5th July 2024

The surprising effect your childhood has on your money mindset

By Jane Patrick

Your relationship with money may play a huge role in how you handle financial decisions and your long-term security. Many factors affect your financial decisions, but you might be surprised by how much your childhood experiences still influence you today.

The majority of parents recognise how important financial education is. Indeed, according to Nationwide, almost 9 in 10 parents to children aged between 8 and 13 say personal finance education would help their children better understand the value of money. 59% also agreed that personal finances were more important than maths.

Yet, studies suggest these parents might be considering the positive effects of financial education too late.

Research: Money habits could be set by age 7

A 2013 study from Cambridge University indicated that financial habits are formed by the age of seven. The research suggests that children have often formed core behaviours by the age of seven which they will take into adulthood and could affect financial decisions for the rest of their lives.

While skills like being able to count money are important for handling day-to-day finances, the study recognised that other factors affected money relationships, such as the ability to regulate emotions and think reflectively.

Your approach to finances when you’re an adult might be just as much about your mindset as your financial knowledge.

For instance, you might understand the tax benefits of using a Stocks and Share ISA to invest in the future. However, letting emotions rule your decisions could mean you miss out on potential returns if you change your investment strategy during market volatility.

In fact, a report in FTAdviser previously suggested that emotional decision-making costs investors at least 2% in foregone returns each year. Over your investment time frame, those lost opportunities could add up to a substantial sum.

The Cambridge University research noted that once habits form, it can be difficult to reverse them later in life. However, it’s not impossible, so read on to find out more.

Please note, the value of your investments (and any income from them) can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance. Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.

4 practical ways to overcome potentially harmful money habits

1. Understand your money habits

If you want to improve your relationship with money, a good place to start might be to take some time to understand your habits.

When you’re making changes to your investment strategy, are you more likely to base your decisions on facts or emotions? If you received an unexpected lump sum, would you splurge or use it to support long-term goals?

Retrospectively examining your financial decisions could help you identify patterns in your behaviour. You might realise that while you’re good at managing your day-to-day budget, emotions are more likely to have an effect when you’re handling long-term investments.

By understanding potentially harmful money habits, you’re in a better position to recognise when they could have an effect in the future.

2. Review your finances regularly

Busy lives can make keeping on top of your finances difficult. Yet, carving out time to regularly review your short- and long-term finances could also help you spot where money habits are harming your wealth or ability to reach your goals.

Seeing the effect money habits may be having on your finances may be useful when you’re trying to change your mindset. For example, if you’re often tempted to dip into your savings to cover non-essential expenses, seeing how it could affect your capacity to retire early, support loved ones, or overcome a financial shock could give you pause next time.

3. Give yourself time when you’re making financial decisions

Sometimes poor money decisions stem from not giving yourself enough time to think through your options or the long-term implications. So, next time you’re making a decision that could affect your financial future, don’t decide right away.

Allowing yourself a few days to think it through could mean emotions or other factors that were influencing your decision have subsided. It could help break negative money habits and start to form new ones.

4. Work with a financial planner

A financial planner doesn’t just help you navigate areas like tax liability or how to use a pension, we can help you manage your money more effectively too.

Having a tailored financial plan in place can highlight how you may work towards your larger goals and the effect day-to-day decisions might have. It could help you overcome previously established money habits that could harm your long-term financial security.

In addition, you have someone to talk to when you’re making large financial decisions. Discussing your options can be a useful way to process information and look at your options from a different perspective. It could lead to you making decisions that have a better long-term outcome.

Contact us to arrange a meeting to talk about your finances

If you’d like to discuss how we could help you manage your finances with your circumstances and goals in mind, please contact us.

Please note:

This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.