What is your Financial Personality?
The way you view money and how you manage your finances is a function of both your personal experiences and what you have learned about finance throughout your life. If we were to give weight to both categories, your experience before the age of 20 most likely plays the largest role in dictating your habits.
Take a moment to reflect on your personal finance habits this year. What did you frequently spend money on? How much were you able to save?
When it comes to financial habits, most people fall into one of the three categories below. Which one do you identify most with?
- The Personality Profile: If you are a Spender, you tend to live in the moment and adhere to the philosophy that you don’t know what tomorrow holds, so immediate gratification tends to win the internal struggle. Savers and Wanderers appreciate how you live in the moment but the probability of you living from one financial hardship to the next is extremely high. There are studies that show how spending improves mood and can be addictive. There are chemicals in our body that can turn a low-end spender into an aggressive spender before you even know what happened.
- The Real-World Impact: As a Spender, you may not fully understand the full cost of your purchases today. For example, if you spend $500 per month on new clothes that would add up to $6,000 per year. If you invested $6,000 per year for 10 years and earned 8% on that money, you would have saved approx.. $94,000. The real question is, were the clothes you purchased worth $94,000?
- A Tip for Improving: How do you give yourself the time to crunch the numbers? Implement the 5-day rule. When you want to make a purchase, wait 5 days. This gives you a chance to evaluate the purchase and determine if it is worth it. Chances are you will pass on some purchases because they are not worth the cost, you will forget about others and move onto another purchase, or you will move forward with the purchase with more confidence.
- The Personality Profile: If you are a Saver, you focus more on long term benefits and will most likely pass on short term gratification more often than not. You may have this tendency based on a passion for a long-term financial goal or due to fear of not having money. The Spender and Wanderer (who is described next) appreciate your ability to sacrifice and the fact that you don’t seem stressed about money as often as them.
- The Real-World Impact: Most regrets that people share later in life are related to spending more time with family, taking more risk, and living in the moment not wishing they had died with more money in the bank. I fall into this group and I tend to miss out on great memories because I am too focused on the long-term goal. Join me in working towards enjoying the moment more often and not burying your money in the yard for a rainy day.
- A Tip for Improving: Try to budget for fun. I know that sounds silly but I don’t want you to abandon the discipline that is serving you well. Just set aside funds periodically that are meant to be spent in the near future. If balanced well, your future self will have a comfortable retirement while also having great stories to tell around the fire.
- The Personality Profile: Most people have heard of Savers and Spenders but who are the Wanderers? I will argue that this is the largest group of the three. As a Wanderer, you may flow in and out of Saving, Spending, and not thinking about it.
- The Real-World Impact: Some days you get bursts of motivation to start saving which results in the build-up of your savings accounts and emergency funds. Other days you have periods of falling into spending habits that you later regret and overall do not have the financial energy to get your financial house in order. This may result in diminishing the savings accounts you’ve previously contributed to.
- A Tip for Improving: As a Wanderer, you need to have a plan that automates as much of the process as possible. If you wait for a perfect time to start saving, focusing on paying off debt and living off a budget, you will be waiting forever. If you set up automatic contributions to savings, retirement, and debt it will leave you the funds that are available to spend. Take as much work off your plate as possible. Wanderers can also greatly benefit from some form of accountability. A friend, financial advisor, or spouse can help keep the plan on track.
It is your responsibility to own your personal habits and identify your strengths and weaknesses. Each financial personality has its pros and cons. The goal is not to rewire your mind overnight but to gain increased awareness of how your financial personality will help or hurt your Future Self.
Rome was not built in a day. Start making daily adjustments that will help you avoid future financial regrets. As a bonus, you will reduce your stress today and have extra money to make memories!
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