare money to save or invest. Yet instead of doing any of them, they choose to spend them all on some lottery tickets that have a 1 in 13,983,816 chance of winning. This is an absolutely horrible decision, but they do have a reason for it. which is why we cannot completely despise their mindset because we haven’t been in their position yet. If we look at it from their point of view, a bigger salary prospect is out of reach for them. They can’t go on a vacation, can’t buy a new car, and can’t register for insurance, let alone buy a house. They can’t pay for their children’s college fees without taking out student loans. They also don't have the finance education books that we can read. Buying lottery tickets is the only time in their lives when they can hold on to the dream that feels real and get valuable stuff that we commonly have. They paid for the dream, and we couldn’t understand it because we had lived inside that dream. That’s why they buy lottery tickets. Even though it is still a bad idea, we can kind of understand why they do that. They seem to let their financial condition control their mindset, yet since we have never been in their position, we simply think that they’re stupid because we can’t truly understand them without being in their position.

 

Now let’s look at the rich. They live a life full of wealth. Any economic crisis in this world usually wouldn’t affect how they live at all. Their children wouldn't even know a crisis was happening until their parents told them, since it makes no difference in their lifestyles. They have so much money, and that’s why they could invest a few hundred dollars without ever being afraid of losing it because they’re millionaires. Now, a rich person must be good at managing money. They don’t just earn their wealth without actually starting as an average person. Their excellent financial decisions made their wealth possible. They made it so their mindset controls their financial conditions, not the other way around. That is why the best way we can be like them is to fix our mindset first. How do we make the most efficient use of our money? We probably can’t. Money is an abstract and complicated subject, made all the more so by a ton of confusing financial products like mortgages, credit cards, student loans, insurances, etc. It doesn’t matter how good we are; we can’t make the best decision all of the time. It would be fine to think a lot about money if doing so allowed us to make wiser decisions. That's not the case, though. The fact is, people tend to make poor financial decisions. We are remarkably skilled at jeopardizing our financial situation, but here is what we can do. Exercising self-control is one of the keys to managing our finances, but it is easier said than done. The goal of "responsibly" handling our own finances is to prepare our future selves. Alternatively, you may try self-rewarding. Consider the tiny reward you may have right away if you accomplish the necessary tasks instead of forcing yourself to constantly worry about your future self. For you, an example of this may be treating yourself to a movie when you pay off a portion of your credit card debt.

 

In school, we were taught that managing money is about math, but in real life, financial decisions are actually more about psychology and less about rational calculations. That’s what makes it more abstract than it should’ve been, which is why mindset and financial condition correlate with each other more than math. We need common sense more than anything to make the best financial decision.

References:

Morgan Housel (2020) - The Psychology of Money

Alicia Adamczyk (2018) - How Your Psychology Affects Your Finances

 https://lifehacker.com/how-your-psychology-affects-your-finances-1821986465