Danica Nelson never used to invest the money she saved out of fear that she might lose it in the stock market.
"Even though there are less risky investment options, I wasn't even willing to learn about them because even the temporary loss of $5 scared me," said the 31-year-old senior product marketing manager and content creator in Toronto.
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Nelson credits this thinking to a scarcity mindset, which is a belief that there are not enough resources such as time, opportunities, connections or in this case, money.
Nelson's scarcity mindset affected her finances in other ways, too. Her anxiety about running out of funds meant she was afraid to use her emergency funds when needed or rock the boat by negotiating terms for a new job. She felt guilty for using any of her hard-earned money to enjoy herself.
She also took on every opportunity to make money, even if it severely underpaid or she had too much work on her plate already.
"I became a workaholic because there was a point in my life where I truly believed the mantra `no missed opportunities' and that being `booked and busy' was the ideal scenario," Nelson said.
While there are many people who live in true financial scarcity, there are others who experience imagined financial scarcity, explained Chantel Chapman, a Richmond, B.C.-based financial trauma researcher and co-founder of financial literacy program The Trauma of Money.
Understanding what's behind this mindset can help decrease shame for those experiencing real or imagined scarcity, she said.
True financial scarcity might look like job loss or underemployment, struggling to pay for rent or food and being unable to handle emergency expenses, such as vet bills for a pet, as they arise. But the same effect can arise from feeling you don't have "enough," Chapman said. In this scenario, the feeling of scarcity persists even when basic needs like housing and food are met.
"The brain doesn't know the difference between actually being in scarcity and the belief that we're in scarcity."
For example, if it seems like everyone on Instagram is enjoying a beach vacation but you don't have enough money to take your own trip, you can put yourself in a state of scarcity if you spend too much time comparing yourself to them," Chapman said.
Nelson said her own scarcity mindset was inherited from her mother, whose experiences as an immigrant to Canada and a single parent influenced her relationship with money.
"She came here with limited wealth and growth opportunities and had to do what she could to take care of my sister and I as a means for survival.Watching my mother do what she had to do to cut costs and save as much money as possible undoubtedly had a strong impact on how my money mindset formed," Nelson said.
What happens to a brain in scarcity mode is similar to what happens to a brain in a triggered trauma state, Chapman explained, citing research from Sendhil Mullainathan and Eldar Shafir.
"Our ability to make decisions, our planning ability, our fluid intelligence 1/8the ability to think abstractly and solve problems 3/8 and our executive decision-making all gets impacted when the brain believes that we're in a state of scarcity."
Those with scarcity thinking can also get tunnel vision. Even when engaged with something else, they're still thinking about money in the back of their minds. This can cause a "bandwidth tax," which is like "having a ton of windows or tabs open up on a computer screen and your computer starts to run really slow," Chapman said.
A tired brain makes you more likely to act on temptation, which is why people experiencing financial scarcity might order via Uber Eats or buy a pair of shoes they know they can't afford.
"The reason why they're doing this is not because they're not smart with money but because they're so burnt out and exhausted ... that their nervous system and their brain is seeking something to soothe them, and that in itself is a survival mechanism," Chapman said.
The tunnel vision associated with scarcity thinking can also lead to difficulty creating and sticking to long-term goals. If someone is focused on financial resources they perceive as scarce, they feel disconnected from longer-term financial plans such as retirement or even debt repayment.
The first step to getting out of scarcity thinking is determining if your resources truly are scarce. You can do that by identifying for yourself what is "enough" and if your needs are actually being met. You might find that your scarcity thinking is a result of comparison or internalizing a cultural push for more, Chapman said.
After that, Chapman recommends starting a gratitude practice to focus on and feel appreciation for what you already have.
She's careful to note, however, that this won't work if you're living in real financial scarcity since it ignores reality. In that case, your first goal should be to put out immediate fires, such as finding a way to pay rent if that's the struggle. Then you can free up some mental space to move onto the next goal, she said.
Nelson said she's been able to make changes by seeking therapy, diversifying her circle with people of different mindsets, pushing through fears or "faking it" when it comes to areas like negotiating and changing her internal script from "I can't afford this" to "this is not in my budget right now."
She's also no longer hesitant to invest her savings. Since 2020, she's learned more about the stock market and moved 60 per cent of her savings into a diversified, self-directed investment portfolio.
"I've also invited my community -- primarily Black, Indigenous, women of colour -- along on my investment journey so they can also learn about the importance of investing and overcoming their fears of the stock market," she said.
"Based on my childhood experiences, I don't know that I'll ever fully shake at least some form of scarcity mindset, but I'm always aware of it when it creeps up and I shut it down immediately once I notice it hindering my success."