What Is Wealth Psychology?

Have you ever wondered how some traders bounce back quickly after financial setbacks, whilst others spiral into self-doubt and impulsive decisions? The answer lies in wealth psychology. Mindset is the key in financial trading, with your habits either supporting your growth or sabotaging your success. So, what is wealth psychology and why is it important?

Wealth psychology looks deeper into the emotions and thought processes that are involved in your financial decision-making. Your beliefs, attitude, and habits when it comes to money can impact not only your choices, but also your feelings when faced with a financial setback. A number of psychological factors can influence your experience with money, so it’s important to understand them and make changes if necessary.

In this blog, we’ll run through exactly what we mean by ‘wealth psychology’ and why it’s such an important step in your trading journey. 

 

Understanding the Concept of Wealth Psychology

The term ‘wealth psychology’ refers to how you think, feel, and behave when it comes to making financial decisions. It also explores the effect of wealth on you as an individual, all with the aim of identifying positive strategies and behaviours to improve your journey of building wealth. 

How Does Wealth Psychology Apply To Financial Trading?

Wealth psychology is an important topic to consider, no matter where you are in your trading career. Your thoughts and behaviours impact your financial decision-making, your performance, and ultimately your success.

In order to help you make trading decisions that are objective and consistent, wealth psychology places importance on:

• Self-awareness: Recognise your own biases, triggers, and behavioural patterns. Without this, it’s easy to fall into emotion-led mistakes.
• Emotional Regulation: Trading markets are volatile, and if you can’t manage your fear, greed, anxiety, or excitement, you’ll choose emotional decisions over strategy.
• Risk Management: Not every strategy works 100% of the time. Effective risk management makes sure that you don’t lose all your money, or confidence, to one bad trade.
• Discipline: Trading success will often come from consistency, not multiple high-risk decisions. Stick to your plan, follow the rules you’ve set for yourself, and avoid those impulsive decisions.
• Resilience: Losses are inevitable in trading. If you can recover from setbacks without losing your confidence, you can refine your strategy and use these losses as feedback.

Why Is The Psychology of Wealth Important?

Ultimately, wealth psychology is important because your mindset is much more influential on your financial outcomes than any investment strategy.

It’ll help you to master your mindset and navigate any issues you come across by:

• Making you aware of any hidden beliefs you hold about money.
• Helping you break any self-sabotaging patterns.
• Building your emotional resilience.
• Supporting your long-term success.
• Aligning your financial goals with personal values.
• Complementing your technical skills.

 

How Does Your Childhood Shape Your Financial Beliefs?

A 2013 study from the University of Cambridge shows that our lifetime money habits are set in place by the age of seven, with those around us having a large influence on our wealth psychology and behaviours. Below, we’ll run through just some of the ways your childhood may have shaped the way you think about money in your adult life.

Spending Habits 

There are two ways you might behave towards your money if you grew up in a household where money was tight. You may be extremely frugal and avoid spending at any cost. 

Alternatively, you could begin to overcompensate when you’re an adult with your own income. Some people might want to ‘escape’ the limitations they had in childhood and begin to spend freely. 

Savings

If your family has always prioritised saving and setting yourself up for the future, it’s likely that their children will focus on building their savings. This could be in a pension, emergency fund, or using their spare cash to start investing. 

If your family was living paycheque to paycheque and money had to be spent immediately to survive, you might struggle to develop the desire to save and build those habits.

Risk Aversion

This aspect of the psychology of wealth is particularly relevant to those who are thinking about financial trading. Those who have witnessed financial loss during childhood, or were taught to avoid investing, may shy away from any financial opportunity that comes with risk.

It’s important to feel comfortable in your ability to take risks when it comes to investing, and this is much more likely to happen if your household openly discusses investments as you were growing up.

Thoughts And Mindset

It’s common for those who grow up in a household with little money and lots of financial stress to develop what’s called a ‘scarcity mindset’. This is a pattern of thinking that focuses on what you don’t have and involves an underlying belief that you will never have the things you want. This mindset can take hold even when you have enough money for basic needs, like food, water, and housing. 

The ‘scarcity mindset’ is especially prevalent in a time so influenced by social media, where wealth and materialism are constantly highlighted. This feeling, alongside anxiety about your finances and worry about not having enough, are often influenced by the environment you grew up in.

On the other hand, if your home environment was stable and without financial stress when you were growing up, you’re likely to have a healthier relationship with money and a more abundant mindset.

What Are The Common Psychological Barriers To Building Wealth?

We’ve discussed the overall mindsets that can be either a barrier or asset to your journey of building wealth, but there are also a number of other psychological factors that can stop you in your tracks. You might not even realise you have these thoughts, but they’re important to identify and overcome if you’d like to move towards financial freedom.

The Need For Instant Gratification

The majority of people will relate to the need for instant gratification. It’s the small voice in the back of your mind telling you to buy a new car or go on a luxury holiday, simply because it will feel good right now. 

However, this desire will often work against your best interest, encouraging overspending and taking your mind away from the bigger financial picture. If you take part in financial trading, this might also cause you to take a more high-risk, short-term strategy, rather than trusted long-term techniques.

You can try to reprogramme this desire for instant gratification by setting long-term financial goals, whether it’s a pension, house deposit, or saving for that new car and avoiding getting into debt. Create yourself a plan, and stick to it.

The Fear Of Loss

We work hard for our money, and it’s common for us to constantly protect it, rather than attempt to make more. This thought process often occurs even if the chances of success outweigh those of failure. Taking calculated risks is almost always necessary to build wealth, but this fear often stops people from doing so.

Start with gaining a better understanding of the risks involved with different types of investments, and then begin investing small amounts with manageable risk.

The Fear Of Failure

Not every trading risk you take is going to pay off. This fear is what paralyses so many people into making possibly the worst financial decision – doing absolutely nothing to build wealth.

Once you’ve told yourself that growth is something you want, try starting with small amounts to boost your confidence with both losses and wins. If you want to avoid making mistakes early on, why not get some advice from the experts at STARTrading?

 

How Can Emotions Influence Spending And Saving Habits?

Our financial behaviours can often be attributed to emotional triggers, like stress, anxiety, or even happiness. Whether it’s about spending or saving, our feelings have a huge impact on how we approach our money, in more ways than you might think. 

 

Spending

• Impulsive Spending: We may turn to spending as a distraction when we feel stressed, anxious or bored. Some even believe it improves their mood, but it’s important to keep an eye on your impulsive buying. In these scenarios, we often buy things we don’t need, sometimes even going into debt for them.

• Reward/Celebration: There’s nothing wrong with rewarding yourself for an achievement or celebrating a milestone. Be sure to think it through to check if it’s something you actually need/want, or is just an emotion-based purchase. 

• Fear Of Missing Out (FOMO): Social media puts luxury lifestyles right in front of us, and this can trigger a feeling known as FOMO. You might start spending money you don’t have on expensive items or services to match the perceived social status of others.

 

Saving

• Low Motivation: A lack of motivation to track expenses or make financial decisions can interrupt your long-term strategy for saving. Try and make the process as easy as possible to keep on top of, even when you’d rather do anything but budget.

• Avoidance: When financial worries surface, it’s easy to simply avoid them by not checking your finances or ignoring bills. This is only going to put you in a worse place in the long run, and make it harder for you to save effectively.

• Lack Of Purpose: If you don’t have a clear vision or goal set out for your financial future, it’s easy to lose focus and choose to spend money for instant gratification rather than long-term success.

 

How Can You Rewire Your Brain For Financial Success?

This blog post has gone through the importance of mindset and wealth psychology when it comes to wealth building in detail, but exactly how do you change for the better? 

We’ve come up with six practical ways to rewire your brain and move towards financial success:

1. Find your why.
2. Daily affirmations.
3. Recognise your negative self-talk about money.
4. Read books about money and success.
5. Create a vision board.
6. Take responsibility for your finances. 

You can read all about these steps to rewiring your brain in much more detail with our helpful blog, “How To Rewire Your Brain For A Positive Money Mindset?”

 

Keep Wealth Psychology In Mind With STARTrading

Here at STARTrading, we know that mindset is just as important as technical skills and strategy when it comes to your financial future. During our trading mentorships, we work closely with our clients to not only arm them with the right tools for trading, but also the thought processes that lead to financial peace. 

Ready to take control of your finances? We’re ready to support you every step of the way! Secure your place at one of our upcoming events, and let us help you make progress towards financial freedom!