The psychology of poverty

Money can’t buy happiness, but poverty sure doesn’t make you happier. Unfortunately, many psychological studies found poverty also holds you back in making decisions that will make you more likely to gain riches. Today, I’ll tell you all about some important studies in the psychology of poverty and what you can do to prevent this from happening to you!

Stress

Let’s start with the stress that comes with poverty. Studies have found that one of the most influential factors in people with heightened stress levels is financial stress. This is not surprising, since financial troubles affect almost everything in your life. It can affect relationships, especially when financial problems are not discussed with the partner properly. It also affects buying decisions, it can affect status, and much more. This causes people with financial problems to have to make more difficult decisions, giving them more stress. It’s a vicious circle.

Resistance

This increase of difficult decisions is also exhausting their mental strength to resist temptation. This can lead to an increase in ‘bad’ decisions, such as unhealthy snacks and buying heavily promoted, more expensive products. Heuristics will also have a larger influence on the decision making because of this. Heuristics are rules of thumb that are often true, but not always. For instance, bigger is better. Often, bigger packaging is cheaper, but it’s still important to check it by calculating price per 100 ml or litres.

It’s also known that people with more stress are more likely to get a scarcity mindset. Because they don’t know what will happen financially next month, they’ll be more likely to buy things now with the money they have. This, instead of saving for the better option. This used to be a logical thing when we would survive in the wild, but in an economy that is more focused on long term, it can be harmful for the overall economic health of someone. For instance, people with more financial stability are more likely to save money. The scarcity mindset however, will leave people to spend money now, because they’re unconsciously afraid that if they don’t, they’ll lose it all.

Avoidance

Another common behaviour of stressed people is avoidance, which is also pretty understandable. They want to reduce the stress. However, by not opening the mail or checking their bank accounts, they increase the uncertainty of their situation. This then often leads to even more stress. In addition, it costs more money in the long run, since their rent is going up due to not paying their bills on time.

What can help in this case is to divide the load in little steps. You could do your finances for an hour or two each week on a set time. You could even make some implementation intentions. This means that you’ll for instance say ‘When it’s Tuesday 10 in the morning, I will spend two hours on paying my bills and do my financial administration.’ By specifying this, you’ll be more likely to actually do it and stick to that rhythm. Another tip is telling someone you’re going to do this, for instance your partner. This person can hold you accountable and that pressure might just do the trick.

Risk taking

However, not only the tasks at hand are often being avoided. Risks also are. And of course, this is not always a bad thing. Gambling with the last bits of money you have is not a good idea. Risks are however often more likely to gain you more riches when they do pay out, compared to the safe options. 

For instance, there is the theory of delayed gratification. If you have the choice between getting 50 euros right away or 100 euros in a week, what would you do? Studies have found that people in more uncertain situations prefer option one, since they’re not 100% sure they’ll get the rest later. What if the company goes bankrupt? However, the risk of the person giving you the money going bankrupt is slim. The 100 euros option would therefore probably be the smartest, although there is a slight risk. The 50 euro option only provides you with a fake sense of safety. It’s important to rationally weigh these options, instead of going with your gut feeling in cases like this. I hope that being aware of this risk avoidance will help you to make more conscious decisions.

Confidence

One reason for this could be, because of the confidence levels that get attacked when the financial status is compromised. Unfortunately, a lot of the social status is still tied to income. In addition, many people experience shame about not having as much money as others. This is partly due to the huge taboo that’s still active in many communities about finances. It’s therefore possible that poor people might not have enough confidence to take risks, even if the risks are small. In addition, the lack of confidence makes them unsure about their ability to manage the situation when things do go wrong.

Smart buying decisions

First, you need to start with finding out what reduces stress and makes you happy. Poverty is partly subjective. Someone with 1000 euros to spend each month might feel just as poor when being around people that earn 10.000 euros, as someone with 100 euros might feel next to someone who earns 1000. Of course, if you don’t have enough money to buy food and have some form of housing, you’re in a worse position rationally, but finding 100 euros on the street might make you feel like a millionaire in that moment. Someone else wouldn’t even be bothered to pick it up.

One thing that makes us happy are experiences. I recently read an article of a Dutch psychologist, Patrick Wessels. It not only stated that experiences make us happier, but also that people in a less comfortable financial decision often chose things before experiences. Now, this theory needs to be nuanced a little, because there are also things that will get you an experience as well. Good examples of this are for instance things you can use for your hobby. But, to keep it short, if you have 1000 euros, you’d be better off with a nice holiday than you’d be with a fancy stereo or the newest car. Status is also influenced by a lot of stuff, so you might think that things giving status would be better. However, even the status of the latest car wears off quickly, since new models are coming out all the time. 

The second thing you need to focus on is sustainable behaviour. I don’t necessarily mean things that are good for our planet, although I would love that. Instead, I mean behaviours you can keep up over a longer time period. For instance, imagine you don’t like the cheapest peanut butter at all. However, you keep buying it for the price. Therefore, during every lunch, you feel like you ‘deserve’ an extra cookie and a large Starbucks cappuccino with extra syrup. In this case, you might be better off with spending a little bit more on a healthy, delicious lunch and not buying the cookies and coffee. 

Talking about sustainable behaviour, it is also a good thing to look at the expenses you’re normally not so aware of. Is your phone company still the cheapest and would living smaller now make you able to buy a house in a few years, instead of renting a bigger one at this moment? And couldn’t investing in solar panels be a good option for you in the long run, even though it’s expensive now? These ‘silent’ expenses are often quite large and keeping an eye on them can save you a lot more money than buying the cheapest peanut butter. Therefore, I’d recommend you to make a list of standard expenses to check every year, like your phone and internet provider, your insurance, and your gas, water and energy bill.

Lastly, it can be smart to not only look at sustainable expenses, but also at sustainable incomes. You might have many talents that people would love to pay money for, like blogging, advice, woollen scarfs or massages. If you really like doing something, it’s not that much of a hassle to turn it into a small source of income! You might be a cleaning lady that can also have a wonderful blog about cleaning. Or a trucker who knows a lot about cars or how to live healthily on the road. Or someone who loves knitting scarfs you could sell as a little side business. For instance, a friend of mine loves baking and she couldn’t eat them all by herself anymore, so she started selling these beautiful, tiny cheesecakes in her neighbourhood. It might not yet be a full-time income, but it is some nice cash on the side! 

Many of these tips have in common that they help you out in the future, more than they do now, but they will save you more money in general and make you feel less stressed or harmed by poverty. Because let’s be honest, do you really feel that bad if your phone bill is cheaper than your neighbours bill?

The conclusion

All in all, I hope being aware of these things that influence us can help us to be more rational when we make decisions. Unfortunately, poverty creates some conditions that keep us from actually getting out of it. However, I believe that by sharing this knowledge, we might be able to decrease these influences. This will hopefully help us to close the gap between rich and poor. In addition, I hope that you won’t beat yourself up for not making the best decisions all the time. As mentioned earlier in this article, having to make so many hard decisions can drain us mentally, making us less sharp as we would be otherwise. This is not your fault; we all have this problem!

I hope you’ve enjoyed this post and have learned something about the psychology behind financial decision-making that will help you save more and spend less! If you did like this, you could also look here for more tips or subscribe here to my blog to get my ‘Saving money without devaluing your life’ e-book! For regular updates on posts and more content, follow me on Instagram, Pinterest and Twitter.

Lots of love,

Lisa 

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