5 Factors That Affect Financial Decision Making | You are influenced by your personality, past experiences, health, culture and your financial literacy. Learning more about personal finance makes a huge difference!

5 Factors That Influence Financial Decision Making

It’s nearly the end of April, which is financial literacy month. Are you more financially literate now than you were at the beginning of the month? I hope so!

Of the thousands of decisions we make each and every day, many of them have at least an indirect impact on our finances. That’s not to mention the times that you are directly faced with a major financial decision such as how to invest your retirement contributions (Roth or traditional?!), buying a home or whether it’s worth it to go back to school and get an advanced degree.

In truth, it’s easier for some people than for others to make good financial decisions, both big and small, depending on a number of different influential factors. By understanding some of these factors, you can learn a little bit more about yourself so that you are equipped to make better financial decisions.

Related Post: Financial Decisions Determine Your Destiny


Whether you are naturally a spender or a saver will have a big impact on your finances. It seems to hold pretty true that there’s one of each in most relationships and that can make it challenging for either partner to learn to deal with combining finances when you don’t have complete control over the money.

A natural saver may have an easier time making good financial choices. However, there’s still hope even if you tend to be a spender. Flexible budgeting and setting clear financial goals can help you to keep the right perspective, while still enjoying life.

In addition, some personality traits including procrastination, stubbornness, pessimism and a predisposition for addictions will all have a negative impact on your finances. And everyone’s emotions causes them at times to make bad decisions such as when you’re angry, frustrated or bored. When you’re happy it may be easier to be more content with your life and not feel that you need to buy things to improve it.

Your level of discipline in all areas of your life can help you to conquer your finances and create a life you love, even despite your weaknesses (we all have them!). Sometimes it’s as simple as just getting started and making small changes.


All of our life experiences collectively shape our views of the world and directly affect our thoughts and actions.

Each generation has faced their own unique challenges from baby boomers to millennials. As for millennials, a lot of us graduated from college around the time of the great recession in 2008-2009. Most millennials were faced with large student loans, but minimal employment prospects. I personally graduated right before the recession, just in time to buy a house at the height of the housing market.

All of your past experiences working, investing and even budgeting influence your current decisions. Investing involves determining your risk profile, and this is almost entirely shaped by your past experiences.

Losing half the value of my home almost suddenly definitely discouraged me from investing in real estate! My husband, on the other hand, has been more influenced by seeing many people have to delay their retirement for years because their 401k accounts dropped so significantly.

The example our parents or caregivers set financially can explain the nurture side of the nature vs. nurture argument. In addition to our individual personality traits, this is one of the biggest factors that affects your finances.

The good news is that parents that provide good examples of frugality and saving money for the future are more likely to have kids that are also good with money. The bad news is that those who live paycheck-to-paycheck and fund their lifestyle with debt are more likely to have kids that are financially unstable. T. Rowe Price conducts an annual Parents, Kids & Money Survey and you can see a great summary of the results in PRNewswire’s article here.


Maslow’s hierarchy follows that your most basic needs need to be met before one will be motivated to other needs and wants. The hierarchy follows this order, summarized from Wikepedia:

  • Basic Needs: These are the absolute basic human needs for air, water, food, clothing and shelter. Except for air (and for most Americans water), all of these things cost money and will be the first thing people prioritize in their finances.
  • Safety: Safety needs stem from a person’s innate desire to live without physical and emotional pain. We all seek safety from war, natural disaster and violence, but on the financial side, this will also include job security, emergency funds, and insurance policies.
  • Love & Belonging: Everyone has the desire to find their place in the world and build relationships of some sort. The lack of feeling love & belonging can lead to depression and anxiety, which can have serious detrimental effects on your finances.
  • Esteem: Next is the need for respect and acceptance. The need to fit into society and keep up with the Joneses can sometimes lead people to get into significant debt to impress or please others or engage in overspending instead of saving for the future. Alternately, others can find a great deal of esteem in getting promotions and opportunities that help financially.
  • Self-Actualization: Only after all other needs are conquered, can one realize their opportunity to reach their full potential. Imagine that you have more money than you need for your basic needs and wants. What would you do with your life if money was no object?

In addition to the way that your needs impact your finances, it is obvious that significant physical or mental problems can impair your ability to both earn income and manage it on a regular basis.


I didn’t realize how much culture affects your finances until I live outside the U.S. as an expat for four years. We often become oblivious to things that we just see as normal. However, the “American dream” doesn’t translate to every other country. Not everyone has a big home, fancy cars and toys as their ultimate goals in life.

For example, in Korea, it’s not common to ever meet someone at their home, so their cars are their biggest status symbol. Plastic surgery is also super common, so many parents start saving at their kid’s birth to pay for this in the future. Koreans tend to be much more frugal in everyday life.

Social media has had a significant impact on people’s finances. Pinterest may convince you that there’s a perfectly styled home or lifestyle out there for you. Facebook and Instagram will show you the amazing homes, vacations and other experiences of those in your network and make you feel like a failure unless you have your own successes to show publicly.

It’s not only okay to be different and go outside social and cultural norms where you live, it is the way to real success! It does require knowing what you really want and setting clear financial goals.


Ignorance certainly isn’t bliss when it comes to your finances.

Not tracking your expenses and net worth will ensure that you never achieve financial independence.

Not learning about investments will solidify your need for someone else to make those decisions for you, which will result in hefty fees that take away from your returns or decisions made that are not in your best interest.

Not knowing how the tax system works will definitely result in thousands of dollars more in taxes in the future.

Knowledge is power and in this case, knowledge is money. The more you read and learn about personal finances, the better off you’ll be financially. Start by learning the basics of creating a budget and then move on to debt management and simple investing. Keep learning and implementing and you’ll find yourself becoming more wealthy.


Don’t let the external, or even internal factors decide what happens to you! Don’t accept the default, which is to go through life following society’s preconceived notions that you need bigger and better and you need it right now.

A life worth living is one that is on your own terms and takes you on the path that you create for yourself to a well-thought-out destination of your own choosing. Take everything you’ve been given and create a life you love from it, one dollar at a time.

What are some the ways these factors have influenced your financial decisions?


12 Responses

  1. I’ve never enjoyed following the crowd. I guess I’ve always had a bit of the cowboy in me. That’s why I started my own business while in university. I just wasn’t interesting in “landing a dream job” like most of my friend were.

  2. Past experiences have definitely had a huge impact on the way I approach saving and investing. Because of my history, where my husband lost his job for years in the Great Recession, and then nearly died of septic shock, I am extremely debt averse and driven to be financially independent ASAP. Why? Well, debt is your enemy when cash flow is a problem. And once I’m financially independent, job losses and catastrophic events just don’t matter financially. Since my family is entirely dependent on my income, the prospect of a job loss is very concerning. So I pay off debt (just mortgage) aggressively to decrease my monthly cash flow needs, and set aside a large portion of my monthly salary.

    1. I think a lot of this explains the vastly different views my husband and I have toward personal finance. I grew up in a poor household, where we always struggled so I’m motivated to reach financial independence. I want to make sure I never have to worry about money EVER (we’ve been really fortunate not to have any major health problems like you’ve experienced). My husband never experienced those same struggles growing up and isn’t one to worry about potential future disasters like I am.

  3. I too bought my house at nearly the height of the market! That first home was very emotional for me. Lots of mistakes, lots of issues BUT I learned a lot and I think I’m a more financially savvy guy because of those mistakes I made.

    Who knows what this current housing market will bring? Another bubble or will it keep soaring?

    Another great post Kathryn!

    1. Argh, our little house still hasn’t recovered from that market decline. We’re hanging in there until we can break even, but it’s taking a while! It seems like the current housing market is trying to repeat history with the lax credit lending, but we’ll see. Hopefully, you and I will be mortgage free before that happens ;).

  4. I was a spender, now I’m a big saver. Definitely learned from my own personal experiences as well as family members who fell on hard times. Hearing other people’s stories can be a real motivator to get your own financial life in order. Increasing my knowledge has also helped immensely. It’s amazing how much we don’t know, what we don’t know. And I’ve always loved Maslow’s hierarchy. While not perfect it can help you evaluate needs from wants. Nice list Kathryn!

  5. Past experiences is a big one for me. I’ve made dumb money mistakes in the past for sure. But one thing I’m kinda happy about is that they happened earlier in life so hopefully I can continue to remind myself of them whenever I am tempted to do something risky with my personal finances or acquire something that does not provide value or happiness based on the past.

    1. Same here! I’m sure I still have some dumb mistakes ahead, but I definitely feel like I’ve learned a lot!

  6. I loved Maslow’s hierarchy. As someone who spent way too much time growing up near the bottom of it, I can assure you even growing up in America there is a wide disparity between perceptions of what is necessary for living.

    Instead of trying to keep up with the Jones’, I have to be honest, I don’t even notice the Jones’ and probably make fun of their spending when they aren’t around. I agree about going to a different Country, it’s absolutely necessary if you’re American because we are some of the most sheltered people on Earth when it comes to living in a soap box.

    One example was a I saw an old lady mowing her lawn the other day, and was at a park, and the woman I was talking to, Southern, said, “why is she mowing the lawn?” I honestly didn’t know what to say, other than “maybe she likes doing it.”

    When you live in the South and someone was raised here, she could mean many different things:

    1. “a woman should never have to mow the lawn, that’s a man’s job” Yes, she could mean this.

    2. No one should mow their own lawn, they should hire someone. (Physical activity is shunned in America but I find even more so in the South).

    I didn’t even bother asking for clarification, it’s not worth it.

    1. I’m not someone that cares what other people think or do either. I’m just doing my own thing, and it’s working out just fine :).



I’m Kathryn Hanna-wife, mother of 3 and a Certified Public Accountant. I love to budget (really, I do!) , build spreadsheets and spend money on travel, sewing supplies and good chocolate.


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