Introduction: Why Do We Often Make Mistakes in Managing Money?
Imagine you just received your year-end bonus. What is the first thing that comes to mind? Do you immediately think about saving? Or are you tempted to buy the latest gadget you’ve been eyeing? Our financial decisions are often not based on logic but rather on emotions and habits. This is what is known as the Psychology of Money.
In the financial world, having a lot of money does not automatically mean someone is better at managing it. Many wealthy individuals go bankrupt due to poor financial decisions, while some ordinary people successfully build wealth through simple yet consistent habits. This article will discuss how to apply the principles of the psychology of money in daily life so that we can be wiser in managing finances.
What Is the Psychology of Money?
The concept of The Psychology of Money was popularized by Morgan Housel in his book of the same name. The core idea is that financial success is more determined by one’s behavior and mindset rather than intelligence or technical knowledge alone. In fact, according to data from the National Endowment for Financial Education, about 70% of lottery winners end up bankrupt within a few years due to poor financial habits.
So, how can we manage money by understanding these psychological principles? Let’s break it down one by one.
1. Money Is a Long-Term Game
Many people think that wealth can be built overnight. In reality, building wealth is like planting a tree: it requires time, patience, and the right strategy. According to research from the Credit Suisse Global Wealth Report, most billionaires in the world built their wealth over decades, not instantly.
Tips for Managing Money for the Long Term:
- Focus on long-term investments, such as index funds or real estate.
- Avoid get-rich-quick schemes, such as Ponzi schemes or high-risk trading without experience.
- Develop the habit of saving and investing regularly, for example, through the dollar-cost averaging (DCA) method, which involves consistently investing a fixed amount at regular intervals to reduce price fluctuation risks.
2. Control Your Ego and Avoid a Consumerist Lifestyle
Have you ever seen someone buy a luxury car just to show off on social media, even though the monthly payments strain their finances? This is an example of how ego can be a major obstacle in financial management.
According to data from the Federal Reserve, more than 40% of Americans do not have an emergency fund because their expenses exceed their income. The main reason? A consumerist lifestyle and social pressure.
How to Avoid This?
- Create a realistic budget and stick to it.
- Avoid impulse buying, such as purchasing items just because they are on sale.
- Practice financial patience, meaning learning to delay gratification for greater financial goals.
3. Save More, Spend Less
Many people think that increasing income is the best way to get rich. However, without a saving habit, even a high income can quickly disappear. According to a Bankrate survey, nearly 60% of Americans cannot cover a $1,000 emergency expense due to a lack of savings.
Effective Saving Strategies:
- Use the "Pay Yourself First" principle – set aside savings before spending on other needs.
- Separate accounts for savings and expenses to avoid temptation.
- Use financial apps like Money Lover or Spendee to track expenses.
4. Financial Security Is More Important Than Instant Wealth
Many people focus on becoming rich without thinking about financial security. However, without an emergency fund and financial protection, a person can become poor overnight if an unexpected event occurs.
How to Build Financial Security:
- Prepare an emergency fund of at least 3-6 months of living expenses.
- Protect yourself with insurance (health, life, and vehicle insurance if necessary).
- Diversify investments to avoid relying on a single income source.
5. Money and Happiness: Don’t Get the Priorities Wrong
A study from Princeton University found that after a person’s income reaches around $75,000 per year, additional money does not significantly increase happiness. This means that having more money does not necessarily make life happier if it is not used wisely.
How to Use Money for Happiness?
- Focus on experiences rather than material things – vacations and time with family are more valuable than buying expensive goods.
- Invest in yourself – taking courses, reading books, and improving skills will provide long-term benefits.
- Use money to help others – research from Harvard Business School shows that giving to others increases happiness.
Conclusion: Money Is a Tool, Not a Goal
Managing finances using the principles of The Psychology of Money is not just about making more money but also about using it wisely. Start by understanding that money is a long-term game, controlling your ego, saving more, building financial security, and prioritizing true happiness.
No matter how much you earn right now, small and consistent steps in financial management will bring significant changes in the future. Remember, the key to financial success is not how much you make, but how well you manage it.