How Feeling Poor Can Lead to Poor Decisions

August 30, 2024

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Hey there,

Ever had that gnawing feeling of financial scarcity, even when you're not exactly broke? It’s that constant worry that there’s never enough, driving you to make decisions that might not be in your best interest. This is what we call the “scarcity mindset,” and it’s more powerful than you might think.

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What Is a Scarcity Mindset?

A scarcity mindset occurs when we focus intensely on what we lack. Whether it's money, time, or resources, the feeling of scarcity can dominate our thoughts, leading to a sense of urgency and even panic. While this mindset can spur action, it often leads to short-term decisions that undermine long-term financial health.

The Psychological Trap

When we’re stuck in a scarcity mindset, our brains go into survival mode. This can distort our decision-making process. For instance, we might:

  • Opt for Immediate Rewards: You might decide to spend money on something small and gratifying right now rather than saving for something bigger and more meaningful in the future. This is the classic battle between immediate gratification and delayed rewards.

  • Avoid Taking Risks: Fear of losing what little you perceive you have can lead to overly cautious decisions. You might shy away from investing, sticking with "safe" options that don't grow your wealth.

  • Overreact to Setbacks: A minor financial loss can feel catastrophic, leading you to make rash decisions like selling off investments at a loss or taking on debt out of fear.

How the Scarcity Mindset Affects Financial Decisions

  1. Living for Today, Ignoring Tomorrow: When you’re focused on getting by day-to-day, saving for the future can feel impossible. You might dip into savings or avoid contributing to retirement accounts, thinking you’ll make up for it later. But as we know, time is one of the most powerful allies in building wealth.

  2. High-Cost Borrowing: When feeling strapped for cash, it’s easy to fall into the trap of payday loans or high-interest credit cards. These might solve the problem temporarily but often lead to a cycle of debt that's hard to escape.

  3. Hoarding Money: Ironically, some people react to a scarcity mindset by becoming overly frugal, hoarding cash instead of investing it. While saving is important, letting fear prevent you from investing can stunt your financial growth.

Breaking Free from the Scarcity Mindset

  1. Shift Your Focus to Abundance: Start by recognizing the resources you do have. Practice gratitude and focus on what’s going right. This can help shift your mindset from what you lack to what you can build.

  2. Create a Financial Buffer: Building an emergency fund can alleviate the constant fear of running out of money. Knowing you have a cushion can reduce the sense of scarcity and help you make more rational decisions.

  3. Set Long-Term Goals: Having clear financial goals can help you see the bigger picture. Instead of getting caught up in the day-to-day, you’ll be more likely to make decisions that benefit your future self.

  4. Educate Yourself: Knowledge is power. The more you understand about finances, the less likely you are to fall into the traps of a scarcity mindset. This might mean learning more about investing, budgeting, or simply how to manage your money more effectively.

Final Thoughts

Feeling poor, even when you're not, can lead to decisions that actually keep you from improving your financial situation. By recognizing this mindset and taking steps to overcome it, you can shift from a cycle of scarcity to one of abundance, where your decisions are driven by long-term goals rather than short-term fears.

Until next time,

Behavioral Finance Team