Scarcity of Money and How It Affect Your Financial Decisions
This interesting phenomenon has two sides. We can analyze it as an economic condition and the natural characteristic of money at the macro level, and as the lack of money to fulfill the everyday needs of certain households on the micro level. We’ll try to give a whole picture of this condition utilizing the both approaches.
First, if you suddenly realize that you don’t have money for some purchases or discovered that after vacations your wallet is empty, it’s not scarcity, it’s bad planning.
You can easily solve this situation by applying for $1000 loan bad credit and implementing healthy financial habits into your life afterwards. But what is money scarcity, and why is it so dangerous for people?
Let’s start with the definition. Scarcity is not just a limited amount of money, it’s a disbalance of your resources and desires. It means that you can have a small amount of money, but manage your spending efficiently and cover all the expenditures. This is not a scarcity, just a low income.
The real problem emerges when you constantly have problems with fulfilling everyday needs. In this case, you experience deficiency of money, and it affects all aspects of your life.
The mechanism is simple. Scarce resource (money, time or other) puts us in the conditions where we have to make a choice. But the situation pushes so hard, that rational thinking can be compromised. We tend to make irrational and premature decisions. With scarcity mindset, money becomes a predominant idea and determines wrong choices.
For example, people with such way of thinking:
- don’t care about saving money;
- use loans with high-interest rates;
- spend a lot on unhealthy habits like smoking and drinking;
- don’t take up welfare programs they are eligible for.
Specialists made a proposition, that poverty and scarcity mindset forms a vicious circle: lack of resources induces scarcity mindset, and this mindset, in turn, leads to a poor financial state. Terrible situation, isn’t it? But there is a way out, we’ll analyze it later in this article, so keep reading. But first we need to describe this phenomenon in more details.
In order to define the main features of this condition, we have to answer some questions. Is scarcity a useful property of money? What are the main effects on human behavior? What are the signs of a scarcity mindset?
First, we want to highlight, that this phenomenon isn’t good or bad, it’s just an original characteristic of any limited resources. The main difference lays in the attitude: in the conditions of scarcity, money gains its value. So, we can come up with the first feature:
Money Scarcity Is Unavoidable
It’s a logical consequence of the market-driven economy. The abundance of material resources would lead to their devaluation. The moment all the people get access to unlimited money sources, the money will lose all its value and become useless. We all know that simply increasing the available amount of any resource leads to inflation. The same is true for money.
Money Scarcity Is Natural
As we said at the beginning, scarcity is the ratio of limited resources to unlimited needs. Let’s remember math classes: if the denominator tends to infinity, it’s impossible to get a high number as a result of division, it tends toward zero.
So, almost any amount of available resources will be compensated by rising needs in the denominator. It’s a natural law of human psychology.
Money Scarcity Is Useful
Yes, we are not mistaken. According to the laws of economic theory, only the deficiency of resources stimulates competition, which leads to improvement of quality and overall development of economical process participants.
In simple words, because money is limited, manufacturers do their best to attract clients with better quality of their products and lower prices. As consumers, we win from this property of money.
As we already mentioned, the lack of any vital resource puts the screws on the person. We immediately start to make some adjustments to compensate for the deficiency.
It can be useful and motivating and sometimes such adaptations determine incredible results, but thinking in the conditions of scarcity has two major downsides: tunnel vision and bandwidth tax effect.
When we concentrate on a certain goal, we tend to miss the whole picture and prioritize wrong. Let’s imagine a man in a deadline situation. He needs to finish a very important project. He has great chances to miss family dinner or his child’s concert because all his thoughts are concentrated on work.
So, we can see the first conflict: between “the goal” and other aspects of life. This man works hard all day and stays at the office after hours, finishing the job, but because of this pressure, he makes a stupid mistake that ruins all his efforts.
It’s the second conflict: between the importance of “the goal” and the quality of work. In simple words, the total concentration on one thing narrows down our vision and makes us ignore other significant aspects. In this situation, we don’t have enough information to make a rational decision.
If a man for the previous example decides to participate in a family dinner, he would probably just be half-involved in the situation. Part of his brain would be at work, thinking of the project, not of the ongoing matters.
It means that he is likely to miss important information or even make the wrong decision. If we imagine the constant situation of money deficiency, pushing the person’s brain every second, we can easily realize the stress and inability to think straight.
Usually, it causes the desire to escape drinking, smoking, and drugs to loosen this pressure just a little. And the scarcity can even be just imaginable from society’s point of view, but very real for this person.
There is no simple answer to changing the scarcity mindset. It’s a long process requiring practice, knowledge, and willingness to develop. The final goal is finding balance and embedding good financial habits, like budgeting and saving, into everyday life. I hope, this article gave you something to think about and motivated you to implement some positive changes in your behavior.