Understanding the Role of Psychology in Financial Planning

Most people understand the importance of acquiring a high level of financial literacy in order to make good financial choices. After all, financial matters, financial challenges, and financial decisions are part of everyday life. Unfortunately being aware of the need for real financial literacy does not always motivate people to commit to the process and perspective necessary for literacy. 

There are many reasons for this dichotomy. One is simply some people are lazy. Financial literacy does not come cheap. It requires a time commitment that some people are not willing to accept. These are often the people who focus on short term immediate gratification and forego benefits from actions that have a longer term reward. Some people are skeptical of the benefits derived from financial literacy education and some are just unwilling to change the way they view the world and make choices. This perspective may come from the view that financial decisions are personal and therefore there can be little help from outsiders. Some people are just ashamed that they have made such bad financial decisions they just want to hide.

Understanding that these reasons are real for many is a starting point for acquiring literacy. Being able to make good financial decisions is too important to stop here. If young people were more literate, maybe we wouldn’t have incoming freshman bringing $1,585 of credit card debt to college or having the number of 18-24 year olds declaring bankruptcy rise by 96% in just ten years, or having only 52% of high school students realize that their bank deposits are given to other bank customers in the form of loans.

A relatively new trend in financial literacy training is to look at every student as a complex individual that brings differing learning styles, abilities, experiences, family backgrounds, and personalities to the learning process. Although there is a body of knowledge and deliberate decision making procedure necessary for good decision making, every person will acquire and use the information differently. 

This perspective and corresponding approach creates a learning philosophy with the following generalizations:

• Every person is and will continue to be different in personalities, planning, and action.
   
• Personalities influence spending levels.
   
• Birth order can affect spending. Many first born seem more concerned about amount of debt and ability to pay bills. Many middle children are less concerned about debt and paying bills on time.
   
• Short term personalities shy away from long term financial planning (like retirement) and evaluate their financial position based upon having just enough money left over at the end of the month. This is the "if I can make the payment in the best of times, it is OK to buy" philosophy.
   
• Introverts need fewer external rewards, consequently, they tend to buy less tangible items.
   
• The value of security is a learned concept. It is difficult to place a high value on financial freedom if you have never experienced or felt how good it is. If being in debt is all you know, trying to identify the benefits of being out of debt is very difficult, if not impossible.
   
• Peer pressure affects different people differently. This condition makes some people more receptive to advertising than others.
   
• Some personalities view money as a means to an end and others see it as an end in and of itself.
   
• A person's level of optimism or feeling of control will influence their financial choices.

This selected list of generalizations will help literacy seekers realize that there is a psychology of finance that helps explain not only why we do what we do, but what personality traits may need to be adjusted if we are to make a long term financial plan that will become doable.  

Most, if not all, Americans believe that the pursuit of happiness is a worthy goal. As far back as 1776 influential Americans were touting the importance of the happiness goal and ultimately in that year, the pursuit of happiness was written into the Declaration of Independence. These influential Americans were not unique in their commitment to happiness; in fact, they were influenced by people like Aristotle, Cicero, Locke, and many others.

If, as the founding fathers suggested, happiness is a strong common goal, then the questions become what is happiness and how are we doing in achieving it? In addition, for the purpose of this financial literacy website, a related question is how is a person’s financial condition connected to happiness? It turns out that research does not support the old adage that “money cannot buy happiness”. To the contrary current research (as current as April, 2013) suggests that the feeling of well-being does rise as income rises and that this connection is a global condition. Interestingly, the connection is stronger in wealthy countries as compared to poorer countries. As understanding happiness seeking may provide valuable insight into the psychology of financial choices - why we do what we do - it is an interesting and important topic for discussion and understanding for those that want to become financially literate.

    IN THE PURSUIT OF HAPPINESS