Financial literacy has become a hot topic in education, with more schools requiring personal finance classes for graduation. While such classes can help students learn the basics of budgeting and investing for the future, they do not alone provide a guarantee that someone will manage money responsibly. In part, this is because there are so many emotions attached to money—sadness, anger, boredom, frustration, excitement, envy, the list goes on and on. All have a major impact on the decisions that we make.
Until you recognize the impact your emotions have on your finances, you’ll likely continue to make impulsive spending decisions that can derail your progress toward your financial goals. And it’s not only that—impulse spending and emotion-driven financial decisions can leave you feeling dissatisfied, frustrated, and unfulfilled in the short term as well.
The Emotional Nature of Financial Decision Making
Emotions tend to drive many of the decisions that humans make, rather than pure logic. We often do things we know will harm us because of emotional drives. This fact does not change when it comes to money. Most people understand that they need to spend less than they earn in order to live within their means, but so many people can’t seem to manage this.
Much of our relationships with money stem from our childhood; research has shown that many fundamental concepts related to financial behaviors develop by the age of 7. We pay attention to what our parents say, what our peers have, and what marketers tell us. People who have parents who splurged may do the same, for example. Meanwhile, people who grew up in an environment that associated wealth with greed might have trouble talking about money or accepting high-paying jobs.
The first step in controlling your emotions is to become more aware of them. Think about your childhood and the early lessons about money that were instilled in you. Think about how money was treated in your household. Did it seem like there was never enough? Did your parents use money to show love? Recognizing and understanding these drives can help you sense when they are steering you in the wrong direction. Take some time to write down the emotions you feel with different financial situations, and look for patterns. Ask how these emotions might relate to early lessons from your parents and peers.
Seeing these patterns can help you understand how you might react in the future to a certain situation. For example, consider how you’d feel if a friend told you they just got back from a European vacation and now they’re shopping for a new car. After thinking about it, you realize that in a situation like this, you tend to feel envious and make a luxury purchase you don’t really need—or even want—just to feel like you can “keep up” with your friend.
When you identify these triggers and your typical responses to situations, you can reduce the power of your automatic emotional response. Rather than react blindly, you can consciously decide how to react. In this way, your actions will be driven less by emotion and more by your priorities, values, and true needs.
Budgeting and Its Impact on Emotional Wellbeing
Poorly designed budgets are one of the biggest drivers of emotional reactions when it comes to personal finance. Much budgeting advice is outdated, unrealistic, and impossible to follow. For example, the guideline that housing should account for no more than 30 percent of total budget comes from 1979 and, while ideal, is unrealistic for many larger urban markets in the United States. Furthermore, traditional budgets often direct people to cut out the small pleasures in life, whether it’s a latte from the café down the street or a nice meal out to celebrate the end of a workweek. These restrictions can make you feel discouraged from the outset and deprived of the things that make daily life pleasant and enjoyable.
Many budgets provoke shame. Some people avoid budgeting altogether because they know they won’t follow it and can’t deal with the shame. People who overspend after they create a budget typically feel bad about themselves, and that negative emotion drives other negative decisions. Sometimes people use these experiences as “proof” to themselves that they are bad with money. However, it’s also possible that the budget was unrealistic and confining, not the person trying to follow it.
Remember: the true point of a budget is to help you reduce financial stress, spend your money more intentionally, and ultimately afford the life you want. Some restrictions will be necessary for this, especially if you want to make a major purchase like a car or home in the future. However, a good budget shouldn’t completely deprive you of pleasure.
To create a realistic budget, spend a couple of weeks tracking your spending with an app like Mint or Personal Capital to see exactly where your money goes and where you can cut corners. This will help you build a budget you can actually follow.
Financial Self-Compassion as a Regular Practice
Everyone experiences emotions around money, and we all make emotional decisions every once in a while. The key is not getting stuck in a shame spiral. That’s why it’s important to develop a sense of self-compassion. Since everyone has this same struggle, it’s not a failing unique to you alone. You need to be able to recognize that financial mistakes are ok, and that you can move on from them. When you make a mistake, don’t dwell on it. Acknowledge it and use it as a learning opportunity; figure out how you can avoid repeating it in the future.
Part of self-compassion involves asking for help when you need it, too. Do not let shame or pride stand in the way of your financial health. Too often, people fail to get the help they need because of their emotions, and they often end up in an even more difficult financial position.
The other side of self-compassion is celebrating your wins. People have a habit of dwelling on their failures and forgetting their wins. By celebrating wins, you remind yourself that the relationship between your emotions and your money is not always negative. Think about how you feel when you have those financial wins, and use that as motivation to keep yourself on track.