How Identity Affects Your Finances

I’m a spender not a saver.

I am bad with money.

I don’t come from a rich family.

Having bad money habits and believing that’s just “who they are” prevents many people from improving their finances.

How do you identify when it comes to your finances?

Ever since I was a kid, I considered myself to be a frugal person. Looking back on what has helped me to save money over the years, believing that I am a frugal person would have to be near the top of that list. It comes up quite a bit actually; when shopping, when trying to decide what to do this weekend, when making all kinds of life decisions. It makes it easier to save money since that is just part of who I am. It feels good to believe I am a certain way then have proof that I was right; I am frugal.

Turns out this is what psychologists call “cognitive consonance”. Definition: State of harmony and internal consistency arising from compatibility among a person’s attitudes, behavior, beliefs, and/or knowledge.

You might be more familiar with the opposite of cognitive consonance; cognitive dissonance. This happens when you have discrepancies between your actions and your belief about you who are and it is part of the reason that it is so hard to change habits. If we have bad habits that are in alignment with a negative self-identity, then we feel weird and out of whack when trying out good habits. Our brains seek to right this discrepancy by convincing us that the new habit isn’t right for us. Our brains want us to take actions in alignment with our identity to prevent identity crises’.

Ultimately, identifying as being bad at money is going to lead to more mental conflicts between spending money and saving money.

If you identify as a “spender” for example but are trying to save money for an emergency fund, that action isn’t in alignment with your identity. Spenders spend money, they don’t save it. That is going to make it much harder to save money because saving that money isn’t going to feel right.

There is a great example that James Clear shares in his book Atomic Habits (by the way, if you haven’t read this, I HIGHLY recommend it, it was my favorite 2019 read). He talks a lot about the importance of identity with regards to habit change and habit creation. He argues that the people see much more success in creating good habits if they work on changing their identity first.

His research found that people who are trying to quit smoking are more successful at eliminating this habit if they say things like:

“No I don’t want a cigarette because I’m not a smoker”

instead of

“No I don’t want a cigarette because I’m trying to quit”.

The second statement implies that they still identify as a smoker. These participants in the study reported more cravings and were more likely to start smoking again than the group that worked on changing their identity to the “non-smoker” choice.

Does that seem like too tiny of a shift to make a difference?

I agree that it seems odd that such a small tweak in the language we use can actually help us change our habits but ultimately, that is what the research shows.

Another example from the book is that people who identify as an athlete, are statistically more likely to work out more often and harder than someone who doesn’t identify as an athlete.

I believe the same is true of money. If you identify as a saver/frugal person, you are going to be more likely to be successful when trying to save money.

When my husband tries to convince me to upgrade my car which is currently valued at a staggering $1400 (boom, flex), I catch myself saying things like, “It still works most of the time, I’m not fancy, I don’t need a fancy new car”. Apparently “I’m not fancy” is another related identity that I have picked up that helps me save money.

Dave Ramsey touches on the subject identity even though he doesn’t specifically use the word identity. He often says: “Debt is normal. Be Weird.”

Adopting an identity of “weird” helps his audience to go against the grain of societal expectations to flaunt wealth that you don’t have by going into debt. It helps them to say “no” when they feel the pressure to conform with the expectations that they go on expensive trips, buy expensive houses and expensive cars.

How do I change my financial identity?

I just can’t help myself. I can’t end a blog post without some practical information and takeaways.

Here are 3 tips for getting started trying to change your financial identity:

*Pick one or two more positive identities to replace negative ones.

Here are some options I’ve observed:

-I am frugal

-I am thrifty

-I’m a saver

-I’m not fancy

-I’m responsible with money

-I’m the kind of person who reviews their finances every week

-Be weird

Try to catch yourself if you are relating to the old negative identity and try swapping it with these.

*Search for past evidence of the new identity.

It’s common for it to feel like you are lying to yourself when you first start trying to adopt a new identity. So look for evidence in your past that would help support the argument that this has been your identity all along.

If you are like me, you sometimes catch yourself driving home from the gym at 7:30 AM beating yourself up about the one time a month ago that you slept in and didn’t work out. We tend to remember more of the negative things we have done than positive. But it is very likely that you have taken actions that support the new identity and just don’t give yourself permission to celebrate them.

Try to think of times that you have paid bills on time, saved up enough money for a trip or event, or said “no” to a frivolous purchase. Use those examples to support your argument…to yourself.

*Develop Some Tiny Money Habits

Find a few very small, tolerable actions that you can do to start building evidence that you are frugal.

Here are a few ideas:

-Save $5 every week either in a piggy bank or savings account

-Challenge yourself to do a “No Spend” weekend or week

-Find a free fun activity to do with a friend or family member

-Go thrift store shopping if you regularly buy new

Warning: It takes a while to get used to any new habit. Often my little experiments are unpleasant at first but after a while I grow to really enjoy them. Don’t give up too soon on a new habit. Try to stick it out past the initial phase of awkwardness.

For Discussion:

What financial identities do you most relate to?

What tiny frugal habits do you have?