Opinion: Money Psychology - Startup Terminal

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Friday, July 26, 2019

Opinion: Money Psychology

Author: Shruti Agrawal, Director & Co-Founder, CAGRfunds

Shruti Agrawal, Director & Co-Founder, CAGRfunds

In contradiction to the concept of a "rational consumer" as per Adam Smith, nobody is entirely rational around money today. Tracking our expenses seems like a tedious job and we obviously have better things to do. Our investment choices are no different than betting on the losing horse. We spend exorbitant amounts out of recklessness or too little out of guilt. Our relationship with money is often that of shame. 

Everything we do with our money is a close representation of our behavior. 

Money psychology is how your beliefs, feelings, and expectations about money influence your financial behaviour and success or disappointment. Your money personality is a complex mix of a plethora of experiences including varied bits and pieces from your childhood. It takes a lifetime to evolve. 

But not only the size of your paycheck holds importance but how you spend it does too. Assessing why you make the decisions that you do is the first step towards a frugal lifestyle.

We have listed three main categories of money personalities. Which one do you identify with the most? Let's find out!

Anita- The Tomorrow Girl. 

Financial planning is the one arena in Anita's life that she finds hard to tackle and daunting. She usually succumbs to putting it off. But the tricky thing is that in the very short run, avoidance works to reduce anxiety for her. As soon as she thinks about sitting down and taking a hard look at her financial situation, just thinking about it makes her anxiety level rise. That anxiety leads to avoidance. She postpones the task and distracts herself. At that moment, her anxiety level immediately drops, giving her positive reinforcement for the avoidance and she becomes inclined to do it more often and she repeats this cycle over and over. 

But on some inevitable day, she will have to face her financial dilemma. The anxiety she will face then will be far more than compared to what she would have to face if she had been regular with charting out a financial plan for herself. 

If you are anything like Anita, don't worry as you are not alone in feeling overwhelmed and helpless around your finances. 

This is what you should do: 

1) When it comes to making financial decisions, it seems many need to feel the sense of urgency only a deadline can provide in order to take action and get started.

2) After taking the first step procrastinators realized it‘s not as hard as it seemed. The first step can be something as easy as setting a simple financial goal. We believe making and meeting financial goals shouldn’t require exhaustive prep time. 

3) Begin by writing down small, achievable financial goals. Achieving small wins can be a huge motivator toward bigger, longer-term goals, like saving and investing for retirement. 

Rahul- the EMI guy

The latest iPhone? Check! EMIs made it possible. A brand-new car? Check! EMIs made it possible. But even the High definition speakers are on an EMI!? 

This reminds me of the famous movie line, “Rahul. EMI to Liya Hi Hoga!"

Rahul puts his money into things that make a statement, often leaving him savings-less. He doesn't fear debt and isn't wary of taking big risks when investing.  He finds solace in exuberant spending after a day's hard work. 

But as Warren Buffet puts it, "If you buy things you do not need, soon you will have to sell things you need.”

If you Can relate to Rahul, here are some tips for you. 

1) Limit your spending what you'll actually use by asking yourself how much value would each purchase hold after a year. If the answer is not much, skip buying it. 

2) Avoid buying things on EMIs. Moreover, buy only things you can afford. Making a statement is not as necessary as a secure future. 

3) Look for investments with a slow and steady return instead of counting on quick wins.

Rhunjhun- Miss Save-it-all

Rhunjhun loves saving money and enjoys finding a great deal. Bargains rock her world. Socking away enough nuts to last through winter comes as naturally to her as any other hobby. She's always taking steps to prepare for those unexpected costs. She turns off the lights when leaving the room, closes the refrigerator door quickly to keep in the cold, shops only when necessary and rarely makes purchases with credit cards. 

But she is not a saver, she is a hoarder. Yes, you can save too much money. There’s a difference. 

Rhunjhun considers holding cash the best long-term investment option there is. Even a slight dip in the market scares her and abhors risk. She would prefer to keep enough in hand to cover all possible future emergencies which sum up to all of her savings.

Do you find Rhunjhun relatable? Then let us help you take your mind off the 'rainy day' for a little while. 

Here's what you should do:

1) Ben Franklin once recommended "moderation in all things." We find this advice particularly important for Rhunjhun's kind. Don't just walk past all the fun parts of life to save a few pennies. 

2) Everyone needs an emergency fund, but cash is not a suitable long-term investment. We are aware of your abhorrence of risk but still, the best option is to invest in suitable long-term options.

If you still feel uncomfortable about loosening the purse strings,

1.     Talk to us. We will prove to be your best friends by the end of this journey. Find us here
2.     Take help from a friend or a loved one. 

Why stress about the future if your present is passing you by. 

If you can relate to any of the people above, there is nothing to worry about. It’s only normal to have similar money habits. But instead of sticking to one attitude, you should try to be flexible with how you manage your money depending on the situations. Such a practice will give you the best results.

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