How do you arrive at the financial decisions that you do?
Well there are many factors that influence our financial decision making and our own personal values account for more than you might think - this includes our personality type, cultural values, level of financial literacy and past experiences.
1. Personality types
Some psychologists broadly agree there are six financial personality types.
From cash splashers and meticulous spreadsheet documenters to those who bury their head in the sand, our financial personality types inform our relationships with money and influence our financial decisions.
Whether it's frequent investment trading, hoarding cash or using money to show grand gestures, these financial personality types can give insight into our underlying desires and attitudes whether it be overconfidence, security or being admired.
2. Social and cultural values
Our societal and cultural values also inform our financial decisions.
In Australia there are tell-tale signifiers of common social values – we are obsessed with home ownership, it is part of the Great Aussie dream.
Our beliefs around success and security are intertwined very closely with home ownership. It’s why, according to ABS data, in 2015-2016 around 67 per cent of Australian households lived in owner-occupied homes.
And it’s why the property market, banking industry and politicians all appeal to our desire to own our own home.
But there are also insights around how we collectively like to have fun.
A key social Australian past time is trotting down to the races, frocking up and taking part in the sweeps.
The race that stops a nation (and the broader gambling sector that supports it) is woven into the fabric of the country’s entertainment industry, and goes hand in hand with Australians’ ideals around taking a punt and ‘having a go.’
It’s the reason why we are a nation of betters. And it’s no surprise Australians experience higher gambling losses per person than any other country.
3. Financial literacy
Comparative international research shows that higher levels of numeracy and financial literacy are positively correlated with proactive approaches around financial planning, investment ownership as well as wealth accumulation.
However broadly speaking, the state of financial literacy worldwide still remains relatively low.
The Standard & Poor’s Ratings Services Global Financial Literacy Survey is the world’s most comprehensive global measure of financial literacy.
Its findings from its 2014 survey show that:
- One in three adults (33 per cent) worldwide are financially literate;
- Women reported lower levels of financial literacy than men;
- Numeracy and inflation are the most understood concepts
- Risk diversification is the least understood concept
Broadly, speaking, there is greater opportunity for all of us to upskill our own financial literacy.
That's why at Spaceship, we try to cut the jargon and talk in plain speak, because we know the positive impact that accessible insightful help can have on your financial literacy.
4. Personal and past experiences
This probably has the most conscious effect on our financial decisions.
People who lived through periods of economic depression, whether they have experienced it first-hand or witnessed wide-scale and economic dislocation, likely bring these memories into their attitude to money.
For instance, pre-retirees and retirees whose retirement savings were impacted by the Global Financial Crisis have strong experiences which they are likely to take into consideration when making financial decisions today.
For these investors, the losses incurred during those periods either forced them to prolong their retirement or adjust their lifestyle expectations accordingly. It also means their personal experiences may make them weary of the share market based on that experience.
You don’t arrive at your financial decisions by accident. Your personal values and life experiences in varying degrees influence how you arrive there.
But understanding the drivers behind your financial decisions, can shed some colour and help you to rationalise future choices.
