The psychology of money: Habits to master in the New Year
Your money decisions aren’t just about numbers, they’re shaped by habits and emotions. This new year, focus on small changes like tracking spending, automating savings and pausing to reflect before making purchases. Understanding biases such as loss aversion and mental accounting can help you make smarter choices. These simple habits don’t just strengthen your finances, they can help boost confidence and wellbeing for the year ahead.
When it comes to money, we like to think we’re rational. We create budgets, set goals and tell ourselves we’ll make sensible decisions. Yet in practice, emotions and habits can play a far bigger role than we’d like to admit.
The start of a new year is an ideal time to reflect not just on what you want to achieve financially, but how you make decisions day to day. Understanding the psychology behind your money habits can help you build new, healthier ones – and ones that stick.
How emotions shape your financial decisions
Money is rarely just about numbers. It’s tied to security, freedom and even self-worth. As a result, emotions can strongly influence how we spend, save and invest.
Stress or fear may lead to avoidance, such as putting off decisions or ignoring your financial statements. Overconfidence, meanwhile, can encourage different poor habits, such as overspending. These reactions aren’t unusual; they’re part of being human.
Recognising your emotional triggers is a powerful first step. When you understand why you tend to behave in certain ways with money, it can become easier to introduce habits that support better outcomes rather than relying on willpower alone.
Behavioural finance concepts to know
Behavioural finance is the study of how psychology affects our financial decision-making. Three concepts in particular are useful to understand.
Mental accounting is our tendency to categorise money and treat it differently depending on where it comes from or how we’ve labelled it. For example, someone might be careful with their monthly income but spend a tax refund without thinking. Being aware of mental accounting can help you make more consistent decisions — and even use it to your advantage, such as by directing unexpected income straight into your savings.
Loss aversion describes how strongly we feel losses compared to gains. Losing £100 often feels more painful than the pleasure of gaining £100. This can influence everyday behaviour, from avoiding investments that fluctuate to hesitating over financial decisions for fear of getting them wrong. While caution has its place, understanding loss aversion can help prevent it from becoming a barrier to progress.
Another common influence is familiarity bias — our tendency to favour what we know, such as investing in companies from our own country or household names. While familiarity can feel reassuring, it can also limit diversification and may increase our exposure to risk.
In behavioural finance, it’s often smart to look for the middle ground. For instance, you probably shouldn’t go wading into totally unfamiliar investments, but understanding familiarity bias can keep your eyes open to opportunities you haven’t before considered. Expert advice can help you sort the high-quality opportunities from the high-risk.
Small habits that can make a big difference
Lasting financial change often doesn’t come from dramatic overhauls. Instead, it’s built through small, repeatable habits that gradually shape behaviour.
Here are a few small changes you can turn into habits over time:
- Track your spending regularly. This doesn’t need to be time consuming; a daily or weekly check-in can increase awareness and reduce unconscious spending.
- Set savings triggers. For example, automatically saving a percentage of any bonus, pay rise or unexpected income. Automation can also help, such as setting up regular transfers into your savings account.
- Create timing rules, such as waiting 24 hours before making non-essential purchases or limiting how often you check your long-term investments. These small pauses can reduce rash decision-making and support more thoughtful choices.
Good financial habits support good wellbeing
Our relationship with money doesn’t just affect our bank balance. It has a direct impact on how we feel day to day. You don’t need to look further than our latest Money and Mind report to see the results.
Nearly two in three people (62%) are concerned or very concerned about their finances, and among those, 79% say their financial situation impacts their mental wellbeing. Nearly a third feel stressed or anxious about money. These figures highlight just how closely our finances and emotional wellbeing are linked.
When your finances feel disorganised or unpredictable, they can weigh heavily on your confidence and peace of mind. By contrast, establishing positive habits — such as regular reviews, automated saving and a clear financial plan — can help reduce uncertainty and provide reassurance, even when volatility strikes.
Setting yourself up for the year ahead
Mastering the psychology of money isn’t about becoming perfectly disciplined or emotionally detached. It’s about understanding yourself better and building habits that support your goals. As the new year begins, focusing on small behavioural changes can make managing your finances that little bit easier. Over time, these habits can help create not just stronger finances, but a greater sense of confidence in everyday life.
Important information
This article is for information purposes only. It is not intended as financial advice.
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