The Psychology of Money: How Behavioural Finance Impacts Everyday Decisions

Most people believe their financial decisions are driven by logic. Compare the numbers, weigh the pros and cons, and choose the sensible option. In reality, money is emotional long before it is mathematical. The way we save, spend, borrow and invest is shaped by habits formed in childhood, stress responses, social pressure and the shortcuts our brains rely on when information becomes overwhelming.

At this moment in time the subject matters more than ever. There is more financial noise, more choice; and more pressure. The cost-of-living squeeze, constant news alerts and the rise of “comparison culture” on social media create an environment where emotional decision-making can easily override long-term planning. Behavioural finance helps explain why this happens and gives us a clearer way to build healthier money habits.

Why money decisions rarely follow logic

Most financial choices are made quickly, often under subtle pressure. The human brain automatically switches to protection when there is uncertainty. That means focusing on risk, avoiding change or choosing an option that feels comfortable in the moment. None of this behaviour is irrational. It is simply how the mind responds to stress.

In the UK, right now, people are dealing with conflicting headlines about interest rates, commentary about inflation stabilising yet staying high, and a constant stream of personal finance content on social media. This creates cognitive overload. When the brain is tired or overwhelmed, it falls back on habits and instinct rather than careful planning. That is why even well-informed people can delay switching accounts, ignore better mortgage deals or stick to unhelpful spending patterns.

Common behavioural biases that shape everyday financial choices

Understanding these biases does not remove them; it gives you the power to recognise what is influencing your behaviour.

Loss aversion

The fear of losing money is stronger than the pleasure of gaining it. This often leads to staying with a poor savings rate because switching feels risky or inconvenient. Even when the maths is clear, the emotional discomfort wins.

Present bias

Short-term feelings outweigh long-term benefit. This explains why many people delay pension contributions, even when they know the logical advantage. The future feels distant. Today’s needs feel louder.

Anchoring

Your brain grabs the first number it sees and treats it as a reference point. If a neighbour mentions their 6.4 percent mortgage, a 6 percent offer suddenly feels attractive, even if it is not competitive in the wider market.

Social proof

People copy behaviour around them without checking whether it suits their situation. This is common with trending investments, viral savings hacks or buying things simply because they seem to be “what everyone is doing this year”.

Overconfidence

Many people believe they can predict market outcomes or beat professional advice. This often results in reacting to headlines, panic-selling or taking unnecessary risks because the decision feels intuitive.

These biases are natural. They happen automatically. The goal is not to eliminate them but to understand how they affect your daily financial behaviour.

How your financial upbringing shapes your adult decisions

Your relationship with money does not begin with your first payslip. It is formed quietly during childhood. Ideas about spending, saving, debt and security often come from what you experienced growing up.

If your household experienced financial stress, you may avoid checking your bank balance or feel anxious about long-term commitments. Open discussions about money can facilitate planning. Cultural background also plays a major role, influencing attitudes toward borrowing, investing and risk.

One useful framework is: reflect, identify, adjust.

• Reflect: Notice what you were taught, directly or indirectly.
• Identify: Recognise which beliefs are helping or hindering you.
• Adjust: Build new habits that match your current goals rather than your past environment.

This gives you a more grounded starting point for healthy decision-making.

Emotional triggers that influence daily money habits

Certain emotional states make sensible financial decisions harder. These triggers are subtle and often feel unrelated to money.

Stress
People under pressure tend to make quick, convenient choices. For instance, they may postpone a remortgage due to the burden of the task, even if this delay results in higher monthly expenses.

Low mood
Emotional spending becomes easier when you want comfort or distraction. Such spending can show up as impulse purchases, unnecessary subscriptions or treating yourself simply to feel better.

Avoidance
Some people put off financial tasks because paperwork or planning feels overwhelming. They may ignore letters, avoid logging into accounts or delay decisions until the last possible moment.

Financial fatigue
After years of cost-of-living challenges, many people feel “burnt out” from managing money. Such fatigue can lead to letting things slide, even when small changes could improve stability.

The goal is not to eliminate emotion. It is to create systems that reduce the impact of these triggers.

Behavioural finance mistakes people commonly make in 2025

The financial landscape in 2025 has its own patterns. People today face different pressures than they did even three years ago.

Staying with outdated mortgage deals
Some households remain on uncompetitive products because the process of switching feels complicated. The emotional barrier is often stronger than the financial argument.

Hoarding cash due to fear
With inflation still unstable, holding large amounts of cash can reduce long-term value. However, the fear of market volatility often forces people to adopt a cautious approach.

Following online trends without context
Social media makes investment ideas, budgeting challenges and financial theories spread quickly. Many people adopt strategies that suit someone else’s circumstances, not their own.

Using buy now, pay later as the default
BNPL feels painless in the moment. Psychologically, it disconnects the purchase from the payment. This can lead to fragmented debt that is harder to track.

Panic-selling during market dips
Short-term news noise triggers emotional responses. People sell investments to avoid imagined losses, often locking in actual losses.

Each of these behaviours is psychological before it is financial.

Building healthier money habits backed by behavioural science

Small practical changes can help you make better decisions, even when emotions are involved.

Automate good decisions

Automation removes the need for willpower.
Direct debits for saving, investing or debt repayment ensure progress happens consistently, even on busy or stressful weeks.

Reframe your goals

Changing how you frame a goal makes it easier to achieve. Instead of “save ten thousand pounds”, break the objective into monthly or weekly targets. Add visual trackers if they help create momentum.

Remove friction from positive actions

Make it easier to do the right thing. Keep documents organised; set reminders for financial reviews or use budgeting apps that simplify tracking.

Add friction to emotional spending

Slowing the process helps reduce impulsive behaviour. You can add a cooling-off rule, remove stored card details, or avoid shopping apps when tired or stressed.

Track emotional states

A simple note on your phone about how you felt when making a purchase can help uncover patterns. Over time you will see which emotions drive unhelpful decisions.

How Rosewood Finance uses behavioural insight in financial planning

At Rosewood Finance, understanding behaviour is equally important as understanding products and regulations. Advisers go beyond numbers to help clients build systems that match their personalities, habits, and long-term goals.

This includes identifying emotional triggers, helping clients reduce reactive decision-making and creating clear structures for reviews and adjustments. The aim is to provide calm, evidence-based guidance that supports clients through uncertainty without overwhelming them with jargon or unnecessary complexity.

Behavioural insight strengthens financial planning because it reflects how people actually think, not how they believe they should think.

Ready to take control of your financial habits?

If you want to build a healthier relationship with money, Rosewood Finance can help you understand the patterns behind your decisions and create a plan that works with your natural behaviours rather than against them. Get in touch to begin your next step.