Chapter 6 - Money Psychology and Personalities

In this chapter, we’re going to discuss you - what your money personality is, how you can discover if for yourself, and how it relates to your financial plans.

There is one primary difference between corporate finance and personal finance. Personal finance is concerned about people. Why does that matter? Unlike companies, people are prone to emotions and the mistakes that emotions can lead us to make. Our own psychology can lead us to make mistakes. You cannot be properly prepared to reach your financial goals unless you understand your own emotional attitudes towards money. This collection of feelings and attitudes is known as your money personality.

Money Personality Assessment

To complete this assessment and get an evaluation of your money personality, simply answer each of the following questions as honestly as possible. Then, use the scoring sheet to count how many answers of each personality you selected.

1. Most of my money is…

a. Spent or owed to creditors

b. In the bank

c. Tied up in shares or property investments

d. Dedicated to my new car or home renovations

2. If I won a million dollars I would…

a. Throw a fantastic party…on a cruise ship, for all my friends and family to celebrate

b. Put it in the bank and phone my financial advisor

c. Use it to set up that business on the side I have been dreaming of

d. Buy a better house and car

3. My philosophy on money is…

a. It doesn’t grow on trees, so be careful with it

b. You can’t take it with you when you die so you may as well use it while you can

c. You need it to be able to surround yourself and your family with things you love

d. It can come and go, make the most of it when you have it

4. My favorite way to spend spare time is…

a. Shopping and/or traveling to exotic places

b. Doing things that are fun, but free (or low cost)

c. Doing things to improve my house, my car, myself, or something else I own.

d. Dreaming up a new business venture

5. What I am most concerned about is that…

a. I earn decent money, but don’t have much savings to show for it

b. I have the majority of my money tied up in savings, but it’s not really growing much

c. I don’t mind taking risks with my money, but it can upset my loved ones

d. I probably shouldn’t spend so much, but I find it hard not to sometimes

6. Other people consider me to be…

a. Generous with my money

b. Careful with my money

c. Well-off, because of my lifestyle

d. A successful investor

7. When I spend money, I buy…

a. Things that I love and make me happy, sometimes on impulse

b. Things only after I have done a lot of research and shopped around for the best price

c. Only things I really need, because I would rather invest it

d. Quality things that will last, even if they cost a bit more

8. My view on retirement savings is…

a. I save money each payday for my retirement

b. I’ll start saving for retirement when I’ve had a chance to pay down my mortgage and get settled into my life

c. I’m investing mostly in property and businesses that I will sell to fund my retirement

d. I don’t really focus on saving for retirement, it’s not my main priority in life

9. When it comes to managing money…

a. Sometimes I have trouble with controlling it

b. I keep careful track of what I’ve got and how much I’ve spent

c. I have a good income but I don’t know exactly where all my money goes

d. I do take risks, but they usually pay off

10. A source you trust wants you to invest $25,000 in an exciting new business venture. You say…

a. Yes, even if you have to borrow some of the money

b. Yes, but only if you have the $25,000 to afford it

c. No, because it’s too risky

d. No, because if you had $25,000 available, you’d rather spend it yourself

11. When it comes to buying a house to live in…

a. I’m not sure I could save enough to buy the one I’d really like

b. I’d buy what I can easily afford

c. I’d buy the house I really like, even if it means having to slightly adjust my other spending to pay the mortgage

d. I’d buy an average house to live in so that I could buy one or more investment properties as well

12. When it comes to credit cards…

a. I either don’t use one or I pay off the balance in full each month

b. Many of my cards have a balance outstanding or are maxed out

c. I still have credit available and I pay off as much as I can each month

d. I would borrow money on a credit card if a solid investment opportunity arose

Scoring

Use the table below to identify the personality code the corresponds to your answer for each question. For example, if you selected “A” for question #1, then write a “P” next to question 1. If you answered “B” for question 2, put an “S” next to question 2. If you answered “D” to question 3, put an “E” as the code for question 3. Continue until you have identified the code for each question. Then add up how many of each code that you have. The code that you have the most of is your dominant money personality.

It is common for people to have tendencies in several different money personalities. The point of this exercise is not to try to lock your personality into a little box, but to help you increase your awareness of your relative strengths and weaknesses so you can plan accordingly.

What determines your money personality?

Your money personality is influenced by three main factors. The first is your motivations. These are internal characteristics that influence your money behavior. These motivations determine what you value the most. Understanding your motivations is important because they determine how much utility you will get from a purchase. If you buy something that doesn't appeal to your motivations, you won't be likely to enjoy it very much.

It is common for our motivations to be subconscious. This means that you might be affected by them without you even knowing it. This is why it is important to regularly stop yourself when you are about to make a purchase. Just pause and think about WHY you want to spend your money on this particular item. Is it because it really will bring you utility? Or is it more of an instinctive motivation?

Stop and ask yourself "Why do I want to buy this?"

The second aspect of your money personality is your time orientation. Some people are future oriented. This means that they are willing to sacrifice their present well-being for their future well-being. Future-oriented people are wiling to make today worse so their tomorrow can be better. People who are extremely future-oriented can even be excited to sacrifice for the future. Future-oriented people tend to be natural savers. They prefer to save for tomorrow even if it means having less today.

Other people are present oriented. This means that they value their present well-being more than their future well-being. People who are present-oriented don't tend to worry about the future. they prefer to live in the moment. They stop and smell the roses. They don't the worry of what could happen ruin what is actually happening now. Present-oriented people tend to know instinctively how to use their money to make life better now.

The third aspect of your money personality is your risk tolerance. Some people are tolerant of risk. The uncertainty of the unknown does not frighten them. They can take risks and leap into the unknown with relatively little concern. Some people can be so risk tolerant that they even come to enjoy the uncertainty of risk. Risk tolerant people tend to make good use of the stock market. They do not let the fear of possibly losing money stop them from taking advantage of the investing in the stock market.

Others are risk averse. The presence of uncertainty makes their emotions squirm. The fear of losing something they treasure can sometimes be paralyzing. People who are highly risk averse sometimes avoid investing in the stock market. However, when they do, they tend to do very well because they don't take too much risk. Taking too much risk with investments is the #1 reason why people sometimes get bad results from the stock market. Risk averse individuals rarely lose money in the stock market because they don't take too much risk.

We categorize money personalities into four categories. These categories are: pleasure, recognition, entrepreneurial, and security. Humans are complex beings. No human can be simplified down into just one of four categories. Everyone has at least a little tendency towards each type of money personality. However, each person also usually has one or two money personalities that describe them better than the others. This dominant money personality is what we call your money personality.

You can think of your money personality as your gut instinct. Some people’s instincts tell them to avoid risk, while other people’s instincts tell them to take risks. Some people prefer to save their money for a rainy day, while others prefer to live in the moment and spend their money now.

There is no right or wrong money personality. The world needs people of all personality types to function properly. Being aware of the nature of your own money personality will help you to be able to identify when it might be about to lead you into a mistake. For example, those who have the security personality might purchase too much insurance, while people who are more entrepreneurial might be vulnerable to take too much risk with their investments.

Let’s take a closer look at each of the money personalities in turn.

Pleasure Personality

The pleasure money personality is characterized by people who are risk tolerant and present oriented. They take risks with their money and with their experiences for the sheer enjoyment of it. These people would rather have fun and experience new adventures more than they enjoy accumulating wealth. The pleasure personalities tend to pursue high income careers because they often enjoy expensive lifestyles. Another key attribute of people with the pleasure money personality is that they enjoy the immediacy of shopping. Those with this personality are the most likely to enjoy retail therapy - buying things to make oneself feel better. This tendency to shop for fun or relaxation leads them to carry high credit card balances.

These people are often the ones who make the world fun! The invent skydiving, roller coasters, and amusement parks. These are pleasures that many people enjoy, even if they are not pleasure personality types themselves.

Those with the pleasure personality need to be cautious. The desire for immediate excitement can lead them to become compulsive gamblers. People with the pleasure personality often struggle with controlling their spending as well. They may need to employ external commitment devices to help them control their spending behavior and save for the future.

Recognition Personality

The recognition money personality is risk averse and present-oriented. Recognition personality people prefer to not take large risks. They have a strong desire to succeed and excel. They often use their income to display their wealth through the living of expensive lifestyles. Like the pleasure personality, these people tend to be ambitious in their careers and education. The motivation behind this ambition is very different for recognition personalities. Those with this dominant personality prefer to spend their money on the best goods and services. They frequently purchase designer clothes, private educations, and luxurious homes and cars.

Recognition personalities are present oriented like the pleasure personality, but instead of purchasing experiences, they purchase items of lasting value. People like this are great because they like to make the world beautiful. These are the people who design luxurious resorts, hotels, cars, and clothes. This personality type does have it's own problems. They need to be careful not to get too carried away with their spending and their lifestyle. Those who go too far in this personality become poseurs and are perceived as being fake or inauthentic. Those with this money personality need to be careful of their spending.

Entrepreneur Personality

Those with the entrepreneurial motivation take large risks with their money not for pleasure, but for the hope of increasing their wealth. They are often the people who produce the most wealth in the world. These people are very future oriented. They would rather sacrifice and work today so that they can be wealthy tomorrow. The entrepreneurial types often succeed without formal education or high income. They frequently use someone else’s wealth to create wealth of their own. To this personality type, money represents an opportunity to realize their passion for generating wealth.

These people benefit the world by making it progressive and wealthy. These are the people who invent airplanes and assembly lines to move the rest of the world forward. When taken to extremes, people of this personality type run the risk of becoming swindlers: people who will do anything to make money. The greatest challenge faced by the entrepreneurship personality is that they tend to take too much risk. They can be a millionaire one day and completely bankrupt the next!

Security Personality

Those with the security money personality place a high priority on safety. They tend to avoid risk and place a strong emphasis on securing their future. These people manage and save their money naturally and instinctively. They prefer to have a budget and know exactly where their money is going. Security personalities invest conservatively. They prefer to earn less interest in favor of decreasing their investment risk. Those with the security personality feel uncomfortable with debt, and therefore carry little or no debt. They are often wary of using credit cards at all.

These people keep the world safe. These are the people who invent airbags and antilock brakes. If the security personality becomes too strong, this type of person can become a chronic hoarder. They can get stuck in the saving mentality and forget to actually use their money to make their lives better. They face is in being too conservative in their investments and missing out on good opportunities to grow their wealth.

Hopefully you can see that each money personality has some advantages and some disadvantages. The world does indeed need people of every money personality. After all, who wants to ride a rollercoaster without brakes or to fly in an airplane that doesn't have cushions and air conditioning? No one personality is better with money than the other. Security personalities can seem like the "best" personality because they are natural savers. They can forget is possible to save too much. They forget that money is meant to be used, and they often struggle to let themselves use their money to enjoy their life. They make their life more difficult than it needs to be simply because they are fearful of running out of money. Recognition and pleasure personalities struggle with overspending, but they know how to get the most out of life. Entrepreneurial personalities accumulate wealth, but often get so caught up in wealth building that they forget to build some security into their financial plan.

As you proceed with the course, keep your own money personality in mind when considering what steps you need to take to ensure that your own money personality becomes a strength, not a weakness.

This is an excellent time to watch Lecture 2 from the course pack!

Definitions:

Money personality: our money behavior driven by motivation, time orientation, and risk orientation

Motivations: internal characteristics that influence our money behavior determining what you value most

Time Orientation: the choice we make in deciding which time frame we would rather sacrifice- their present well-being for a better future well-being or a more valuable present well-being for a riskier future well- being

Risk tolerance: the comfortability we have in making riskier decisions

Risk averse: choosing to marginalize risk when it is possible

Pleasure: taking risks with our money for the experiences and enjoyment of it

Recognition: working diligently to become successful and excel to gain status and appearance

Entrepreneurial: taking large risks with our money to seek a larger return growing as much wealth as possible

Security: being risk averse in aiming to have a financially sound future down the road