The Psychology of Money – How Your Mindset Affects Your Wealth

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Psychology is the study of the mind and how it affects your behavior. If you apply psychology to money, you have the study of the mind and how it affects your behavior when it comes to your money. 

Whether you have a habit of impulse spending, you’re anxious every time you make a purchase, or you’re too afraid to even check your credit card balance, all of this says a lot about your personal psychology of money.

Let’s talk about some of the different ways our mind influences our behavior with money. 

Your Mindset Around Your Money

Your mindset around your money can influence your behavior. Everyone has their own personal psychology of money, whether they realize it or not. We all behave differently when it comes to personal finance. Also, we all have different values and beliefs from our personal history surrounding our money and how we spend and save it.

Those values and beliefs can change as we learn more about financial independence and better ways to handle money in our individual situations. The financial independence community focuses on how the concept of money mindsets — popularized by Morgan Housel’s international bestseller The Psychology of Money — can affect personal finance decisions.

Abundance vs. scarcity mindsets

There are two main types of money mindsets:

  1. Scarcity mindset
  2. Abundance mindset

Many people who are on the path to financial independence have shifted from a scarcity mindset to an abundance mindset. This is often because an abundance mindset often opens up an abundance of opportunities, not just an abundance of cash. 

An abundance mindset allows you to be more giving and generous with your money. And the financial independence community is full of generosity and giving. 

For example, Jeremy Schneider of Personal Finance Club gives over 20% of his company’s revenues to charity. Jeremy’s outrageous generosity has been influential in my own giving habits. I have made giving the No. 1 line item in my budget. Since I made this change, giving has reinforced my abundance mindset. 

On the other hand, a scarcity mindset can be a roadblock on your path to financial independence. A scarcity mindset can often lead to money-related anxiety and stress because you’ll always feel financially insecure. It can also deter you from future financial success.

How can you become financially independent if you never feel like you will have enough? 

Small Things Lead to Big Changes

The shift from a scarcity mindset to an abundance mindset doesn’t have to happen overnight. Learning about your money behavior and mindsets can help you start implementing small changes over time. 

A key factor in obtaining financial independence and building wealth is consistency over time. When I started increasing my giving, I started out by donating $5 per week. It was only $5, but what I did with that money helped an entire community of low-income individuals. Combining an abundance mindset with my giving, I also felt secure investing more as well.

Consistently transferring money from a checking account to a savings or investment account is another way to reinforce an abundance mindset. Say you decide to transfer $2 a day. In a year, those little $2 increments will add up — especially if you invest them. 

The infamous latte factor

We’ve heard this a million times: Cut out the coffee habit, invest that money, and become rich. Right? Well, not exactly. A lot of people misinterpret the “latte factor” to mean you should stop buying things that bring you joy. 

Instead, it’s supposed to teach you about how investing leads to compound growth over time — a “trick” used by the financial independence community to build wealth. By changing your behavior on things you don’t value (such as a theoretical latte), you can shift to an abundance mindset.

However, if your morning coffee run is the highlight of your day, please don’t eliminate it!

Other Lessons in the Psychology of Money

Along with the abundance mindset and the latte factor, there are many timeless lessons to be learned from the financial independence community about the psychology of money.

These include:

  • Live below your means
  • Cut your expenses
  • Increase your income
  • Invest the gap between your income and expenses
  • Track or know your expenses and income
  • Use a budget or spending plan 
  • Invest in low-cost index funds and/or real estate
  • Time in the stock market beats timing it

One of my favorite phrases in the financial independence community is “personal finance is personal.” That means there’s no cookie-cutter approach to achieving wealth.

Your personal money psychology will determine your personal route to financial freedom and financial goals. The above guidelines can be followed in different ways. For example, not everyone uses a detailed budget or tracks their expenses.

Your behaviors and opinions can change as well. I used to be very debt-averse. I have since switched to focusing on investing in my future and paying the minimum payments on my low-interest debts. 

Mental Health and Money Behavior

More and more financial independence community members are discussing their money behaviors and how they relate to their mental health. Common themes I keep seeing are:

  • Therapy
  • ADHD and impulse spending
  • Anxiety and stress
  • Shame and guilt


Many in the financial independence community advocate for therapy. My friend Jackie Cummings Koski has even devoted her time after early retirement to studying financial therapy and financial literacy. 

Financial therapy combines financial planning with counseling about money issues and feelings. Although financial therapy is a specific type, generalized therapy is recommended often as well.

Anxiety and financial issues are among the most common complaints by those seeking treatment. Understanding your spending and savings behaviors can allow you to invest in yourself and still indulge in spending on what you value. Therapy, financial or general, can also help you realize what you value and don’t value spending money on. 

ADHD and impulsive spending

More and more of my personal finance friends are openly discussing difficulties with ADHD and their spending habits. A quick Google search for “ADHD and spending” yields more than 43 million results. 

I know of several instances in which friends in the financial independence community — who check all the “boxes” of good financial habits, such as having an emergency fund — claim their ADHD have led them to go on impulse spending binges.

There have been times when I have also spent impulsively — typically on groceries. Although I don’t have a diagnosis, I do sometimes exhibit symptoms of ADHD.  

The good news is that we all make financial mistakes. You can still reach financial independence even if you make a mistake or two. 

Anxiety and stress

One study found that 60% of participants felt anxiety around personal finance and 50% felt stress discussing personal finance. The same study found that 65% of those anxious about personal finance were women.

I have slowly been overcoming my own anxiety around money. Thanks to an emergency fund, I was able to work through a solution to my significant other having a canceled flight. Had I not had an emergency fund, I would have had a full-blown panic attack.  

Anxiety can indirectly affect our money habits as well. Often we equate success with productivity, being busy, and making lots of money. However, sometimes the appearance of productivity hides the internal struggle someone is going through. 

Fighting stigma and shame about money

The best way to fight stigma and shame about money is to talk about it. There are many examples of those in the financial independence community sharing their experiences about money and their mental health. Many financial independence content creators are speaking out about shaming others for their financial decisions.

One of my personal favorites is Lexa from the Avocado Toast Budget. She has spoken out about shame as well as sharing her personal history of ADHD when it comes to her money and investment decisions.

Lexa and I both advocate for not being afraid to talk about money. There are many in the financial independence community who love coaching and teaching others about money. I consider myself a personal finance enthusiast and enjoy talking about personal finance. A great way to build wealth is to talk to those who have and want to help others. Don’t be afraid to ask questions.

Nobody handles your money better than you do. Financial gurus will tell you never to take on debt, always eat at home, brew your own coffee, never use a credit card, and deprive yourself of any luxury. Ignore that outdated advice. 

Instead, spend on what you value, what brings you happiness, and what aligns with your financial goals. I use a 2% cash-back credit card that funds my Roth IRA automatically. Some friends of mine never use a credit card. Others use several.

Don’t be ashamed if you have debt, a low income, or are struggling financially. Everyone has a different starting point on their financial journey. If you don’t like cooking or enjoy your daily coffee, or both, add coffee and dinner out to your spending plan. Want to take a vacation every year? Add a vacation as a financial goal. Personal finance is personal. 

Why Care at All?

As I mentioned before, understanding your behavior and psychology when it comes to money can be beneficial to your mental health. It can alleviate financial insecurity. It can help relieve stress and anxiety toward money. Understanding your behaviors also helps fight stigma and shame about money. 

But what if you don’t need the mental health benefits? Sure, you could go through life without a second thought of your behavior toward money. But achieving financial independence without understanding your behaviors, values, and beliefs can be very difficult. 

But why should you care about financial independence at all?

Your “why” of financial independence

Many of us have our own reasons for financial independence. Some enjoy the freedom to travel for long or short periods of time. The freedom to travel wherever and whenever they want without taking time off work. Time to travel while they are young enough to do so.  

Others prefer the flexibility of not having to work for money. The desire to put a passion project out into the world without having to rely on income to pay the bills. 

When venturing out on the quest for financial independence, take time to think about your “why.”

How Can You Learn More About Your Money Psychology?

Trying taking a money-type personality test. The seven types of money personality list can be a helpful starting point. Another starting point might be making a list of 10 things that bring you happiness by spending your money on.

If you aren’t already doing so, try to track your expenses or keep a spending journal. Collect some data to see if you notice patterns in your spending habits. Does your mood affect your spending habits? Are you not preparing for unexpected events? Are paying too much for convenience? Too little?

Another way to think about your money behaviors is to think about your financial goals. What is your biggest financial goal? What is your smallest? How can your behavior affect the time it will take to reach these goals? Are you willing to change your behavior to reach them sooner? Can you stretch these goals out to enjoy more spending now? 

Thinking about your financial goals can help you better understand your money behaviors as well. 

Financial Freedom in Uncertain Times

When I started my financial independence journey, there was so much to learn. I wish I knew about the Financial Freedom In Uncertain Times Course when I started investing. I knew nothing about investing or the stock market. 

Like most members of the financial independence community, I look back and wish I had the knowledge to start investing and building wealth sooner. Instead, I feared losing all my money if I invested in the stock market because I didn’t understand it.

Because I have learned about my money behaviors and financial literacy, I feel like I’m closer to financial success. Because of courses like Financial Freedom in Uncertain times, I feel less stress and anxiety about my investment decisions. I’m not worried about chasing the highest returns or the next big stock pick. I’m secure in building wealth for the long term.

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