Getting Connected with Your Money: What are financial behaviors, and how do they develop?

Some of my favorite childhood memories come from rainy days spent with my family when we would play board games late into the night. We enjoyed many classics, but our favorites included Monopoly and EasyMoney. Little did I know, those game nights were helping me build positive financial behaviors before I was even old enough to understand the gravity of managing finances.

Children as young as five begin developing emotional responses to spending and saving. More importantly, these responses can foreshadow financial decision-making in adulthood.

Analyzing your money behaviors and understanding what drives you to spend or save is essential to making informed financial decisions.

What is financial behavior or money behaviors?

Financial or money behaviors encompass everything concerning how you view finances, money management, and decision-making.

Here are some succinct definitions from scholarly resources:

“It can be defined as any human behavior that is relevant to money management. Common financial behaviors include cash, credit and saving behavior.”

“The capability to capture [an] understanding [of] overall impacts of financial decisions on one’s (ie. person, family, community, country) circumstances and to make the right decisions related to the cash management, precautions and opportunities for budget planning.”

“It is the personal management of financial situations such as savings, investments, money, and credit.”

“The actual financial decision making, practices and decisions.”

Common money behaviors include being a spender or saver, living within or beyond one’s means, or being charitable toward others.

Examples of negative money behaviors include:

- - Paying bills late or failing to plan ahead.
  - Mismanagement of debt or investment accounts.
  - Making unnecessary purchases or being impatient to purchase.

Examples of positive money behaviors include:

- - Maintaining an emergency fund or earning interest on savings.
  - Resisting urges for compulsive spending.
  - Setting and achieving financial goals or creating a financial plan.

Identifying your financial behaviors is the first step to getting them under control. If you feel your money management could use improvement, start by having an open and honest conversation with yourself about your financial habits and tendencies.

To learn more about strengthening your relationship with money, check out Bhaj’s blog article, How well-connected are you with your money?

What drives financial behavior?

Many people are under the impression (and misunderstanding) that their money behaviors are driven by logical decision-making and math. The truth is that financial behaviors are much more complicated than a simple equation. Our relationship with money is hardly built on rational thought alone—in fact, it’s predominantly emotional.

Let’s look at a typical example: paying rent is a means of survival, but deciding where one lives is often personal. If it were only about the money, everyone would simply choose the cheapest place available. But, most people consider comforts beyond financial considerations, such as safety, accessibility, and aesthetics. You might choose a neighborhood where you feel safer walking home from work. Or, you might look for a house with a park nearby for your children to play.

The emotional nature of our relationship with money necessitates understanding where our habits and feelings regarding money come from.

How are money behaviors developed?

The development of financial behaviors is surprisingly multifaceted. As mentioned earlier, our emotional responses to money behaviors begin developing at a very young age—even before financial decision-making has real relevance.

Children’s observations of their parents’ spending habits inform their own. For instance, children with excessively frugal parents may grow up to be frugal themselves or take the opposite approach and overspend to compensate. Feeling deprived as a child can make someone prone to binge spending.

Thus, it’s no real surprise that our early financial behaviors tend to follow us into adulthood; if you saved your allowance at 16, you’re more likely to prioritize saving as an adult. A 2013 study found that early childhood socialization is positively associated with later financial asset ownership and effective money management practices while also negatively associated with financial worry.

Build a stronger legacy by helping your children develop positive money habits!

A staggering 83% of parents with children 8-14 years old wish they had learned more about finances growing up. 13% of those polled reported their parents didn’t speak to them about money at all…no wonder 62% of Americans don’t talk about money with family, friends, or even their romantic partners.

Though financial education in schools can help with developing early positive money behaviors, studies have found that financial literacy is mostly cultivated at home and from family observation. In a very real sense, financial habits are inherited.

One of the best ways to set your children up for success is to help them develop smart money behavior from a young age.

Strategies for helping your children build strong money behaviors

- - Instead of buying your children games or other non-essential items, provide them an allowance with which they can save and make purchases themselves.
  - Earning money in exchange for doing chores teaches children about its value and scarcity.
  - Kids as young as toddlers can learn money behaviors from using a piggy bank.
  - Let your children handle the banking job when you play money-related board games.

You may be tempted to hide important financial decisions from your children, but being privy to such information helps them learn financial literacy and develop money behaviors. I would even suggest including them in family conversations about money.

Common Questions About Financial Behavior

Are money behaviors set in stone?

Anyone can change their money behaviors, but breaking habits instilled since childhood can be challenging.

If you want more guidance in examining your relationship with money or addressing negative financial behaviors, contact F&S expert Bhaj Townsend via email at bhaj@focuasandsustain.com.

What does financial behavior include?

Financial behavior includes everything that informs your decisions with money, from purchasing choices to proclivity for savings.