Have you’ve ever felt a rush of excitement at making a big purchase? Or have you experienced feelings of shame at making a financial mistake? Does looking at your net worth statement give you a sense of accomplishment? If so, you know that relationships with money aren’t completely rational. For most people, money comes with a lot of emotional and psychological baggage. These feelings aren’t necessarily bad, but they can affect the decisions we make.
Psychologists call these emotions "money scripts." These unconscious beliefs can drive many positive and negative financial behaviors.
Many money scripts come from our families and the way our parents handled and discussed their finances. That’s one of the reasons why we encourage clients to talk to their kids about money and teach them good financial skills early in life. As adults, it’s also our responsibility to explore and understand our own feelings about money and how they drive our behavior.
As financial professionals, we know that money is a very emotional subject. We have seen many instances where emotions drive negative actions.
- Emotional investing decisions can wreak havoc on long-term performance by leading to overconfidence when markets rally and panic when markets decline.
- Anxiety about the unknown can leave people feeling paralyzed with worry and unable to make financial decisions or prepare for the future.
- Shame and avoidance can lead to inaction and push people into ignoring critical financial tasks that make them uncomfortable.
- Emotional spending can give people a brief feeling of euphoria or distraction but it can cripple savings strategies if left unchecked.
What Can You Do?
The first step to unraveling your psychological relationship with money is to realize that you’re in good company; everyone has positive and negative emotions related to money that can lead them to make not-so-savvy decisions.
One way to help you explore your internal money scripts is by imagining how you feel in certain common financial scenarios:
- How do you feel about earning money?
- What does money mean to you?
- How does buying something make you feel?
- How does saving for the future make you feel?
- How do budgeting and tracking expenses make you feel?
- How do you feel when markets are up?
- How do you feel when markets are down or volatile?
- How do you feel about meeting with a financial professional?
- How do you feel about your financial future?
If you have strong positive or negative reactions to these questions, it’s a good idea to take note of those feelings and explore them in more depth – perhaps with the help of a professional. Some emotional triggers can lead to positive activities like saving and preparing for the future. Others can cause negative behaviors like avoidance, overspending, and emotional investing. Even positive emotions like self-confidence and optimism can lead to negative outcomes when they cause people to ignore the future or disregard facts.
Another way to help avoid letting emotion derail your finances is by harnessing the power of psychology:
- Build strategies to help neutralize your emotions during stressful periods.
- Work with a professional to get guidance and positive reinforcement.
- Automate your saving and investing through your workplace retirement plan to stay on track regardless of your emotional state.
- Take small steps toward better financial behaviors like bi-weekly family budget meetings.
- Forgive yourself for mistakes and get back on track as quickly as possible.
How Can We Help?
As financial professionals, we help our clients untangle their emotions about wealth and guide them in developing strategies for the future. Part of that entails acting as an impartial party when clients deal with stressful situations and harbor powerful emotions about money. If you or someone you love is finding it difficult to tackle finances or is experiencing a lot of financial stress, please reach out to us for help. We’ve helped many clients work through tough periods and would be happy to be of service.
Disclaimer: The information provided here is general and intended as educational in nature. It is not intended nor should it be considered as tax, accounting, or legal advice. Investec Wealth Strategies and its advisors do not provide tax, accounting, or legal advice. We recommend you seek the counsel of your attorney, accountant or other qualified tax advisor concerning your situation.