Financial Identity: What is it and Why Does it Matter?

Scott | June 30, 2021 | Mind and Your Money | No Comments

financial identity mirror — What identity do you see when you look in the mirror?

Identity and money are rarely uttered in the same breath. I’d like to change that. I never really thought about having a financial identity until I read James Clear’s book called Atomic Habits. Actually, I first heard him talk about the concept of identity and in a podcast and quickly purchased the book soon after. While he wasn’t talking specifically about financial identities, it was more general to behavior change that is linked to your identity, but it absolutely hit home with me as it relates to me and money. I think I even yelled back at the podcast with excitement “that’s it, that’s what happened to me!” It was an eye-opening moment for me and allowed me to put a framework and words to what happened in my financial life and how I totally believe it can have a huge effect on your financial life too. In fact I’ve started to see it allow for powerful changes in many of the people that I coach.

First let’s briefly cover a bit about identity in general and then why and how it is so powerful in our lives. I believe we have multiple identities in our lives. Who do you see when you look in the mirror? I identify as a father, a husband, a son, a Christian, a financial coach, a cyclist, etc. I used to have another identity that was unhealthy on our finances, but I’ll get to that in just a moment. The reason identity is so powerful (according to psychologists much smarter than me) is that true behavior change is really identity change. And when we identify as something/someone, it is hard to do things contrary to that identity. Not impossible, but that identity drives so much of our behavior.

Here’s a couple examples from the book to illustrate better. If a person offers you a cigarette, you could say 1) no thanks, I don’t smoke or 2) no thanks I’m trying to quit. In example #1 you don’t identify as smoker and a normal action of a non-smoker is to refuse a cigarette. For example #2, the person still identifies as a smoker and indicates they are trying to quit. Sadly, not smoking is contrary to what a person who identifies as a smoker would do. That person is going against their identity which will be extremely hard. It sounds subtle but it can make a big difference.

Or think about a vegetarian. I was one for many years. When you decide to make that shift, it is now an identity change and not just a diet change. You don’t likely hang out at barbeque places and you seek out dining choices that are plant based. There are many actions you are now taking and trust me, when people find out, they will also identify you as a vegetarian. And each time you take an action that is in support of that identity, it is a vote for that identity. When enough votes are cast you tip the scales and solidly identify in that way. So now allow me to share a bit of my story of a harmful identity and then how I changed it to improve our financial life.

My wife and I got married fairly young soon after college. We both had new jobs and of course we decided to buy a house right away (probably not the best choice, but that’s not the main part of the story). We got a good deal, did some home improvement projects and after a few years we had the itch to get a larger house. Not only that, I wanted a house on the water. We lived in the Houston suburbs, so that was possible and we got another older home and started to put some money and time into it to make it like we wanted. I had a hobby at the time that made it helpful to be on the water as well and we liked to have folks over to our home for dinners or activities.

This all sounds pretty tame and there is nothing inherently wrong with houses or hobbies or any of this. What was starting to happen though is we (or really more so I) was starting to feel successful because we have this nice house on the water and I like having people over so they could see my success. It was very subtle to those around me, but deep down, I was driven by success and comparison and wanting to show others that somehow I have “made it”. I would have denied this completely during that time, so this has only come after much self-reflection. And the ugliest part of all was that I really harbored feelings that I (or we) were better than other people because we had these things or lived in this way. I had skewed my view of success so much that it meant I had to be better than other people.

So, of course after 5-6 years at this house, we found another house and neighborhood we liked even more. The house was newer, but we decided to gut nearly the entire thing and make it our “dream home”. It too was on the water and had a larger yard, and believe me when I say that we put a lot of money into making it our dream home. We worked hard and it turned out really nice. And you bet we had people over often, because deep down I wanted to show others how successful we were. Sure, we were viewed as a hospitable family and that is a gifting we have, but on top of that, I really had the success thing as a convenient part that I got to show.

And finally, after finishing the last house on the lake and living there for 6-7 years, was when I had the confrontation with my identity. My wife and I really talked with each other about the money we were spending (and saving) and realized that who we always wanted to be was a couple/family that had the freedom and flexibility in our early 50’s to live and work wherever and however we liked, without the pressure of full-time income. Call it early retired if you like, but that was really what we had said or wanted to be for years, but we allowed a flawed identity (for us) to creep in and take over. Again, there is nothing wrong with nice homes, homes on the water, hobbies or any of it. What was not healthy for us was the value we placed on it and how it took over our identity.

When we fully committed to the new identity of a person who is going to be financially free in their early 50’s, things would have to change. I was a little under 40 at that time and my wife a couple years younger. We then had to continuously ask ourselves: what would a person who is financially free in their early 50’s do? They probably don’t live in an expensive house on a lake. They probably move closer to their jobs and put less wear and tear on vehicles (did it), and most importantly, they start saving 20, 30, 40, 50 and even 60% of what they earn (yup, did that too). That last one isn’t that easy though. You have to continue to ask yourself that same identity question when faced with any money saving or spending decision. Would a person with my financial identity do that? And for us, after we started saving away a large part of our income each year, our savings balances in retirement and non-retirement accounts started to really grow. And when you have a good size balance and put the engine of compound interest behind it, some really great things can and did happen!

Or think about a vegetarian. I was one for many years. When you decide to make that shift, it is now an identity change and not just a diet change. You don’t likely hang out at barbeque places and you seek out dining choices that are plant-based. There are many actions you are now taking and trust me, when people find out, they will also identify you as a vegetarian. And each time you take an action that is in support of that identity, it is a vote for that identity. When enough votes are cast you tip the scales and solidly identify in that way. So now allow me to share a bit of my story of a harmful financial identity and then how I/we changed it to improve our financial life.

My wife and I got married fairly young soon after college. We both had new jobs and of course we decided to buy a house right away (probably not the best choice, but that’s not the main part of this story). We got a good deal, did some home improvement projects and after a few years we had the itch to get a larger house. Not only that, I wanted a house on the water. We lived in the Houston suburbs, so that was possible and we got another older home and started to put some money and time into it to make it like we wanted. I had a hobby at the time that made it helpful to be on the water as well and we liked to have folks over to our home for dinners or activities.

This all sounds pretty tame and there is nothing inherently wrong with houses or hobbies or any of this. What was starting to happen though is we (or really more so I) was starting to feel successful because we have this nice house on the water and I like having people over to hang out, but also so they could see my success. It was very subtle to those around me, but deep down, I was driven by success and comparison and wanting to show others that somehow I had “made it”. I would have denied this completely during that time, so this has only come after much self-reflection. And the ugliest part of all was that I really harbored feelings that I (or we) were better than other people because we had these things or lived in this way. I had skewed my view of success so much that it meant I thought I was better than other people.

Naturally as the pattern continued, after 5-6 years at this house, we found another house and neighborhood we liked even more. The house was newer, but we decided to gut nearly the entire thing and make it our “dream home”. It too was on the water and had a larger yard, and believe me when I say that we put a lot of money into making it our dream home. We worked hard and it turned out really nice. And you bet we had people over often, because deep down I wanted to show others how successful we were. Sure, we were viewed as a hospitable family and that is a gifting we have, but on top of that, I really had the success thing as a convenient part that I got to show.

And finally, after finishing the last house on the lake and living there for 6-7 years, was when I had the confrontation with my financial identity. My wife and I really talked with each other about the money we were spending (and saving) and realized that who we always wanted to be was a couple/family that had the freedom and flexibility in our early 50’s to live and work wherever and however we liked, without the pressure of full-time income. Call it early retired if you like, but that was really what we had said or wanted to be for years, but we allowed a flawed identity (for us) to creep in and take over. Again, there is nothing wrong with nice homes, homes on the water, hobbies or any of it. What was not healthy for us was the value we placed on it and how it took over our identity.

When we fully committed to the new financial identity of a person who is going to be financially free in their early 50’s, things would have to change. I was a little under 40 at that time and my wife a couple years younger. We then had to continuously ask ourselves: what would a person who is financially free in their early 50’s do? They probably don’t live in an expensive house on a lake. They probably move closer to their jobs and put less wear and tear on vehicles (did it), and most importantly, they start saving 20, 30, 40, 50 and even 60% of what they earn (yup, did that too). That last one isn’t that easy though. You have to continue to ask yourself that same financial identity question when faced with any money saving or spending decision. Would a person with my financial identity do that? And for us, after we started saving a large part of our income each year, our savings balances in retirement and non-retirement accounts started to really grow. And when you have a good size balance and put the engine of compound interest behind it, some really great things can and did happen!

Would a person with my financial identity go out to lunch at the office each day? (nope, brought my lunch to save the $10/day). Would a person/family with this financial identity go out to eat several nights a week? (nope, we started going out maybe one time a week and cooking at home). Would a person with my financial identity drive this car, or buy these types of clothes, and on and on? If you honestly look at the answer to these questions, you’ll see that many of your actions and behaviors will be modified to line up with your identity. Enough ‘votes’ started stacking up and we do fully identify as that family now. We are and will be the family that is financially independent in our early 50’s. Do I still battle with wanting to be viewed as successful? Yes, but not nearly as often. I would say I’m still in recovery for that. I’m finding other ways to feel successful that don’t cost so much money!

So now I ask you, what is your current financial identity? What does the evidence of your actions and spending show regarding your financial identity? If you’re not sure, maybe ask yourself, what would your friends, family or neighbors say your financial identity is?

Is that the identity you want or is it sustainable? If not, what do you want your financial identity to be? This may take some time to figure out. Mine took me some time, but I share my story so that you can hopefully figure yours out much quicker. This will be a short statement for your identity, not some lengthy thing. Once you (or you and your spouse) have figured it out, hold each other accountable to it. Ask yourself that question over and over; what would a person with my financial identity do in this circumstance? Tell friends, neighbors, family, about your identity. If you keep it secret it really isn’t much of an identity after all.

and on? If you honestly look at the answer to these questions, you’ll see that many of your actions and behaviors will be modified to line up with your identity. Enough ‘votes’ started stacking up and we do fully identify as that family now. We are and will be the family that is financially independent in our early 50’s. Do I still battle with wanting to be viewed as successful? Yes, but not nearly as often. I would say I’m still in recovery for that. I’m finding other ways to feel successful that don’t cost so much money!

Is that the identity you want or is it sustainable? If not, what do you want your identity to be? This may take some time to figure out. Mine took me some time, but I share my story so that you can hopefully figure yours out much quicker. This will be a short statement for your identity, not some lengthy thing. Once you (or you and your spouse) have figured it out, hold each other accountable to it. Ask yourself that question over and over; what would a person with my financial identity do in this circumstance? Tell friends, neighbors, family, about your identity. If you keep it secret it really isn’t much of an identity after all.

If you enjoyed this information or know someone who would, I encourage you to share this post with them. And if you would like help taking control of the financial aspects of your life, please consider Aspelin Financial Coaching to help you be victorious with your money! Servicing clients around the world via in-person sessions, video calls or phone consultations.

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