What is Your Money Mindset?

HOW DOES IT HOLD YOU BACK AND HOW CAN YOU USE IT TO YOUR ADVANTAGE?

The psychology behind the money mindset is an interesting concept. One that each person will struggle with in their own individual ways. Why? Because you have been developing your relationship with money since you were a child.

This relationship with money will force you into developing certain beliefs, in turn impacting the way you spend your money. If you have a negative relationship with money, it will form negative emotions towards the concept of it. Meaning you are more likely to develop unhealthy money habits.

The Psychology of Money

What does money, or the idea of money do to your brain? It activates the pleasure center of the brain, which heightens neural activity and affects decision making. How this plays into trading is that, no matter the money mindset you have, the idea of making more money causes people to be riskier with their funds.

Evolutionary development has caused humans to understand that opportunities to make money (survive) are important. So naturally, the mind wants to make as much money as possible to feel secure. Losing money causes us physical pain. The receptors the brain sends to the body when money is lost causes the body to go into fight, flight, or freeze mode. This is because of evolution and how loss or threat to survival/security was always more dangerous than the opportunity to improve.

Touching on your beliefs about money, the way it was talked about (or wasn’t) will affect the way you spend it. What did your parents have to say about money? How were you raised to think about it? No matter the answer, your psychological response will fall into one of two mindsets: spender or saver.

Money Mindset #1: Spender

Usually, people who fall into the spender mindset do it for one of two reasons:

1. If money was plentiful growing up, they are used to getting what they want and desire to continue that lifestyle into adulthood.
2. If money was tight growing up, they are used to not getting what they wanted and they tend to want to spend because it proves to themselves that they can afford the nice lifestyle they always wanted.

I’m sure there are other reasons, but these are the two most common ones that cause people to develop a spender mindset.

Spending money causes the brain to release dopamine for this money mindset and it becomes addicting. Not spending will cause the person anxiety. Have you ever heard the phrase, “money is burning a hole in your pocket”? This is because the brain knows you have money not being spent and is craving that dopamine release.

How does being a spender impact your trading?

PROS:

• The confidence and calmness you have about spending money will cause you to take riskier and more profitable trades when the setup is right
• You will be more apt to let your winners run.
• You will be more likely to stay consistent in your trading because of the dopamine release you get when you hit buy.

CONS:

• You will be more likely to overtrade and FOMO into trades.
• It will be difficult for you to focus on consistent growth instead of major gains.
• The dopamine release you receive when trading can turn into more of a gambling/degenerate mindset if you are not careful.

Money Mindset #2: Saver

Usually, people who fall into the saver mindset do it for one of two reasons:

1. If money was plentiful growing up, they are used to the security that comes with financial freedom and desire to continue that lifestyle into adulthood.
2. If money was tight growing up, they tend to crave financial freedom because they watched their family struggle growing up and do not want to be in the same position.

These are the two most common reasons that cause people to develop a saver mindset.

Saving money causes the brain to release dopamine for this money mindset and it becomes addicting. Spending money on unnecessary expenses will cause the person anxiety. This is because they know they do not need this item to survive and feel guilty for purchasing something that is a want.

How does being a saver impact your trading?

PROS:

• You are very picky with your trades and will ensure your technical analysis is foolproof before entering a trade.
• Cutting your losses short is not as big of a problem because the idea of losing money for no reason makes your stomach sick.
• Your mindset will make you want to keep your position sizes small and focus on consistent growth instead of major wins.

CONS:

• You will be more likely to fear taking trades because the possibility of losing money scares you out of the trade.
• You will cut your winners short because you are just happy to have profit and do not want to risk losing it.
• The dopamine release you receive when saving money can cause you to struggle more with your emotions while trading (overthinking, anxiety, insecurity).

In conclusion…

The psychology behind money is a tricky thing and this post only scratches the surface of what money mindset can do to you and your trading career. Understand that neither one is better than the other and both have their pros and cons.

Being aware of what your money mindset is will show you the direction you need to take to move forward and improve your trading. What is your mindset and what do you feel you struggle with most/do the best? Let us know below in the comments!