Financial Psychology

Key topic

In this lesson we examine how to prepare yourself to approach money issues and various financial situations and how to set financial goals and utilize proper attitude to achieve financial success in the future.

Learning objectives

• Understand the importance of financial skills
• Plan ways to set financial goals and go after them
• Understand that money-related issues invoke certain emotions
• Discover how your personality affects your financial behavior
• Money-related stress and anxiety can take a toll on a teenager as much as it can on an adult

The importance of money and financial skills

Today we will start by watching a 3-minute video with some facts about teenagers and money.

Teaching Teens About Money

It is often being said that money is the most important thing in the world. This is not necessarily true. Money itself is not as important as other things in life. Money becomes important when it can be properly utilized to give you freedom and choices in life. THAT, is important, yes.

When you have money, you have the freedom to decide for things, such as where you want to live, or what car to drive, or how to spend your free time etc. Developing strong financial skills can support both your motivation and the fulfillment of your financial goals, as it allows you to choose the lifestyle you want to have, create your legacy and help people and causes you care about, experience the freedom to do what you want, and live without the stress and emotions associated with financial struggles.

Money should not change who you are. You should focus on enjoying the benefits that come with financial success, without letting go of your values and beliefs that you are being taught from the time you are an infant up until now and probably until further down the line.  Money or no money, you should continue to be a good person, to respect and care for others and be grateful.

Financial goal setting

Being able to afford the life you dream about is an incredible feeling. Imagine having the ability to live life on your terms and at the same time being able to help the people who are important to you. Goals define the actions you must take to make your dreams real. Setting goals and priorities and then following through with active plans to make them happen, is the essential process for turning dreams into reality.  The process of setting and achieving financial goals is very similar to the experience of an athlete setting an athletic goal.

The basic steps of the process are:

1. Start by identifying your goals, which must be directly connected and in line with what is most important to you and what exactly you want out of life.  Discuss your goals with those you trust, parents, friends, coaches, mentors etc. For example, you want the new iPhone
2. Set time frames for their achievement. For example, 1 year.
3. Quantify these goals and build a plan around them. For example, the iPhone costs $1,000 so that is the amount you need.
4. Your ultimate goals are not going to be achieved overnight, so you will have to set intermediate goals with events and deadlines that will help you stay focused and enjoy small victories on your way to their achievement. Intermediate goals also provide a measure to check whether your plan is working or needs adjustments. For example, by month 6 you want to have 600 of the $1,000. If by that time you only have $200, that probably means that your timeframe needs to be reviewed.

Here are some other ideas about financial goals that teenagers may want to set. We will explore some of the below at later stages:

• Earn enough to buy a prom suit/ dress
• Get a summer job to earn some money
• Set up a savings account this month
• Create a budget
• Live within your means
• Download an app to track spending
• Holiday presents for siblings and/or parents
• Concert tickets
• Save money for college
• Buy your first car

Goals can fall into three categories: Short-Term, Medium-Term and Long-Term. Short-term financial goals for teens are those that you set for yourself to be completed within a few months to a year maximum. They can be set for one week from now, or one month or six months from now. Examples include:

• Download an app to track spending
• Create a budget

Medium-term goals take less than long-term but more than short-term. They are like intermediary goals. They can be set for one to two years from now. Examples include:

• Finding a summer job
• Saving money for a soccer camp next year

Long-term goals are the last goals you should go after because of the length of time and money that it takes to achieve them. They could take up to 5 years. Examples include:

• Buying your first car
• Saving for college

The process of setting and working towards achieving your financial goals doesn’t need to be perfect. The path to success won’t be straight, and you will need to achieve intermediate goals and correct your course along the way.

Personality affects financial planning

People relate to money in different ways.  Elements such as what money means, how it is utilized and how people behave in money situations, or make financial decisions, define people’s relationship with money. This relationship is called “money personality” and it affects the overall finances of people. The money-management habits of people, tend to fit into four different money-personality categories.

Personality #1: The Saver

While others see money as a means to buy nice things, Savers see it as a means to obtain security and feelings of financial safety. No matter how much money a Saver has, they will always fear that one false move or unexpected disaster will make them poor and when they need to use that money, for the purpose that they were saved for, they panic.

Personality #2: The Big Spender

Spending is a common behavior that makes people feel good about themselves, especially if they spend on others too. They are status seekers who think that the more they have the more they are worth and that their possessions define them. Opting for style over financial substance, may lead to mistakes that will be difficult to fix!

Personality #3: The Avoider

Avoiders are not comfortable with the subject of money, due to either their lack of interest or because they feel that there are other more important issues. The Avoider takes a “don’t ask don’t tell” approach to financial matters and they want to have as little do with money as possible!

Personality #4: The Worrier

Worriers feel that money is bad and has the power to corrupt. Handling money in any way makes a Worrier feel like they are giving in to its evil power. In short, this lot thinks that money is evil and that if you are not careful, you will fall prey to it.

You still have time to figure out where you fit in this, as you have not yet developed your personality and haven’t had the opportunity to handle your own finances but it is good to be aware of the characteristics of each money personality for future reference.

Money and emotions

I want you to imagine you are at the mall with your friends and you only have $10 in cash. You want to go to lunch with your friends but the cheapest item on the restaurant menu costs $15.  How would that situation make you feel? I don’t want you to try and think what you would do. Just concentrate on how the certain situation would make you feel.  Not very happy I assume!

It’s important to identify feelings and to be aware of your emotions towards money as you develop your own financial knowledge.  After you identify how emotions and money are connected, you need to understand that good financial planning helps you avoid negative emotions towards money.

Let’s now watch a 7-minute video which looks into the different ‘Money Signs’ which are similar to the money personalities we have just discussed.

What’s your Money Sign?

Money and mental health

Mental health is something that we, as a society, only recently started taking seriously. Just like we treat our bodies (hopefully) with care, by eating healthy, sleeping well, exercising, we should be doing the same for our brains and making sure that we do not do things that harm them. Unfortunately, in the past decade, mental health problems have risen especially among the young, including teenagers. Financial problems are one of the principal causes for mental health struggles during adulthood, however, that does not mean that teenagers are immune to this.

Many teens may have to work not just to supplement their income and allowance, but to actually make a living. This may entail part-time jobs, long working hours and saving for college. All these, although unfortunate, are manageable. However, to be manageable you need the right tools, knowledge and mentality. That means that you need to know how to use your money efficiently, know what you can and cannot buy (living within your means) and being able to prioritize based on needs (needs vs wants).

Some of the common feelings and emotions that are associated with financial issues are denial, anger, stress, fear and anxiety.  If you have any of these feelings, you should talk to a parent, teacher, coach or an adult you trust.  One way to reduce the chance of this happening with respect to financial issues is undoubtedly financial literacy. What we are and will be trying to teach you are all the basic tools, concepts and techniques that you need to lead a financially healthy life.

When you know what you make/ spend, have a budget to keep you at check, know how to set financial goals, how to live within your means, how to prioritize between needs and wants and how to save, then you’ll be in a position to make the most of your financial situation. Most importantly, you’ll be able to look at your financial situation objectively and find possible solutions to your problems. A lot of times, stress and anxiety are the result of us being unable to think about our problems in a calm manner. When you learn about the tools at your disposal, you’ll be able to categorize your problems and determine how big they are and how to deal with them. In this regard, financial literacy can be a solution to several problems!

Action steps – Exercise 1 (5 minutes)

Time for a mini quiz to see what you took away from today’s lesson. Please answer with a True or False (T/F) next to each statement:

1) The most important thing about having money are the choices, freedom and security that come with it ___ 

2) If you make a lot of money, you should let that affect your beliefs and values ___

3) The second step of financial goal setting is deciding on a timeframe ___

4)  One of the steps of financial goal setting is revisiting your plan in case is not working as you expected ___

5)  One of the money personalities we discussed is the saver. The saver tends to spend too much as a way to feel good and validated___

Answer sheet

Imagine your financial future

When we refer to your financial future, what we mean is how the state of your finances will be in a given period from now, whether that is 5, 10 or 15 years. Ten years from now, most of you will be working except perhaps those who would be undertaking a masters’ degree or enhancing their education in another way. Ten years may seem like a long time but then again, time flies and you’ll get there before you realize it. What we want to do now, is to encourage you to envision the future, to make you think about it and there is no need to stress about it.

In 10 years from now you will be lawyers, accountants, handymen, journalists, software developers, web developers, clerks, civil servants, doctors and engineers, or maybe even something that has to do with sports. You will all go on to eventually have what we call a ‘career’. A career is an occupation or job undertaken for a significant period of an individual’s life and with opportunities for progress. People have careers because they want to succeed and achieve things, because they enjoy their jobs and/or to make money in order to enjoy life.

As we stressed before, you need to set financial goals in order to have a purpose and be motivated to do what you are doing. For example, many of you might want to go to college, but first you need to have good grades which is why you need to study. So, in this case the goal is going to college and the way – the means – to achieve that is to study. There is also a timeframe: you need to get good grades in the next 5 years, not 15 years from now. Now, your goals for the age of 30 let’s say, will not be the same as the ones we listed in the financial goal setting section above. You’ll have more difficult and expensive goals. The goals that adults set from themselves include:

• Buying an apartment
• Buying a house
• Buying a car
• Creating a retirement fund and saving for it
• Having a family
• Making a salary of X amount per year

These are some of the typical goals people set for themselves. Do not feel obliged to have these as your dreams and goals. There are other less conventional goals to set such as: “By the age of 30 I want to have visited 50 different countries”. You might want to live in different countries or volunteer in different parts of the world. The possibilities are endless. You should also know that there are sacrifices to be made in order to get to your goal.

If you want to buy a new apartment by a certain time, you might need to miss a few of the holidays that your friends will go to. If you want to live and volunteer and work in different places, then you might need to accept that you might not be making as much money as you would have, had you stayed at one place and followed a different career path. If you want to make a lot of money, you must be willing to work long hours every day for years.  In short, to reach your goals you must be focused, determined and accept the sacrifices that come with achieving those goals. Only you know what you want, what you want to do and how far you want to go.

Most importantly, you need a plan. Set realistic goals, know how much you’ll want and what you’ll need to do to get there and how long it’ll take you to get there. You also need to accept that you will have to make sacrifices to get there.

Action steps – Exercise2 (7 minutes)

Think of two goals you would like to achieve by the age of 30. You have three minutes and then we’ll discuss them in class.

Lesson wrap-up

Today’s lesson was about financial psychology. We started by discussing the importance of financial skills and money, before moving to financial goal setting and the steps that constitute the process of setting such goals. We also discussed the different money personalities, as well as the relationship between money and emotions. We then explored the relationship between money and mental health, before turning to how you can shape your financial future.

At this point we will wrap up today’s lesson.  First, we will go over the learning objectives of this lesson and we want your feedback as to whether they have been achieved and then we will address any questions you may have.  Please feel free to ask anything you’d like in relation to today’s lesson and we would love to hear how the concepts we discussed today relate to you and your life!