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Uncovering Your “Money Mind” and Why It Matters

For generations, economists assumed in their theories that individuals were rational actors, always making choices that would optimize their “utility,” or economic well-being. However, in recent decades, behavioral economists have demonstrated that this is not always true. In personal finance, for example, individuals do not merely want to maximize the amount of their assets over time. They have other goals and priorities that inform how they view and use their money, and they also have fears and concerns that may inhibit making rational financial decisions.

The Three “Money Minds.”  In his book, The Money Code, financial analyst Joe John Duran describes what he calls the three “Money Minds,” which shape how individuals view financial decisions:

  1. Protectors:  focus on using money to protect themselves and avoid pain, value money as a source of security and peace of mind;
  2. Pleasure Seekers:  focus on using money to obtain things that provide happiness, value near-term rewards and sometimes fear missing out on opportunities;
  3. Givers:  focus on using money to help care for others in their family, community, or society, value money as a means of supporting others and sometimes fear letting others down.

There are pros and cons to each of these Money Minds, and individuals might lean toward one or another in different situations or in different phases of life. However, Duran suggests that we generally lean toward a particular Money Mind, and it is important to figure out which one.

How Can You Determine Your Money Mind? Some individuals might immediately recognize which Money Mind informs their financial decision-making. For those who do not, Duran provides questions in his book and on his company’s website to help uncover it. For example, if given three job offers, would you take the one that pays the highest salary, brings you the most joy, or gives you the most time with family? If you won prize money, would you save it, take a vacation, or buy a gift for someone you care about. Obviously, you may consider multiple factors or courses of action in these situations, but your gut reaction may provide some insight as to your Money Mind.

Why Is It Important to Figure Out Your Money Mind? When we work on financial plans at PFS, we always begin by considering a client’s financial goals. These often include retiring at a particular age, maintaining a certain standard of living, paying for college expenses for kids, buying a bigger home, taking a long vacation, etc. Occasionally, clients are not aware of some of their financial goals until we go through the planning process, or sometimes not even until we have worked together for several years. Determining your Money Mind, however, may help shed light on your financial goals by clarifying the ends to which you see your money as a means.

Your Money Mind also impacts how you make financial decisions, so identifying that lens—and taking steps to consider how it affects you—could help you to be more balanced and objective in your financial decision-making, and thus, result in better outcomes. This can also help your relationships. If you and your spouse, for example, often have conflicts about money, knowing each other’s Money Mind might help you to understand and empathize with each other’s perspective. Alternatively, Duran points out that if you and your spouse have the same Money Mind, you may fight less about money issues, but you may also be more prone to making poor financial decisions. When both spouses share the same perspective on money, you might not have any incentive to question it or consider other uses, goals, or priorities in financial decision-making.

How Can You Mitigate Your Money Mind Biases? Many events that impact your financial life are outside of your control, such as a job loss or a downturn in the market. But, as Duran explains, you do have control over other aspects of your financial life— namely, your saving, your spending, the timing of major financial decisions (e.g. retirement, home purchase), and the amount of risk that you take (e.g. with investments and insurance). Your perspective on money can bias your financial decision-making in these areas. However, you can mitigate this bias by trying to objectively consider the pros and cons of any financial decision. Duran suggests that you outline both the quantitative and qualitative benefits and costs of each decision before taking action. If you determine that you can afford the cost—and the cost is worth the benefits—then you can move forward with confidence. If not, perhaps there are ways to reduce the cost or increase the benefit. For example, perhaps you are considering a two-week cruise in the Mediterranean, but the cost is more than you should spend, despite the expected benefits of relaxation, exploring new sights, and spending time with a friend or family member on the trip.  However, if you take a one-week cruise and spend a few days before the cruise with a long-lost cousin in Italy instead, you reduce the price of the trip and add a benefit of reconnecting with family.

At PFS, we want to help you achieve your financial goals.  But, in order to do that, you need to determine what your financial goals are.  Figuring out your Money Mind could be a helpful step in that process.  If you want to discuss your perspective on money and how it impacts your financial decision-making, we are always here to help.

     
 

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