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Understanding the Psychology of Money: Helping Youth Make Better Financial Decisions

Financial decision-making isn’t always about logic—our choices around money are often influenced by emotions, habits, and unconscious biases. This is especially true for young people who are still developing confidence and experience in managing their finances. Through the PROFIT project, we support youth in building financial awareness that goes beyond numbers. By understanding the psychology behind common money behaviours, they can learn to avoid pitfalls and make more informed, balanced choices.

Why Emotions and Biases Matter in Financial Education

Behavioural psychology helps explain why we sometimes spend impulsively, delay saving, or stick with financial decisions that don’t serve us. These behaviours are not due to a lack of intelligence or motivation—they’re often rooted in how our brains are wired to react to risk, reward, and short-term gratification.

For young people navigating a rapidly changing world, recognizing these patterns can be the first step in building healthy financial habits. Financial education that includes emotional awareness and decision-making strategies is essential for long-term wellbeing and independence.

Four Common Psychological Biases That Affect Financial Decisions

  1. Loss Aversion

People tend to fear losses more than they value equivalent gains. For example, the idea of losing €50 feels much worse than the pleasure of gaining €50. This can lead to overly cautious behaviour, like avoiding investment opportunities or hesitating to switch mobile plans, even when it would save money.

Tip for Youth: Focus on long-term value rather than short-term risks. Learning to tolerate small losses in service of bigger goals is part of financial growth.

  1. Emotional Spending

Whether it’s stress, boredom, or excitement, emotions can drive spontaneous purchases. A common example is buying unnecessary items after a tough day or as a reward. While the temporary high feels good, it can lead to regret or financial strain.

Tip for Youth: Encourage reflection before buying. Questions like Do I really need this? or Can I wait 24 hours? help build mindful spending habits.

  1. Hyperbolic Discounting

This refers to our tendency to prefer smaller immediate rewards over larger future ones. For example, spending €10 today on fast food feels more satisfying than saving that money for a concert ticket next month—even though the concert might be more meaningful.

Tip for Youth: Introduce tools like savings goals or visual trackers that make future rewards feel more tangible and exciting.

  1. The Endowment Effect

We tend to overvalue things simply because we own them. Young people may hold onto unused subscriptions, outdated tech, or clothing they no longer wear, simply because letting go feels like a loss—even when it costs them money.

Tip for Youth: Regularly reviewing expenses and possessions can build a habit of financial decluttering. Ask: Would I buy this again today? If not, it may be time to let it go.

Building Awareness to Build Financial Confidence

The goal of financial literacy isn’t just to teach budgeting and saving—it’s to help young people become more self-aware and intentional with their money. Understanding emotional and psychological influences empowers them to:

  • Recognize unhelpful spending habits
  • Create systems that support better decisions (like automation or goal-setting)
  • Make choices that align with their values and long-term goals

The PROFIT project encourages educators, youth workers, and parents to integrate this perspective into financial education. By blending practical tools with emotional intelligence, we create space for young people to develop not just knowledge, but true financial confidence.