Understand what money represents for you, in order to determine your relationship with it

Does money represent safety for you? Or status and recognition? Freedom from people who can tell you what to do or how to live? Does money validate that your creativity or self-expression has market value? Or is it merely a means to an end?

When you ask yourself what money means to you, and how it provides for your primary psychological needs, it helps bring clarity to how much you’re willing to sacrifice to get it. Maslow’s hierarchy is a good place to start when it comes to working out which universal need money might represent for you: basic needs (like food and rent), safety, belonging, esteem or self-actualisation.

Understand what money can give you — and what it can’t

We often think that the next big purchase will make our lives so much better. But that’s not what the facts say. A 2010 study by Nobel prize winner Daniel Kahneman and Angus Deaton of Princeton University — one of many such studies — shows that the relationship between money and happiness isn’t linear: it’s logarithmic. That means that more money brings more happiness, but only up to a certain point. Once your day-to-day needs are met and you’re not actively worrying about money, the amount of happiness gained by each additional pound earned diminishes drastically and begins to approach zero. Once you’ve reached a certain level of income, your happiness will be better served by non-monetary pursuits: more meaningful work, for instance, or a better philosophy of life.

Understand your values so that you avoid cognitive dissonance

What we choose to spend our money on says a lot about who we are; in some sense, we vote with our supermarket trolley and our values are shown in every purchase. Whether it’s expensive luxury items or supermarket basics, sometimes our spending can offer clues into our unconscious values.

For example, we might say we value books, but then spend more money each month on Netflix. Being aware of the difference between what we say and what we do can help us harmonise within ourselves and become more congruent. After all, there’s nothing wrong with Netflix. And owning our values explicitly helps us not feel guilty when that Netflix subscription goes out every month. Greater self-knowledge helps reduce the chance of us experiencing cognitive dissonance, that uneasy feeling we get when we do things that aren’t consistent with what we really think.

Understand how your formative experiences shape your spending habits

We know that a lot of what we do now is actually learned from role models we had in our formative years. So take a moment to ask yourself how the important people in your life dealt with their finances. What do you think you might have unconsciously internalised from them? Do you tend to cut corners on small purchases and then splash out on something big now and then? Do you view holidays as a time to financially let go? Do you have the need to constantly be ‘careful’ with money drilled into you? Understanding this will help you spot which bits of your financial habits replicate those of people you grew up with, and what are the financial habits you’re trying to build yourself.

Understand what you can and can’t control

The mind often focuses on things outside of our control. Getting a promotion, worrying about the economy, or thinking about how our investments are doing. Dwelling on these things just gives more oxygen to the feeling of being out of control, which itself fuels anxiety symptoms.

If we bring our attention down to the micro-level, it’s possible to see there’s a lot we can control. What we do when we see our friends, how many nights a week we eat out or even how often we check our bank account. The closer you look, the more you see the things we have decision-making power over. And the more we focus closely on these small things we can control, the better we can defend ourselves against those things we can’t control. The good micro-habits compound over time.