The Number One Factor in Financial Success – Or Failure

The Number One Factor in Financial Success – Or Failure

Have you ever wondered why some people are financially successful and others are not? I know factors like inheritance and “luck” play a really big role, but what accounts for those with almost identical backgrounds? How can two people with the same relative incomes and backgrounds start so similarly but wind up in such different places?

I found myself asking this after meeting recently with two separate couples. They don’t know each other, but two things were remarkable about the comparison: the similarity of their opportunities, and the difference in how they’re doing now. What accounted for such a dramatic contrast?

It’s tempting to point at specific behaviors like spending, saving, or investing habits. After all, that’s what I help people do for a living. But anyone who’s helped someone else try to change habits knows there’s always something more going on. These habits may explain what someone’s relationship with money is like, but they still don’t account for why some have a healthy relationship with their finances and some don’t.

It turns out that the number one factor in financial success or failure is what you believe about money itself.

We all have a series of money scripts – beliefs about money that guide how we treat our finances. Like an actor on the stage, a script tells us what to do in each scene of life that plays out. Most of these scripts are subconscious; we’re not usually aware of thinking them. And most are unexamined; we probably didn’t create our money scripts after careful thought and consideration.

Typically, money scripts are formed early in life, most often in childhood. Do you have any relatives that grew up as children of the Great Depression? Many carried the frugality they learned well past the economic need for it. It shaped their entire approach to money.

Most people believe their money scripts strongly. For example, last week we had two 60-somethings in our office separately declare the following:

“Never buy a new car – they depreciate as soon as you drive them off the lot!”

“Never buy a used car – no one sells a good car. You’re buying someone else’s problem!”

Don’t think too hard about why you agree or disagree; just notice how strongly you hold your belief. They were not just stating facts. They were stating an opinion with some emotional weight to it. And it’s this emotional weight that helps – and hurts – us in our search for success.

The 4 Most Common Money Beliefs

Researchers at Kansas State University have been studying the relationship between these money scripts and financial behaviors. In a 2011 study, Bradley Klontz and Sonya Britt took over 72 statements about money and asked people how much they agreed or disagreed with each. The statements were things like:

  • “You should not tell others how much you make.”
  • “My life would be better if I had more money.”
  • “Rich people tend to be greedy.”

After analyzing all the results, they noticed a few interesting items. First, four distinct categories of thought emerged that all the respondents tended to fall into. Second, these four ways of thinking about money were useful in predicting both positive and negative money behaviors, including serious misbehaviors. Third, many people’s money script could be guessed accurately if you knew what their occupation was.

Though we hold a primary belief, many of us hold to more than one of these to some degree. Interesti2ngly, each category believes their script is “normal” or the “right” one. This isn’t the case. But each has strengths and weaknesses.

Here are the four main categories of money scripts:

1. Money satisfies.
Those who believe this way tend to think about what money does for them. It’s a means to an end. And they often view it as the primary tool to solve their problems. In general, they believe more money would mean more happiness. This view of money is the most common one among Americans, especially those who are younger, white, or lower income.

Strengths: Often very hard working and good at enjoying the fruits of their labor.
Weaknesses: More likely to carry credit card debt, take unnecessary financial risks, or develop workaholism.

2. Money corrupts.
In contrast, many believe that money is dangerous and a negative influence in most people’s lives. This could be an explicit belief, like “rich people are greedy,” or an implicit feeling like they don’t deserve money. These individuals tend to avoid talking about or dealing with money in their own lives.

Strengths: Tend to be compassionate people and often others-focused.
Weaknesses:
More likely to neglect their finances, live in denial, or even self-sabotage to avoid dealing with money.

3. Money validates.
This belief centers on what money says about people. Those who believe “money validates” think that wealth represents achievement and is a sign of doing things right. Wealth opens doors not available to others. They don’t mind spending their money on higher quality products because something isn’t worth buying if it isn’t the “best.”

Strengths: Can be supportive to others in community with their influence and philanthropy.
Weaknesses:
Prone to lower self-esteem and happiness, because there is always someone with more. At risk of depression if financial situation worsens.

4. Money protects.
The final group sees money as something that can protect them, and in return are very protective about their money. They tend to be the consistent savers and frugal spenders. They’re often very secretive about their finances, viewing discreteness as a positive character trait.

Strengths: Usually disciplined in saving, spending, and investing.
Weaknesses:
Increased anxiety and secretiveness may prevent them from enjoying the money they’ve saved.

Your Personal Approach
As I mentioned, certain jobs tend to carry certain scripts. Financial planners generally believe “Money protects.” So when I took the Money Script Inventory that the researchers designed, I wasn’t surprised that this was my dominant viewpoint. Social workers as a group fall into the “Money corrupts” category, and they tend to avoid money issues because of it. Are you able to tell what your viewpoint might be?

So which money script was associated with financial success? Is there a right script?

This depends on how you define success. If you define success as higher net worth, then “Money corrupts” is definitely not the winner. But many people in this category can still have a healthy relationship with their finances and (more importantly) with those around them. The “Money protects” group tends to be more financially healthy as a whole, but their conservatism can sometimes hold them back. In other words, a script like “Money satisfies,” which might welcome higher risk, may end up with bigger financial payouts (or bigger losses). But they will trade off financial security to get there!

Here’s my point: your definition of success itself will be determined by your money script. This is why money beliefs play such a big role in our financial lives. They both limit us and at the same time define the target that we’re shooting for.

Discovering your personal money beliefs will not guarantee success. But it could be the first step in helping you see the pitfalls you’re prone to, false assumptions you may be making, and even rethinking what success actually is.

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