We all have our own relationships with money.
Some people struggle with spending even small amounts, while others are happy to “flash the cash” at every opportunity.
The same applies to attitudes towards investing. You may be a cautious investor, whereas others will happily take significant financial risks.
Much of your attitude comes down to instinct and emotions rather than deliberate thought. For example, according to Nobel Prize-winning psychologist Daniel Kahneman, our brains are wired to fear losses far more than we value equivalent gains.
The emotions that influence the financial decisions you make are often referred to as your “money language”.
Understanding your own money language can help explain why you make certain decisions. You can then use that understanding to make changes that could lead to better long-term financial outcomes.
Money languages describe your relationship with wealth
Several factors influence your attitude towards money. These include:
- Experiences in your childhood
- The values instilled in you by your parents
- Your own personality
Over time, these influences have created habits that affect how you earn, spend, and invest – your money language.
The following money languages are among the most common.
Rather than fitting neatly into one of these languages, you are more likely to exhibit attributes from two or more, with your dominant language having the strongest influence on your attitude to money.
It may be easier to manage your spending if you understand your relationship with money
A lot of the financial issues you face are likely to come down to your money language. So, understanding the source of your behaviours makes it easier to adjust them if needed.
For example, if you know you are prone to prioritise spending over saving, you could automatically set money aside each month straight after you get paid. This goes into long-term savings and investments, so you avoid the temptation to spend it.
You are then free to enjoy spending the remainder of your monthly income, safe in the knowledge that you are saving for the future.
Planning this way ensures you have the necessary measures in place that work with your personality rather than inhibit it.
Knowing your money language can help you develop a balanced investment strategy
Your money language will clearly have a big influence on how you invest.
If your language is all about taking risks, you might relish the excitement of stock trading – reacting to short-term market trends and focusing heavily on particular stocks or market sectors.
This approach may deliver strong returns. However, trying to time the market and over-reliance on a limited range of investments could expose you to a high level of risk and significant losses that harm your long-term wealth.
Conversely, if you are always looking to avoid risk because you fear market volatility, you may end up holding too much cash, which will lose purchasing power over time due to inflation.
A long-running study of investor behaviour conducted by DALBAR (as reported by Forbes) has consistently shown that the average investor underperforms the market over the long term due to behavioural decisions rather than poor investment choices.
Understanding your money language allows you to recognise these tendencies before they begin to influence important investment decisions. You can then create an investment strategy that matches your personal circumstances and goals, rather than letting emotional reactions drive your decisions.
As a result, you may be more likely to see consistent long-term growth.
It’s easier to share finances with a partner if you understand their perspective
Finances remain one of the most common sources of disagreement within relationships, so understanding money languages is particularly useful for couples.
Sky News confirmed that three-quarters of couples argue about their finances. A big underlying cause of this is revealed in a Starling Bank report that found only 26% of UK couples speak the same money language.
In a relationship, this could result in one of you prioritising saving for the future, while your partner prefers to spend freely and improve your quality of life today.
Similarly, you may be comfortable investing during periods of market uncertainty, while your partner is continually risk-averse.
Neither of you is necessarily wrong in your outlook; you just have a different relationship to your finances.
Because of this, you need to understand each other’s financial motivations to ensure the joint decisions you take are constructive and consider your differing views.
Doing this will create opportunities for compromise and lead to a joint financial strategy you are both comfortable with.
Self-awareness can help you make better financial decisions
While understanding your money language won’t solve every financial challenge you face, it can help you become more aware of your instincts and the potential blind spots that may be holding you back.
As a result, you should be able to make more conscious financial decisions, avoid common mistakes, and work towards securing long-term financial security.
However, that kind of security is built by combining understanding with clear goals and a well-structured financial plan.
An experienced financial adviser can help you recognise how your money language influences your decision-making, so you can build a financial strategy that works with your natural tendencies rather than against them.
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Please note
This article is for general information only and does not constitute advice. The information is aimed at individuals only.
All information is correct at the time of writing and is subject to change in the future.
Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.
The value of your investments (and any income from them) can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.
Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.