Oran A. Hall | Your emotions and your money

You have a financial plan you believe is sound, but it has not delivered the results you expected and you cannot understand why.

You could get the answer if you develop a better understanding of yourself and how you relate to your emotions.

A good financial plan addresses matters such as your income, savings, spending/expenses, investments, insurance, taxes, estate planning, and retirement planning. The ultimate goal is to provide financial security now and in the future, but this goal can be elusive if you do not take a very important part of your being into consideration: you cannot separate your emotions from your financial decision-making.

Your emotions are concerned with your feelings, beliefs, past experiences, relationships, and personal values. These show themselves in fear, stress, and guilt but also in confidence and hopes for the future.

Money is at the heart of financial security. When it is adequate, there is a sense of freedom, enjoyment, and peace of mind, but if it is not, there is a sense of despair, failure, and hopelessness, and may cause financial pressure, which may manifest itself in shame, anxiety, avoidance, and impulsive decisions. To some extent, this is understandable considering that money is required for food, housing, healthcare, and family responsibilities. It provides our basic needs and security.

There are several ways in which emotion manifests itself: fear, anxiety, guilt, shame, overconfidence, envy or comparison, and scarcity thinking.

Fear may cause you to avoid making decisions because you want to avoid making a loss. This is often evident in investing. It may cause you to stay away from investing or to delay until you feel it is best to do so. This may lead to missed opportunities and may delay or scuttle the chances of realising important goals.

Anxiety shows itself in constantly worrying. It may cause delay in making a financial plan or implementing a good one that has already been made.

Guilt shows itself in feeling bad about spending your money, but is it not legitimate to do so as long as it is not done in a wasteful way?

Shame may be in the form of hiding debt or financial difficulties from the people who matter in your life. The problem with this is that it could delay or kill any opportunity to get help.

Overconfidence is often bred by past success, or an inflated view of your knowledge or your competence, and may cause you to take excessive or unnecessary risks.

Envy or comparison may drive you to spend to match the lifestyle of others. You may fail to recognise that if the Jones’ lawn is greener, their water bill is generally higher.

Scarcity thinking traps you into believing there will never be enough, which can lead to hoarding cash rather than investing it or to avoiding financial planning altogether because the situation feels hopeless.

Manage emotions

Managing your emotions in financial matters is critical because failure to do so can breed serious stress, which can shorten your planning horizon, cause you to be more impulsive, and make complex financial tasks feel overwhelming.

Understanding your experiences with money – and what you believe about money – requires looking back over your entire life. Consider your childhood, family practices, religious beliefs, cultural expectations, your experiences at school, how you and your family dealt with economic hardship or success in the past, how major events like job loss and natural disasters affected you and your family, and how your community, colleagues at work, and friends treated and continue to treat money. Many of these still influence how you relate to money today.

The best financial plan is the one that aligns with what matters most to you – for example, family security, independence, health, and education. To achieve your goal, tailor your plan to that goal. For example, create an education fund if education is the priority, and make insurance, an emergency fund, and a steady and reliable stream of income priorities if family security is what matters most to you.

There are steps you can take to make financial decisions without putting yourself under pressure. Here are some examples: pause before making major purchases to allow excitement, fear, anger, or pressure to wane; automate good habits like scheduling the payment of debts and bills and saving money; create an emergency fund; and create spending categories reflecting needs, important goals, and discretionary expenses.

You cannot eliminate your emotions – and they can play an important role in how you manage your finances. Recognise them early, though, so that temporary feelings do not impair your ability to achieve your long-term goals.

Oran A. Hall, author of Understanding Investments and principal author of The Handbook of Personal Financial Planning, offers personal financial planning advice and counsel. Email: finviser.jm@gmail.com