Lifelong Money Habits Rooted in Our Youth

Financial psychologist Brad Klontz explains how childhood experiences help shape our financial futures

Adam Zoll 23 July, 2013 | 10:51AM
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Along with our lifelong relationships with family and friends, each of us will have a lifelong relationship with money. Brad Klontz, co-author of Mind Over Money: Overcoming the Money Disorders That Threaten Our Financial Health and co-founder of, is a Hawaii-based financial psychologist who studies the sources of people's financial behaviour. He answered questions from Morningstar via email.

1. You've studied how people's past experiences with money help shape their long-term views. Can you provide some examples, and is this impact usually negative or can it be positive, as well?

Money is one of the most powerful forces in society. Our survival and well-being depend on it. We need money for food, shelter, safety, security and medical care, and also to fund our hopes and dreams. As a result, many of us have an emotionally charged relationship with money, which is shaped very early on in our lives. We typically learn from our parents and grandparents what money is, what it means, how to deal with it and how to feel about it. 

Our research at Kansas State University has found links between socioeconomic status in our growing-up years and money scripts—beliefs about money—and financial behaviours in adulthood. For example, those of us who grew up in poorer households are at greater risk of holding "money status" beliefs, in which our self-worth becomes synonymous with our net worth. Money status beliefs are associated with lower income, lower net worth and overspending. If we grow up in a household that disparages money and the wealthy, we are more likely to carry money avoidance beliefs, such as "rich people are greedy" or "good people should not care about money." Not surprisingly, these beliefs are also associated with having a lower income and lower net worth.

Parents who have a balanced relationship with money and are strategic in what and how they teach their children about money can increase the chances that their children develop healthy money habits.

2. As investors, sometimes we are our own worst enemies, buying when the market is up and selling when it's down rather than the reverse. Does your research provide any insight as to why we fall into these bad habits?

Our animal brains are incredible instruments designed to keep us safe in an unpredictable and dangerous world. When faced with a challenge, our instincts take over and we engage in a fight-or-flight response to increase our chances of survival. However, when it comes to investing, our animal instincts are dead wrong. In a world of large predators, the slowest-running beast in the herd misses out on lunch or becomes lunch. 

Today, most of us don't live in a world of daily threats to our survival. However, our brains haven't kept pace with our rapidly evolving world. As such, when we see the herd sprinting toward the newest, tastiest investment, we feel an irresistible urge to run along. When we see the herd stampeding away from a holding, we feel compelled to retreat also. To our animal brains, staying still feels like a threat to our very survival. 

Our animal instincts have made us the most successful predators on the planet and set us up for chronic failure as investors. On a macroeconomic level, we know for certain that economic bubbles and crashes will continue. In the midst of a bubble, all sorts of rationalisations will emerge to justify that it isn't a bubble. After a crash, new models will be developed to make sure that it never happens again. Then the cycle will repeat. It is up to the individual investor to recognise the herd instinct when it emerges and to tame the animal brain.

3. How can we guard against self-defeating behaviour such as spending more than we should or taking on more risk than we should? 

The key is to recognise that we can't trust our instincts around money and to engage our rational brain. Often our destructive financial behaviours occur when we are excited, scared, depressed or angry. When it comes to money, when we are emotionally charged, we become rationally challenged. It helps to put some time between your financial impulse and your action to let your animal brain calm down and your rational brain to come on line. Talk to a financial expert about your impulse, take some deep breaths, delay making a big purchase for 24 hours.

It is also very beneficial to uncover our personal money scripts—those typically unconscious beliefs we have about money, often developed in childhood—that drive our financial behaviours. For example, if a boy grows up in poverty, he may have the belief that "You will never have enough money." This is a logical conclusion to a child who sees that there is not enough money to make ends meet and there is no end in sight. Unless this belief is challenged as the boy grows up, he may decide that it is not worth trying to acquire or save money, since it won't work out anyway. Therefore, he might spend every penny he gets and leverage all the credit possible to get what he can get when he can get it. On the other hand, growing up in poverty could create a Scrooge, who works to excess at the expense of family and health, hoards money and won't allow himself to enjoy his resources.

4. We often hear stories of people trying to "keep up with the Joneses" when it comes to maintaining a certain lifestyle. What do our spending patterns say about our own personal psychology?

Keeping up with the Joneses is nothing more than an animal impulse. When we feel like we are getting further and further away from the centre of the herd, our anxiety increases and we become at greater risk of making bad financial decisions. In terms of personal psychology, relative deprivation is key. It has nothing to do with an absolute, real dollar amount. We determine whether we are OK based on what we see around us. Unfortunately, the average [person] continues to live above his or her means, so we base our comparisons on what we "should" have on a distorted benchmark. The sad truth is that the Joneses are weeks away from having their Hummer repossessed and their house going into foreclosure. Understanding the animal brain's impact on our financial psychology opens the door to making rational financial decisions.

5. When our personal wealth increases, such as when we get a raise at work or receive a sizable windfall, we usually adapt pretty easily to an increased standard of living. But when our financial picture worsens, such as through the loss of a job or a decline in our retirement savings, cutting back can be particularly painful. From a psychological standpoint, why is it so difficult to lower our standard of living?

I think this dynamic can best be explained by something we call the "financial comfort zone" in our most recent book. The financial comfort zone is the socioeconomic herd in which we feel the most comfortable. For many of us, it is the level of wealth in which we grew up. Think of it as a culture, or a neighbourhood in which you feel most comfortable. You know the rules, the dress, the language and norms. You feel most comfortable wearing the expected clothes, driving a similar car, eating at the restaurants and having a similarly priced house. 

Most of us are not aware of our financial comfort zone until we step out of it. Examples might be: sitting at a table with more silverware than we know what to do with, or walking into a place where we suddenly feel overdressed and out of place. Whether it is a sudden money event such as an inheritance or winning the lottery, or a financial loss, being thrust out of our financial comfort zone creates intense anxiety. Our animal brain feels vulnerable, and it will go to extraordinary measures to get us back to our level of comfort, even if doing so is financially destructive. This explains why many highly successful individuals will recover quickly after a huge financial loss and why many lottery winners will burn through their money in just a few years.

6. What advice can you offer for discussing money matters with members of one's own family, such as spouses, siblings, children, parents? It seems like these discussions are fraught with psychological implications.

Money is an emotionally charged topic. It can be very difficult to discuss. In good times and bad, money is the number-one source of stress in the lives of three out of four Americans. It is the number-one reason for divorce in the early years of marriage. Many of us are taught, "It is not polite to talk about money," and we feel shame about having too much money or too little money.

Many money conversations within families are often full of conflict. Most quandaries regarding money are the result of conflicting money scripts. Rather than having the typical "drive-by" money conversation, where frustrated comments or snide remarks are shot back and forth in the kitchen, money conversations need to be handled with care. Ideally, an appointment should be set, and it helps to start with a conversation about money scripts. Each person can talk about his or her earliest memories around money, the most painful experiences, the most joyful experiences, the lessons learned from parents, the biggest fears around money, and goals. When we better understand our relationship with money and the money fears, hopes, and experiences of those we love, it becomes much easier to negotiate financial solutions.

This article was originally published on in December 2012.

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

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Adam Zoll  is an assistant site editor with, the sister site of

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