The Psychology of Loans & Money

Is it possible for money to make us happy? There are many people who have had loads of cash and yet are miserable. But anyone who has a lack of money – or suffers any difficulties with it – knows not having cash can make life feel very uncomfortable.

So, where does money sit in terms of overall happiness and can we achieve financial well-being?


Psychology and money

We’re all individuals and so we cope with our cash in very different ways. Some of us turn to loan lenders, others don’t. But, some general themes do emerge and there are certain personality types that throw up some useful insights into the ways we humans consider money.

Many of us, for instance, find delayed gratification difficult even though it can lead to better outcomes in the long run.

There was a test in the 1960s test, known as the Stanford marshmallow experiment, which gave kids a choice: eat a marshmallow immediately or wait and receive two as a reward for delaying their gratification.

What was interesting was that those children who could wait showed in follow up studies that they had better life outcomes. Whatever, waiting is difficult, not least because of the era in which we are living now is one where just about everything is instantly available. Spending hits our brains’ pleasure zones, whereas saving doesn’t.


Different financial personalities

Hoarders are savers who fear letting go of money that they have saved. He or she would probably benefit from using some of this cash for investment that could well generate more.

Social Value Spenders are those who generate warm and fuzzy feelings when they spend. The advice would be to stop spending on impulse and monitoring any debts.

Cash Splashers use their money to encourage others to think more highly of them. Cash Splashers would benefit from choosing alternative ways of achieving contentment.

Ostriches avoid bills, refuse to talk about debts and just wish it would all go away. Good advice would be to face up to the facts and get organised.


Financial well-being

Whatever financial personality type a person is there are a plethora of ways to define their financial well-being.

Some people, for example, focus on low debt and high net worth as the ideal combination of factors to achieve it.

In the US, the Consumer Financial Protection Bureau defines financial well-being as the state where “a person can fully meet current and ongoing financial obligations” as well as feeling secure in their financial future and able to make choices that enable life to be enjoyed.

Whatever subtle differences everyone has for assessing financial well-being in terms of money, savings, loans, finance, overall, it comes down to the ability to handle the money available to enjoy your life and not worrying too much about having a lack of it.

The majority of people’s financial well-being objectives come down to:

 •  Being able to tackle any life event that leads to a financial shock

 •  Controlling budgets and finances on a daily, weekly or monthly basis

 •  Possessing a degree of financial freedom to make choices

 •  Setting financial goals and moving towards them

To take steps in the direction of financial well-being:

Start saving. The average Brit struggles to save even 4.6% of their income.

Change your mindset. Start seeing saving as a gift to yourself.

Review your account to ensure you need to spend what you are spending.  More than 12% of people in the UK pay for subscriptions they don’t use, for example.

Use savings tools. Track saving and spending.

Prioritise important payments. These should leave your account when you’ve been paid.

Shop for the best deals. 

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The views expressed in this article are those of the authors and do not necessarily reflect the views or policies of The World Financial Review.