We would all like to think that we approach our finances with a clear mind, and nothing but numbers in our heads.
The truth is that for most of us, our emotions play a huge role in our finances, and how we end up spending our monthly income.
So why is it that our emotions are so tied up in our money?
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How Our Emotions Inform Our Money Decisions
Money, like emotions, is something you must control to keep your life on the right track. – Natasha Munson
As humans we are emotional beings, and no matter how rational we might think we are, we are often going to be in situations where we make emotional decisions about our money. We have life experiences that inform the way we respond in different situations, and help to determine how we view and relate to the world.
For example, if you're making a decision about which house to buy, your emotional side may get wrapped up in ideas bringing you back to the type of house you grew up in, where you experienced familial love, good memories and positive relationships with family. Thinking about buying a house like your childhood one makes you feel warm and fuzzy inside, and you may start looking at houses like that, even if they're more expensive than what you can afford. The emotional side tells you that you'll be happier in that type of house, and in the end you buy more house than you can afford because your emotional side told you you'd be more happy in that house. The truth is you could probably be happy in a much smaller house.
Oftentimes you may not even realize that you're acting on your emotions, it's just a gut-level instinct that's telling you which way you should go. One study by Caltech found some interesting things surrounding our perceptions of price, and how spending more money affects us emotionally.
Everyday consumers were asked to sample a selection of wines. The samples were actually all of the same wine, but the researchers gave each participant a different price point for each sample. While they drank the wine, an MRI machine tracked their brains’ pleasure sensors. The researchers found that when people believed they were drinking pricier wines, they were happier and seemed to enjoy it more. In other words, our brain mistakes high price for high quality. Now, apply this irrational thought process to some real world situations and you can see how dangerous it can be for our finances.
Our brains make the emotional calculation that spending more money will make us happier. Even when the same wine was sampled each time in the study above – the wines that were perceived as being more expensive were enjoyed more. Our brain makes emotional decisions that aren't based in fact, and then our rational minds often pitch in and try to rationalize why those decisions are good ones.
While it's important to allow our emotions to play a role in our financial lives, it's also important to make sure that you don't let your emotions take over, and take center stage.
Keeping Our Emotional Side In Check
We can't completely get away from our emotional sides, but we can accept that we are in fact emotional creatures, and put in place behaviors and stop-gaps that will help us to make better decisions, even while allowing our emotions to play a role. As Dave Ramsey has said on more than one occasion, it's about putting in place behaviors, actions and planning that will allow us to succeed, despite our emotions.
Personal finance is 80 percent behavior and only 20 percent head knowledge – Dave Ramsey
So how can we put in place behaviors and actions that allow us to keep our emotions in check? The first step is realizing just how often our emotions play a role in our decision making.
Emotional Spending: A Band-Aid For Larger Issues?
For any people, engaging in emotional spending can have the sole purpose of improving a mood. They spend in order to
- Improve or maintain a mood
- Cope with the stress in their lives
- Deal with their loneliness
- Attempt to improve self esteem
Spending becomes a band-aid of sorts, a way to improve their mood and provide a temporary fix to a problem they're dealing with in their life. ReadyForZero tackles emotional spending, and encourages us to think about why we're tempted to spend.
Buying something unnecessary can do a variety of things: give your self esteem a boost, take your mind off of something you’ve been struggling with, placate feelings of inadequacy, bolster your “I deserve this” attitude. Think about when you’re really tempted to spend. Is it tied to certain situations or when certain emotions arise? Recognizing these emotional spending triggers are essential to creating a solid financial foundation.
In other words, think about why you spend when you do. Is it tied to certain hard to deal with emotions that arise in your life? Do you have certain emotional triggers that cause you to lose your financial footing? Do your best to identify situations and topics that are triggers for you, and put in place rules and behaviors to help you overcome those triggers.
Recognizing Your Emotional Spending Triggers
Figuring out what your emotional triggers are is key. Emotional triggers can come in many different forms for different people. Here are a few examples of emotional spending triggers, and how they can trigger emotional spending.
- Worry: Being worried about a drop in the stock market could cause you to make an emotional decision and get out of the market when you shouldn't.
- Jealousy: Being jealous of a neighbor's nice car and beautiful boat could lead you to buy expensive things that you don't really need.
- Regret: Emotional regret can lead to a victim mentality and living in the past, avoiding trying to improve your situation.
- Embarrassment: You can overspend because you don't want to admit (to friends or acquaintances) that you can't afford to do something.
- Sadness: Money can become extremely hard to handle when you're dealing with grief, sadness or loss, and in the end you can make rash and emotional decisions.
- Feeling overwhelmed: Sometimes when we're feeling overwhelmed by life, it can lead to emotional spending.
- Feeling inadequate: Feeling inadequate may lead you to spend to make you feel better about yourself.
Use Emotions As An Indicator To Pay Attention
You may not see your emotion or feeling in the list above, but the point is that we all have emotions, we all have times where those emotions hit us hard, especially the negative ones.
Maggie Baker, Ph.D., author of Crazy About Money: How Emotions Confuse Our Money Choices and What to Do About It, found that negative emotions “hit us with an intensity that's two-and-a-half times as strong as positive emotions“. Why? “because they are signaling a disturbance you should tend to“.
We should recognize that negative emotional triggers aren't necessarily a bad thing, but can be used as an indicator that we should pay attention, and work towards getting back on the right financial path. Amy Jo Lauber CFP®, author of Living Inspired and Financially Empowered, puts it like this:
Once you've identified those negative feelings, you can use that knowledge to help get back on the right financial path. They can motivate you to rectify a problem, and come up with creative solutions.
Re-framing Your Emotional Triggers Into Productive Behavior
The greatest happiness is to transform one's feelings into action. -Madame de Stael
Coming up with creative solutions, and re-framing your emotional triggers into productive behaviors is the key in my mind.
Make Positive Financial Behaviors More Appealing
If you can, find ways to make saving, and other frugal behaviors, more emotionally pleasing. Set goals for saving, and give yourself a reward and emotional boost for reaching that goal.
Find ways to give yourself an emotional boost that doesn't necessitate spending any money. Instead of buying yourself some new earrings to make you feel good, volunteer at a local soup kitchen, or go and exercise.
Work On Being Content
One of the issues we have when it comes to emotional responses to financial issues is because we aren't content with our current situation. We want more than what we have, and we want it now. The thing is, if we can practice Godly contentment and gratitude for what we already have, we'd be much better off. Allow your convictions, not your circumstances, to be what determines your contentment.
But godliness with contentment is great gain. For we brought nothing into the world, and we can take nothing out of it. But if we have food and clothing, we will be content with that. Those who want to get rich fall into temptation and a trap and into many foolish and harmful desires that plunge people into ruin and destruction. For the love of money is a root of all kinds of evil. Some people, eager for money, have wandered from the faith and pierced themselves with many griefs. But you, man of God, flee from all this, and pursue righteousness, godliness, faith, love, endurance and gentleness.1 Timothy 6:6-11
Re-frame Negative Emotions As An Opportunity For Productive Action
When you're dealing with negative emotions that have the potential for creating emotional spending, realize that it's OK to engage in that emotion – for a time. Allow yourself to feel the emotion for a short time, and then move past it, and find a productive way to change things for the better instead.
For example, if you're worried about something, indulge that emotion for a short time and allow yourself to obsess over it, but for no more than 5 minutes. That can help you to alleviate some of the stress surrounding that emotion. Don't allow it to creep past that, however, and become an all day worry. Instead, commit yourself to productive action and come up with some small things you can do to control the situation you're dealing with.
So if you're worried about retirement, for example, allow yourself to worry about it for a few minutes, and then take some concrete steps towards fixing the problem. Open a retirement account, figure out how much you can save every month and make your first deposit.
Or let's say you're engaged in a bit of jealous thinking, wishing you had fancy sports car like your next door neighbor. Think about owning that car, and how it would feel for a couple of minutes, and then be more productive by thinking about all the things you have to be grateful for, and possibly even starting a gratitude journal of things in your life you're grateful for.
The key is to:
- Identify: Identify the emotion that you're feeling, and think about why it has been triggered.
- Feel: Allow yourself to feel the emotion, and relieve a bit of the stress it brings on.
- Act: Move past the emotion and on to more productive behaviors that help you to move forward in a positive financial direction.
Emotional Spending Questions To Ask Yourself
When you're in the midst of a spending decision, it may pay to take a step back and ask yourself a few questions
- Do I need it?
- Can I afford it?
- Could I purchase something of equal quality or utility for less?
- Am I allowing my emotions to affect my decision making?
- Are there emotional aspects of my life I need to address that might be affecting my spending decisions?
Have your emotions caused you to make spending decisions that you probably shouldn't have? How have you addressed emotional spending?