When I was four, my mom opened up a shoebox in our closet and pulled out something I’d never seen before: a crisp, beautiful $100 bill. Naturally, I shouted, “A HUNDRED BUCKS?!” She immediately put her hand over my mouth, whispering, “You want the whole world to hear? They might rob us and we’ll have nothing!”


I can’t blame her. We lived in a high crime neighborhood, we didn’t have much, and she’d grown up in severe poverty. It was no wonder she was afraid—she knew what it was like to have nothing, and she was terrified of going back to that. The personal finance world often refers to this as a “scarcity mindset.” It’s when you make financial decisions based on your fear of not having enough.

For a while, that fear actually worked well for us. It motivated my parents to scrimp and save thousands of dollars on minimum wage salaries. It motivated me to develop a strong work ethic. We were afraid of losing what we had, so we worked hard and saved as much as we could based on that fear-driven goal.


However, there comes a time when that mindset backfires, and it can end up hurting your finances instead. Ironically, living in constant fear of falling back into poverty can keep you from moving past it. Over time, I’ve found that it’s gotten in my way more than once.

Don’t Be Afraid to Strive for Your Earning Potential

I’ve talked about my money fears before. I was always afraid to ask my employers for a raise, because I didn’t want to lose my job. This is a classic example of the scarcity mindset, as Debt Roundup defines it:

the scarcity mindset often makes you feel as if you aren’t worthy of wealth and success. You might be focused on just “getting by” and avoiding imminent disaster. Never mind that there’s no reason to believe that things will fall apart; you just want to stay afloat so that you’re reluctant to take any chances — even if it’s just investing a small amount of money.

For a while, I didn’t quite understand this fear. I didn’t value myself, and yes, that had a lot to do with my own confidence and self-esteem, but it also had a hell of a lot to do with being afraid to rock the boat.

I was working an entry-level, low-paying job right out of college, and I found a much higher paying job a year later, but I almost didn’t take it. Why? Because I was afraid it wouldn’t work out, and then I’d have nothing. It’s hard to imagine a career where you never progress because you’re too afraid of losing what you already have, but I almost chose to do just that.




Don’t Just Buy the Cheapest Item

People with this scarcity mindset focus on defense, not offense. Instead of considering the future and how you’ll grow, you’re focused on not losing what you have now. When it comes to spending, this actually seems smart. You want to keep your money, so you’ll probably spend less of it. However, spending less isn’t always a smart financial move.


We’ve talked about this before, but sometimes it pays to spend more on quality items. When you’re in a mindset of scarcity, that’s lost on you. Growing up, we resented quality, name-brand stuff. My mom scoffed that people only bought expensive things for the label. And for years, I didn’t even bother looking at name brands for this very reason. She was right to some extent, but it was a defensive mindset.


We thought we were being frugal. To us, the cheapest option was always the smartest; only a fool would spend more. As a result, we bought cheap clothes that didn’t last. As an adult with a scarcity mindset, I often bought cheap, replaceable household goods. And I can’t tell you how many DIY projects I’ve botched because I’m too cheap to hire a professional who will get it right the first time. It’s taken a while to get over my defensiveness toward expensive things and realize what frugality is truly about.

Don’t Blow Off Investing

When you don’t know anything about investing, it’s intimidating. We always hear bad news about the stock market, so it seems like a big gamble. For someone with a scarcity mindset, this makes investing downright scary. Scary enough that, if you’re like me, you’ll refuse to learn more about it.


For years, I never thought I would invest. I figured it was a thing for rich people who had money to burn and could afford to throw that money away. I wanted to keep my money, so I shoved it under a proverbial mattress and blew off investing entirely.

The more I learned about personal finance, though, the harder it was to deny that investing is how most people build enough wealth to retire. Of course, at the time, I wasn’t focused on building; I was focused on protecting what I already had. As a result, I missed out on time. When you start investing, you appreciate the power of compound interest, and time is a powerful factor when it comes to compound interest. Of course, I was focused on protecting what I had, so that concept was lost on me.


Don’t Let Distractions Cloud Your Decision Making

A scarcity mindset can also lead to poor, rash decisions. In a book called “Scarcity: Why Having Too Little Means So Much,” researchers Sendhil Mullainathan and Eldar Shafir conduct a series of experiments to see how this mindset affects our actions.


They found that the fear and pressure of not having enough makes us less polite, more impulsive, and can even lower our cognitive capacity. For example, in one study, they conducted basic IQ tests on subjects in a New Jersey mall. They took note of the subjects’ self-reported income, then introduced them to a financial problem:

Imagine that your car has some trouble, which requires an expensive $3,000 service. Your auto insurance will cover half the cost. You need to decide whether to go ahead and get the car fixed, or take a chance and hope that it lasts for a while longer. How would you go about making such a decision? Financially, would it be an easy or difficult decision for you to make?


The answer wasn’t really important; the IQ test results were. Without the problem presented to them, all subjects generally performed the same on the IQ tests, regardless of income. However, when low-income subjects were presented with the problem, their IQ results actually dropped. The point isn’t that scarcity makes us dumber; it’s that it stretches our bandwidth, stresses us out, and distracts us. We’re not thinking at full capacity, which makes us vulnerable to bad decisions.

Financially, this takes the form of debt traps like payday loans, debt settlement, or layaway. Most of us know these aren’t the best financial decisions: all you have to do is look at the interest rates and statistics. When you’re in a mindset of scarcity, though, it’s harder to think objectively about the long-term. You’re distracted and focused on surviving in the short-term.


How to Move on from the Scarcity Mindset

In their book, Mullainathan and Shafir discuss policy and programs that can help people break out of this mindset, but they do offer a few practical tips too. One of my favorites is to change your decision making time:

One powerful tool is to just change when you make very big decisions. We call this bandwidth. We often neglect the importance of bandwidth in our decision-making.


In my own example, this might mean I should’ve made financial goals and plans during a time of abundance (when I got paid, for example) rather than a time of stress and worry (like when my paycheck was running out after paying rent).

A lot of financial writers talk about how it just boils down to shifting your mindset and embracing abundance instead of scarcity. It sounds hokey, but practically, it makes sense. When you can let go of fear, you’re more open to taking risks.


To let go of this fear, Ramit Sethi uses what he calls a Tripod of Stability:

...nailing the big things means that you can play around and take risks in other areas. We can apply this principle to our own lives. I call this concept my “tripod of stability.”By taking care of the big things — my home, my car, my relationships, I can increase my growth by taking risks in other areas like pushing my limits when working out, experimenting in my business or traveling to new places.


You could hone this concept in on your finances. It doesn’t necessarily have to be three areas, it just has to be enough that you feel safe. For example, let’s say you want to look for a better paying job, but you’re afraid of losing your current one. Going by Sethi’s advice, you would take care of the “big things,” so you have less to worry about. For me, this meant having an emergency fund. Knowing that I would be okay in case of an emergency made me feel comfortable enough to stay open to options for growth.

GOBankingRates recommends expressing some gratitude while you’re at it. This can be helpful because you’re less obsessed about bills, obligations, and what-ifs, so you make fewer defensive decisions. We’ve written a bit more about how to embrace gratitude here.


Lastly, Debt Roundup suggests starting with small steps:

Make small steps toward growing your wealth. Open a savings account. Invest a small amount of money in the stock market. Increase your 401(k) contributions. Build your safety net, realizing that you won’t miss a few hundred dollars here or there in the overall scheme of things.


These steps assume you have money to start investing, of course. Depending on where you’re at financially, your own small steps might be paying off a credit card, coming up with a plan to pay off your student loan, and learning how to ask for a raise and get it.

When I was in debt, part of my plan was to learn about the next step while I was working on my debt goal. Beyond the knowledge, learning helped me stay motivated and keep my eye on the prize, rather than lament about how much my situation sucked. It also helped me feel in control. There was only so much I could do about my situation, but I did have control over two things: how I handled it and what I learned about it. That made a big difference in shifting my mindset.


Illustration by Tara Jacoby.