How each person’s mind works is unique, from our genetic disposition to our environmental influences. And that includes the way we think about money. So the psychology of money can help us understand the emotions and thinking patterns that drive how we behave regarding finances. And self-awareness is ultimately a tool for creating healthier financial habits.  

What is the Psychology of Money?  

You’re standing in the checkout line at the market. Bread, coffee, dog food, candy bar—wait a second. That wasn’t on the list. Oh, and the chips? Those weren’t on the list either. 

Doesn’t sound like a big deal, right? It’s just a few extra dollars for a snack?  

Without giving it much thought, you’re suddenly sinking your teeth into a last-minute bite of chocolatey goodness or enjoying the satisfying crunch of potato chips on the ride home from the grocery store. Maybe you’re sipping an ice-cold soda or chewing a refreshing piece of minty gum. 

According to a recent SlickDeals survey, if you’re like 72% of Americans, then you don’t mind paying an extra $5 or $10 for the irresistible satisfaction of impulsive purchases at the grocery store.  

But what if those last-minute purchases added up to more than $5,400 a year?  Logic tells us this is an outrageous number.  

But the truth is that you, and everyone else who participates in the global economy, don’t use logic when making purchases. In reality, we are driven by a complex set of emotions and mental shortcuts that psychology has only begun to unravel.  

Studying these behaviors, that is, how people behave with their money, is called the psychology of money. Managing money is not just about our IQ or GPA.  

Instead, it’s about understanding the thinking patterns that drive us to spend and save. Once we recognize why we spend and gain foundational knowledge of how money works, we can change our future and help us reach our financial goals. 

You Are Not Rational (But You Can Learn to Be)  

When it comes to money, we like to think of ourselves as rational beings. But the truth is that our emotions are a contributing factor in our ability to make sound financial decisions. 

The illusion of rational choice 

The next time you’re about to make a financial decision, big or small, take a step back and examine your motives.  

Are you driven by logic or emotion? By long-term gain or short-term gratification? By a need for security or a desire for adventure? These questions will help you start building self-awareness of your financial tendencies.  

This brings us to a long-held belief about economic behavior that may require a second look — rational choice theory.  

Rational choice theory is the belief that humans are rational beings who make decisions based on logic and reason. This idea stems from the mind of Adam Smith, a Scottish philosopher commonly referred to as the “father of modern economics,” and assumes that people will always make economic decisions that maximize gains and minimize losses. 

While there’s plenty of empirical evidence to support many aspects of this theory, especially concerning businesses and organizations, it fails to consider one essential part of human nature—irrational individual impulse.  

Did Adam Smith ever have to resist the temptation to buy a refreshingly cool soda on a hot day as he cashed out at the grocery store? Would he have demonstrated rational decision-making when a coupon for 50% off all home goods for his favorite online retailer landed in his inbox on Black Friday?  

Considering he died in 1790, we may never know for sure.  

But you can be sure of one thing: in behavioral economics, people don’t always follow strict philosophical rules. As a result, most people tend to make irrational economic decisions to the tune of $324,000 throughout their lifetime.  

What really drives financial behaviors?  

So if we aren’t driven by rational decision-making, what drives us to spend or save when it comes to personal finances? In the psychology of money, three primary motivators drive financial behaviors: mindset, biases, and emotions. 

Financial Mindset 

Financial mindset is our overall attitude and beliefs about money. It’s the lens through which we view the world of finance. Mindsets are shaped by our experiences, family, culture, and society. 

Financial Biases 

Financial biases are the judgments we make about investments or purchases without knowing the facts. They can lead to assumptions that may not be accurate, and whether we realize it or not, those biases impact financial decision-making daily. 

Personal Emotions 

Emotions are also powerful drivers of financial behaviors. Sensations like fear, joy, or sadness caused by bursts of neurotransmitters like dopamine can lead us to make decisions that we wouldn’t otherwise make. As a result, they can significantly impact our financial wellness if they’re allowed to rule our spending habits. 

When we understand what drives us to spend, invest, or save, we can make better financial decisions aligned with our goals and values.  

Knowledge is power with personal finances, so here’s a breakdown of everything you need to know to better manage your finances. 

Understanding Your Financial Mindset 

Everyone has a unique relationship with money and finances. How you perceive financial resources is primarily developed by your lifetime experiences, identity, and social environment. 

For example, during the height of the COVID-19 pandemic, single moms, in particular, struggled to keep themselves and their families afloat. As the primary caretakers, and in many cases, the primary breadwinners, the layoffs and disruptions caused by shutdowns forced single moms and female heads of households to switch into full survival mode overnight. 

Women already had to contend with limited opportunities and unequal pay for high-paying positions compared to their male counterparts. But the added stress of income uncertainties and grueling hours of homeschooling pushed many to their breaking point. 

These kinds of unique identity factors and experiences lead to what financial psychologists call a scarcity mindset. 

What is a scarcity mindset?  

The concept of a scarcity mindset—the belief that money is limited rather than flowing— was officially coined in Stephen Covey’s bestseller The 7 Habits of Highly Effective People.  

Covey explains that when someone perceives wealth, time, and opportunity as limited resources, they adopt a scarcity mindset. This thinking can lead to negative emotions and behaviors, such as anxiety, fear, greed, and hoarding.  

Moreover, the negative associations with money that come with a scarcity mindset are often self-perpetuating. For example, if you believe you’ll never have enough money, you’re less likely to make small changes.  

A scarcity mindset may cause you to write off the importance of making minor cuts to your budget, such as canceling subscriptions or learning to save money as a couple. However, the cumulative effect of cutting back on discretionary spending can add up—reducing your spending by just $50 a month ends up leaving you $600 wealthier by the time the holiday season rolls around. 

Beliefs of a scarcity mindset  

  • The poverty mindset: You believe there is not enough money to go around, so you must hoard what you have. 
  • The financial scarcity mindset: You believe you will never have enough money, no matter how much you earn. 
  • The time scarcity mindset: You believe there are not enough hours in the day, so you must make the most of every minute. 
  • The opportunity scarcity mindset: You believe that there are limited opportunities for success, so you must seize every opportunity that comes your way. 

If you think you have a scarcity mindset, don’t worry—a scarcity mindset is not an inherent trait. Rather, it is a learned behavior. And like any other behavior, you can change it.  

Financial education is one way to change the way you think about money. If you understand how money works and how to make it work for you, you can begin to shift your thinking to adopt a healthier financial mindset.  

What is an abundance mindset?  

​​An abundance mindset is a belief that money and opportunities are always available. When you have an abundance mindset, you realize that there is always more money to be made and more opportunities to seize.  

Therefore, you don’t let your current situation limit your ability to improve your financial situation. Instead, you focus on what you can do to make more money and take advantage of opportunities that come your way. 

This abundance mindset is essential for developing better financial habits because it helps you stay motivated and focused on your goals. When you believe there will always be opportunities for more money, you are more likely to take the necessary steps to make more money.  

You are also more likely to be open to new opportunities and willing to take risks that could lead to greater rewards. 

While having an abundance mindset doesn’t mean risking more than you can afford to lose, it does mean accepting that some loss is possible in exchange for the chance to make significant gains on an investment. 

To develop better financial habits, start by cultivating an abundance mindset. Once you internalize an abundance mindset, you’ll be well on your way to developing habits to achieve your financial goals.  

Understanding Your Cognitive Biases 

Along with your attitudes toward earning, it’s helpful to understand your tendencies toward spending. Since the 1950s, scientists, economists, and marketers have devoted themselves to understanding your purchasing decisions. They found that subconscious beliefs and cognitive biases drive many financial decisions. 

What is cognitive bias? 

A cognitive bias is a misjudgment due to an error in your thinking. Unfortunately, cognitive biases often dictate your spending habits, and marketers use them to get you to spend money. However, even a basic understanding of consumer psychology can help you become a more rational consumer.  

Behavioral biases that affect purchasing behaviors  

Understanding these cognitive biases is critical to understanding the psychology of money. Between clever marketing schemes and human judgment errors, falling prey to your cognitive biases can cost you a lot of money. So let’s look at some of the biases that affect your behavior as a consumer.  

Present Bias 

Present bias refers to the tendency to settle for smaller short-term gains rather than more considerable long-term gains. For example, although buying certain household products in bulk might be more economical, present bias may induce a preference for more minor purchases for a faster payoff.  

The Decoy Effect 

Have you ever wondered why so many offers exist as packages of small, medium, and large? And the medium option usually seems to be the worst value for your money. This marketing trick is called the decoy effect, and it’s one of the oldest marketing tricks in the book.  

When two offers are available, the offers will evenly split consumers’ choices. But when a third option makes the more expensive choice seem like a better deal, consumers overwhelmingly go for the most costly option.  

You can avoid the decoy effect by reframing your spending choices in advance. For example, the next time you’re at the movies, set a budget for popcorn ahead of time. That way, you’re less likely to spend extra money on the large tub of popcorn just because it feels like you’re getting a better deal.  

Loss Aversion 

The poet Alfred Lord Tennyson famously wrote, “better to have loved and lost than never to have loved at all.” As it turns out, that’s not true—people don’t like losing things. Loss aversion is why you feel the adverse effects of losing money much more strongly than the positive effects of gaining it.  

So next time you’re offered a free trial to a subscription service, take a day or two to decide if the subscription is worth it. Not only is it easy to forget to cancel before the trial period is over, but you might also be less willing to cancel it once you’ve used the service.  


Research has shown time and time again that we think we’re better at things than we actually are. This is especially true in the case of investing. Overconfidence can affect your purchasing decisions even if you’re not playing the stock market.  

For example, you may be overconfident in your willingness to wake up early and go to the gym daily. Unfortunately, your overconfidence could ultimately lead to you wasting money on a gym membership that you don’t use enough to justify the expense. 

Scarcity Heuristic 

In the late 1990s, a bizarre craze swept the nation–Beanie Babies. Ty, the toy manufacturer behind the stuffed animals, designed thousands of different Beanie Babies but only produced a limited number of each. Because of this scarcity, the Beanie Baby trade boomed–for a while.  

Soon, however, the Beanie Baby fad ended, and those who had paid exorbitant amounts of money for “rare” Beanie Babies were left high and dry when the market crashed. The takeaway from the Beanie Baby Bubble is this—we’re more likely to buy things when we perceive them as scarce. 

Sunk Cost Fallacy 

The sunk cost fallacy refers to our tendency to continue investing in things we’ve already invested in, even if the costs don’t outweigh the benefits. So, for example, if you’ve invested lots of time and money into fixing up an old car, it’s likely that you’ll continue—even if it would be more rational to ditch the project and buy a new car.  

These biases and mental shortcuts collectively influence everything, from how we spend our money to the stocks we buy and sell. But arming yourself with knowledge of these biases sets you up to overcome them.  

Emotions That Drive Purchasing Behaviors 

Emotions are a huge driver of our purchasing behaviors. Studies have shown that 95% of our purchasing decisions occur subconsciously. We may think we make informed, rational decisions – such as comparing brands – but most of those decisions are unconscious.  

Financial Stress 

Financial stress can drastically affect our behavior patterns when spending, saving money, and investing. Stress may spur you to save your money to execute some control over the situation. Conversely, stress may cause you to increase your spending—especially on things that you consider necessities.  

Worrying about money doesn’t make you richer. And in fact, the rich worry about money too, but their fears are different from the rest of us. Research has repeatedly shown that money only buys happiness up to a certain point. But once your needs are met, a higher income leads to a classic case of diminishing returns. Learning to manage your money with wisdom can help alleviate this stress and help you look forward to expensive life events like marriage, higher education, or purchasing a home.  


The effect of financial success on self-esteem is nuanced—especially in societies that place a high degree of social value on a person’s economic success.  

One study found that those who base their self-worth on their financial status are more likely to compare their financial success to others. However, the same study found that people whose self-worth is contingent on financial status experienced more financial hardship than others—and more anxiety.  

Research has also shown that compulsive spenders typically have lower self-esteem than those with more stable spending habits and that compulsive spenders “have beliefs about money which reflect its symbolic ability to enhance self-esteem.”  


Rich or poor, it’s common to feel shame about your financial status. Those who have achieved great wealth often feel shame about their fortunes. But conversely, shame also is a common sentiment among the less fortunate, who may think that their financial insecurity reflects their worth as human beings.  

The Neuropsychology of Money  

The psychology of money is even more complex than we thought. Neuropsychology is the branch of psychology that studies the interplay between your brain and your behavior. And it turns out your money decisions are as much a function of your brain’s inner workings as your conscious choices.  

The Rational and Irrational Brain 

Neuroscientists have observed that the areas of your brain responsible for making rational decisions sometimes make irrational decisions. This can manifest itself in many ways, from changing brand preferences to inconsistent spending discipline.  

One neuroimaging study revealed that the area of your brain responsible for determining social value also processes information about money. This helps explain why so many financial choices are intertwined with ideas about social status. 

The Science Behind Addictive Spending 

You’ve probably heard people joke about “retail therapy,” but the idea has its roots in neuroscience. If you’ve ever felt like your spending habits are out of control, you’re probably right. 

Your Brain on Retail 

Shopping can be addictive. It’s a highly stimulating experience that causes your brain’s circuitry to release pleasure hormones and light up your limbic system. The limbic system controls emotions and behavior associated with survival, so shopping isn’t just fun—it’s primal. And while it may feel like a little extra spending is a necessary part of cultivating joy and self-care, remember that it’s possible to have too much of a good thing.  

Online Shopping and Your Limbic System 

Online shopping can be particularly problematic. Not only do eCommerce retailers make it super easy to shop and pay, but the extended period of anticipation between placing your order and receiving it also makes it a gratifying experience.  

While you might think that the dopamine rush arrives when you’re finally wearing your new roller skates, it turns out that your limbic system goes wild in anticipation of the reward. That’s right—your brain’s reward center lights up like a Christmas tree from the time you place your order to the time it arrives on your doorstep.  

Moreover, online shopping makes impulse buying more effortless than ever before. Between near-constant online advertising and the crafty tactics that online retailers use to get you to spend more money, impulse buying has far surpassed the scope of a candy bar bought at the grocery store checkout line.  

Cash or Card?  

Whether you use your credit card to buy a pack of gum or a new iPhone, the act of swiping at the register is the same. But when you use cash, your brain processes the physical loss of the money as pain. As a result, using cash for discretionary purchases can help cut your spending by as much as 28%.  

The Psychology of Saving 

Saving money, unfortunately, isn’t nearly as exciting as spending. But understanding what drives us to save money rather than spend it is critical to understanding the psychology of money and how you can adopt healthier financial habits. 

Leveraging Incentives 

You don’t reap the rewards of saving your money until much later, meaning that your limbic system isn’t ignited in quite the same way as spending.  

And while the incentives to spend money are strong and more visible—especially in consumeristic cultures—the incentive to save is usually a lot vaguer. You might know you need to save money, but it’s harder to save when the “reward” for saving is unclear.  

So defining your goal in more precise terms is a great way to visualize your reward and incentivize yourself to save. For example, one study found that identifying just one specific goal, such as buying a new car, was associated with a whopping 127% increase in savings.  

How Self-Control Helps You Save More 

Those who can exercise delayed gratification are more likely to achieve financial success—and they’re also more likely to save.  

But you’re not doomed to poverty just because you don’t have good self-control. As with anything else, the more you practice self-control, the better you become at it.  

Try keeping track of the moments you exercise financial discipline in a journal. Then, note how much money you saved by not following your impulse. You’ll be shocked by how much money you’re saving, and your discipline will undoubtedly carry over into other areas of your life.    

How Optimism Affects Savings 

Optimism is another factor that affects your money-saving habits. One study found that optimistic people are more likely to save money than pessimistic people. They’re also more likely to invest and generally have better financial habits.  

Adopting an optimistic attitude toward your financial future can help you plan and save even if you’re not optimistic by nature. It’s easier said than done, but adopting an abundance mindset can help you re-frame your relationship with money and help you visualize—and save for—a prosperous future.  

Need more support? Julep pairs psychology with financial management techniques to help you change your money mindset.

Post Disclaimer

Julep is not a financial institution, financial advisor, or credit repair company, and does not provide credit repair services of any kind. The information provided is for general educational and reference purposes only. The information is not intended to provide legal, tax, or financial advice. We do not propose any guarantee that the information provided will repair or improve your financial profile. Consult the services of a competent licensed professional when You need financial assistance.

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