Buzz
When I was four, my mom pulled out something I'd never seen before from a shoebox in our closet: a crisp, shiny $100 bill. I couldn’t help but shout, 'A HUNDRED BUCKS?!' Immediately, she pressed her hand over my mouth, whispering, 'Do you want everyone to know? They could rob us, and we'd have nothing!'
I couldn’t blame her. We lived in a high-crime area, had very little, and she had grown up in dire poverty. It made perfect sense she was afraid—she knew the reality of having nothing, and the thought of returning to that terrified her. The personal finance world often calls this a 'scarcity mindset.' It's when you make financial choices driven by a fear of lacking.
For a while, that fear actually worked to our advantage. It pushed my parents to stretch every dollar, saving thousands on minimum wage. It inspired me to develop a relentless work ethic. We were scared of losing what little we had, so we worked tirelessly and saved every penny, all driven by that fear of scarcity.
But eventually, that mindset can backfire, and it may actually harm your finances. Ironically, the constant fear of slipping back into poverty can prevent you from moving forward. Over time, I’ve discovered that this fear has held me back more than once.
Don’t Be Afraid to Reach Your Full Earning Potential
I’ve shared before about my fear of money. I was always terrified to ask for a raise because I feared losing my job. This is a classic case of the scarcity mindset, as defined by Debt Roundup:
The scarcity mindset often leads you to feel unworthy of wealth and success. You might become focused solely on 'just getting by' and avoiding any immediate disaster. Even though there’s no real evidence that things will fall apart, you simply want to stay afloat, leading you to avoid taking any risks—even something as small as investing a bit of money.
For a while, I couldn’t quite grasp this fear. I didn’t value myself, and yes, that had a lot to do with my self-esteem and confidence, but it also stemmed from my deep-rooted fear of upsetting the status quo.
I was stuck in an entry-level, low-paying job straight out of college, and a year later, I was offered a much higher-paying position. Yet, I almost turned it down. Why? Because I was afraid it wouldn’t work out, and I’d be left with nothing. It's hard to imagine a career where you’re paralyzed by the fear of losing what you already have, but that’s almost what I chose.
Don’t Always Opt for the Cheapest Option
People trapped in the scarcity mindset tend to play defense rather than offense. Instead of thinking about future growth, their focus is on avoiding any loss of what they have right now. When it comes to spending, this approach seems logical—you try to keep your money, so naturally, you’ll spend less. But spending less isn’t always the best financial strategy.
We’ve discussed this before, but sometimes it’s worth it to invest in higher-quality items. When you’re stuck in a scarcity mindset, that idea is hard to embrace. Growing up, we resented buying quality, name-brand products. My mom mocked those who paid extra just for a label. For years, I avoided even considering name brands because of this. She wasn’t wrong in some ways, but it was a defensive mentality.
We thought we were being prudent. To us, the cheapest option was always the wisest choice; only a fool would spend more. As a result, we ended up with cheap clothes that didn’t hold up. As an adult with the same scarcity mindset, I often bought inexpensive, disposable household items. I can't even count how many DIY projects I've messed up because I was too cheap to hire a professional who could do it right the first time. It’s taken me a while to overcome my defensiveness toward pricier items and realize what true frugality means.
Don’t Ignore the Importance of Investing
When you don’t know anything about investing, it can feel overwhelming. We’re constantly bombarded with negative news about the stock market, making it seem like a huge gamble. For anyone with a scarcity mindset, investing becomes downright terrifying. So much so that, if you're anything like I was, you’ll avoid learning about it altogether.
For years, I never considered investing. I thought it was something only rich people did—people with extra money to burn, who could afford to lose it. I wanted to protect my money, so I tucked it away, metaphorically under the mattress, and completely disregarded the idea of investing.
However, the more I delved into personal finance, the harder it became to ignore the fact that investing is the key to building wealth for most people to secure their retirement. At the time, though, I wasn’t focused on building wealth—I was fixated on preserving what I already had. As a result, I missed out on time. When you begin investing, you realize how powerful compound interest can be, and time plays a massive role in maximizing that power. But my focus was on guarding what I had, so I missed the whole concept.
Don’t Let Distractions Affect Your Decision-Making Process
A scarcity mindset can lead to hasty, poor decisions. In the book “Scarcity: Why Having Too Little Means So Much,” researchers Sendhil Mullainathan and Eldar Shafir conduct experiments to examine how this mindset influences our actions.
They discovered that the anxiety and pressure of not having enough makes us less polite, more impulsive, and can even decrease our cognitive abilities. For instance, in one experiment, they administered basic IQ tests to subjects in a New Jersey mall. They first noted the subjects’ self-reported income, then introduced a financial problem to them:
Imagine your car has a serious issue that will cost $3,000 to repair. Your insurance will cover half of the cost. You need to decide whether to get it fixed now or take a risk and hope it lasts longer. How would you make this decision? Would it be an easy or difficult choice for you financially?
The answer wasn’t the key point; it was the IQ test results that mattered. Without the financial problem, all subjects performed similarly on the IQ tests, regardless of income. However, when low-income subjects faced the problem, their IQ results actually dropped. The takeaway isn’t that scarcity makes us less intelligent, but that it strains our mental bandwidth, causes stress, and distracts us. We’re not thinking at full capacity, which leaves us open to making poor decisions.
In financial terms, this often manifests in debt traps like payday loans, debt settlement, or layaway plans. Most of us know these aren’t the best financial choices: the interest rates and statistics speak for themselves. But when you're trapped in a scarcity mindset, it becomes harder to think rationally about the long-term. You're preoccupied with surviving the present moment and distracted from objective, future-focused thinking.
How to Move Beyond the Scarcity Mindset
In their book, Mullainathan and Shafir explore policies and programs that can help individuals break free from the scarcity mindset. They also offer a few practical tips, one of which I particularly like: change when you make important decisions.
One effective strategy is to simply adjust the timing of major decisions. This concept is referred to as bandwidth. We often overlook the critical role bandwidth plays in how we make choices.
In my own case, this might have meant setting financial goals and making plans during times of abundance (like when I received my paycheck) rather than during moments of stress and anxiety (such as when my funds were running low after paying rent).
Many financial experts suggest that the key to overcoming this mindset is about shifting your perspective to one of abundance rather than scarcity. It might sound overly simplistic, but in practical terms, it makes sense. Letting go of fear opens you up to taking risks.
To overcome this fear, Ramit Sethi introduces a concept he calls a Tripod of Stability:
...by securing the important things, you create the freedom to experiment and take risks in other areas. We can apply this idea to our own lives. I refer to this as my “tripod of stability.” By managing the essential elements—
my home, my car, my relationships,
I can create space for growth by taking risks in areas like pushing my limits in fitness, trying new things in my business, or exploring new destinations.
You could adapt this concept to your finances. It doesn’t need to involve three specific areas, but it should be enough to make you feel secure. For example, if you're considering seeking a higher-paying job but fear losing your current one, following Sethi’s advice would involve securing the “big things” to reduce worry. For me, this meant having an emergency fund. Knowing I had a safety net in case of an emergency made me feel more comfortable and open to pursuing growth opportunities.
GOBankingRates advises expressing gratitude as part of the process. This can be beneficial because it shifts your focus away from bills, obligations, and worst-case scenarios, leading to fewer defensive financial decisions. We’ve written more about how to embrace gratitude here.
Finally, Debt Roundup recommends taking small, manageable steps:
Take gradual steps toward building your wealth. Start by opening a savings account. Invest a small sum in the stock market. Increase your 401(k) contributions. Strengthen your financial safety net, understanding that a few hundred dollars here and there won’t make a significant difference in the grand scheme of things.
These actions assume you have the means to begin investing, of course. Depending on your financial situation, your initial steps might involve paying off credit card debt, developing a strategy to tackle your student loans, and learning how to successfully ask for a raise.
When I was in debt, part of my plan was to educate myself about the next steps while working towards my debt goal. Gaining knowledge not only helped me stay motivated and focused on my end goal but also empowered me. While I couldn’t change everything about my situation, I had control over two things: how I managed it and what I learned from it. That shift in perspective was crucial for changing my mindset.
Illustration by Tara Jacoby.
