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What is Financial Psychology?

September 6, 2019

What is Financial Psychology?

Money is a central part of our daily lives. From paying bills to planning for the future, our financial decisions impact nearly every aspect of our well-being. Yet, for many people, money is also a significant source of stress and anxiety. This is where financial psychology comes into play.

Understanding Financial Psychology

Financial psychology is the study of how our thoughts, feelings, and behaviors influence our financial decisions. It bridges the gap between traditional financial education and the emotional and psychological aspects of money. By exploring the deeper reasons behind our financial choices, financial psychology aims to help individuals develop healthier relationships with money.

The Emotional Connection to Money

Money is more than just a tool for purchasing goods and services; it carries deep emotional significance. Our financial behaviors are often shaped by our experiences, beliefs, and emotions. For instance, someone who grew up in a household where money was a constant source of conflict might develop anxiety around financial matters as an adult. Alternatively, a person who associates money with success and self-worth might engage in risky financial behaviors to achieve their desired status.

Key Concepts in Financial Psychology

Money Scripts: These are the unconscious beliefs we have about money, often formed in childhood. Money scripts can be positive or negative and influence our financial behaviors. For example, believing that “money is the root of all evil” might lead someone to avoid accumulating wealth, while thinking “money makes everything better” could result in overspending.

Financial Behaviors: These are the actions we take related to money, such as spending, saving, investing, and borrowing. Understanding the psychological factors behind these behaviors can help individuals make more informed and beneficial financial decisions.

Financial Therapy: This is a therapeutic approach that combines financial planning with emotional support. Financial therapists help clients address the emotional and psychological aspects of their financial issues, providing strategies to improve both financial and mental well-being.

Why Financial Psychology Matters

Traditional financial advice often focuses solely on practical aspects like budgeting, investing, and saving. While these are essential components of financial health, they don’t address the emotional and psychological barriers that many people face. Financial psychology recognizes that true financial wellness requires a holistic approach.

By understanding the emotional drivers behind financial behaviors, individuals can:

  • Reduce Financial Stress: Addressing the root causes of financial anxiety can help people manage stress more effectively.
  • Improve Financial Decision-Making: With greater self-awareness, individuals can make more informed and rational financial choices.
  • Enhance Relationships: Money is a common source of conflict in relationships. Financial psychology can help improve communication and resolve financial disagreements.
  • Achieve Long-Term Financial Goals: By overcoming negative money scripts and developing healthier financial habits, individuals can work towards their financial goals with greater confidence and clarity.

How to Get Started

If you’re interested in exploring financial psychology, here are a few steps to get started:

  • Reflect on Your Money Scripts: Take some time to think about your earliest memories of money and the beliefs you hold about it. Understanding your money scripts is the first step towards changing any negative patterns.
  • Seek Financial Therapy: If you find that your financial behaviors are causing significant stress or conflict, consider working with a financial therapist. They can provide guidance and support to help you address both practical and emotional financial issues.
  • Educate Yourself: There are many resources available, including books, articles, and workshops, that can help you learn more about financial psychology and improve your financial literacy.
  • Practice Mindfulness: Being mindful of your financial decisions and the emotions they evoke can help you make more intentional and balanced choices.

Financial psychology offers a comprehensive approach to understanding and improving our relationship with money. By recognizing the emotional and psychological factors at play, we can take control of our financial lives in a way that promotes both financial stability and emotional well-being. Whether you’re struggling with financial stress or simply looking to improve your financial health, exploring financial psychology can be a valuable and transformative journey.

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Explore the Introduction to Financial Psychology blog series

Blog 1 – What is Financial Psychology

Blog 2 – Why the World is Turning to Financial Therapy for Help.

Blog 3 –  How Financial Therapy can Help you.

Filed Under: Financial Therapy, financial wellness, resources

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DR. ALEX MELKUMIAN, PSYD, LMFT

Dr. Alex Melkumian

Dr. Melkumian is a licensed Marriage and Family Therapist and founder of the Financial Psychology Center in Los Angeles. As a pioneering financial psychologist, he helps clients improve both their financial and mental health by uncovering the emotions, beliefs, and behaviors that shape their relationship with money. Dr. Alex is a sought-after media expert and has been featured in Forbes, CNBC, and the Wall Street Journal.

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  • Navigating Financial Independence with a Balanced Earning Mindset
  • What to know about ‘money dysmorphia’
  • The Psychological Trick Scammers Rely on and How to Protect Yourself
  • My Parents Have a Lot of Stuff in Their House. I Don’t Want Most of It.
  • Your unconscious beliefs about money have a significant impact on your behaviors.
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