7 Mistaken Beliefs About Money
Our attitudes about money are formed in childhood, according to Maggie Baker, Ph.D, a psychologist who deals with relationship, money and wealth issues and is author of Crazy About Money: How Emotions Confuse Our Money Choices and What To Do About It.
And it’s these attitudes that shape how we use money today. Unfortunately, we usually don’t know it. People “can be very rational about money and irrational about their behavior.”
For instance, you assume you’re careful and conservative with your cash. You might even know all the right things to do. But once you start recording how much you spend, you begin to see patterns that suggest your behavior isn’t reflecting those assumptions.
We also might hold onto erroneous stories we’ve picked up over the years. Here are seven mistaken beliefs to relinquish.
1. Mistaken belief: Money makes you happy.
“It’s not money that makes you happy,” according to Kathleen Gurney, Ph.D, CEO of Financial Psychology Corp. and author of Your Money Personality: What It Is and How You Can Profit from It. It’s how you use it. “If you don’t know how you want to use it as a vehicle to create happiness, it will be used indiscriminately and never achieve what you value most.”
Consider your personal objectives, goals and aspirations, she said. Don’t be swayed by how others use their money, either. “The path to achieving a greater sense of happiness lies inside and not by following what others may do with their money.”
2. Mistaken belief: Money is a scorecard.
Some people believe “if I make more money, I can be competitive and win the race,” Baker said. When money is the top priority for a person, and they lose it – because of a layoff, for instance – their self-worth shrinks. (“They mix up net worth with self-worth.”) They suffer significantly because money is the only thing that matters, instead of another person who places greater value in family and is passionate about other things, she said.
3. Mistaken belief: Someone will take care of me.
Many women commonly believe that a man will provide for them, Baker said. (In one of her workshops, women in their 50s still held onto this belief, even though they had zero evidence of this in their lives.) A similar belief is that God will provide everything you need, she said.
Placing the responsibility outside yourself can mean you don’t pay attention to your money or worry about managing it. And such avoidance can prompt money problems.
4. Mistaken belief: There is never enough money.
According to Gurney, “this is a common mental mistake and rationalization for not dealing with the truth of ‘what is’ versus ‘what we would like it to be.’” In fact, people tend to go into debt trying to reach this point of enough, she said.
The first step to living within your means is to focus on what’s most critical, such as survival and security, she said. Then learn how to add to your money for the extras you want. (“…[E]arn it through smart money management and not through delaying the transaction through debt.”
5. Mistaken belief: These people must be onto something, so I should do the same.
“We hear of and watch others making certain financial choices and we start feeling like ‘they must be onto something’ and talk ourselves into following suit,” Gurney said. She used buying real estate as an example. A few years ago, this became a key trend, and many people bought properties they couldn’t afford.
Another example, she said, is “pulling retirement money out of more conservative investments to join in the frenzy to ride the stock climb only to find out that they have missed the climb.”
We can overcome this bias by “sticking to our original strategy and solutions that made sense for our particular money personalities, goals and financial situations.” Also, remember that the media provides “expert entertainment,” so it’s often tough to distinguish between what’s truly prudent – and best for you – and simply popular, she said.
6. Mistaken belief: You can get great advice from financial gurus.
While you can learn some helpful information, be wary of one-size-fits-all financial tips. “Everybody’s situation is unique,” Baker said. Many factors, including your goals, age and risk tolerance, have to be considered. Baker wishes that the media conveyed the importance of working with a financial expert. Just like you’d seek out an expert who specializes in an illness you have, you should do the same with a financial advisor.
When searching for an advisor, you can ask friends, Baker said, “but be leery.” (Baker actually ended up experiencing her biggest financial loss after receiving a recommendation from a friend.) If you do turn to friends, ask them how much money, on average, the advisor has made for them, she said.
When interviewing potential advisors, she suggested asking these questions:
- Who is your ideal client? For instance, advice to a 30-year-old will be very different than to a 70-year-old, she said. You want to find an advisor who helps people with your net worth and who will know which investments are most suitable for you, she said.
- How much do you charge for your services? In a typical year, how much would I spend on your services? Do you make a commission from trading? It’s very important to see if the advisor is upfront about how much they charge and how they’re paid. According to Baker, some advisors get paid a flat fee per hour, while others get paid a percentage. “The more they make for you, the more they make [for themselves].”
- Are you available anytime to answer my questions?
- Do you subscribe to suitability or fiduciary standards? Suitability is a lower standard of responsibility. Fiduciary responsibility is when “you have an ethical responsibility to act in the best interest of your client,” Baker said. Let’s say an advisor’s company bought too much Coco-Cola stock, and they need to sell it off. This might be suitable for you, but it might not be in your best interest. (Here’s more information on the distinction.)
Consider if you trust or could trust this advisor. You might want to pick an advisor from an independent firm because they won’t need to push company stocks, she said.
7. Mistaken belief: It doesn’t take much effort to manage money effectively.
Managing money actually “demands real commitment and attention to detail,” Baker said. “It involves sitting down and looking at all the money facts of your life, [such as] your bills, spending habits and goals.”
If you’re married, sit down with your spouse and get their ideas. “It’s a big mistake for one person in the family to do all of the money without consultation from the other.” (If one person is in control while the other is oblivious, this leads to relationship issues, she said.)
“Pay a little attention to [your finances] every day.” For instance, review your expenditures, open your mail and check your bills, she said. Use programs like QuickBooks to get a clear understanding of how much you’re spending and make adjustments as needed.
While money is a taboo topic, it’s crucial to discuss it with your family, Baker said. “Don’t be afraid to talk about money, or to ask for help from a financial therapist, your accountant or even a good friend.” If your friend is struggling with the same issues, you can work through them together, she said.
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Tartakovsky, M. (2018). 7 Mistaken Beliefs About Money. Psych Central. Retrieved on October 28, 2020, from https://psychcentral.com/blog/7-mistaken-beliefs-about-money/