If you're like the 70% of Americans who are financially vulnerable or coping, your relationship with money can be fraught with strong emotions. Among guilt over past spending and stress related to your financial standing and future, money can evoke many feelings. Managing these emotions can significantly impact your financial decision-making and overall well-being. Even if you believe your decisions are grounded in logic and common sense, the truth is that our financial choices are frequently driven by emotion, often more than we realize.
How Do Our Emotions Influence Our Financial Decisions?
78% of these Americans face moderate to high levels of stress and anxiety. Emotions such as confidence, fear, or joy play a decisive role in financial matters such as investment decisions. These emotions generate positive or negative stimuli that influence our willingness to take risks and our overall confidence in self-efficacy when making financial decisions. Our thought patterns are built on beliefs, knowledge, and experiences, making our behavior a result of the interplay between thought and emotion.
Strategies to Make Better Financial Decisions and Avoid Becoming Your Financial Enemy:
- Restrict Spending When Emotions Are Heightened: Managing our spending during periods of heightened emotions can help us avoid losing control and making poor financial decisions that may lead to financial loss. This involves recognizing when emotions like stress or excitement are influencing your choices. For instance, if you're feeling particularly anxious or euphoric, it might be wise to delay a major financial decision, giving yourself time to cool down and think rationally.
- Avoid Overconfidence: Overconfidence in investments can lead to lower returns than expected. It's crucial to remain realistic and grounded. To combat overconfidence, regularly review your financial performance and seek feedback from trusted advisors or financial mentors. This external perspective can help keep your expectations in check and ensure you’re making decisions based on facts rather than feelings.
- Accept and Move On: Recognize that thoughts and emotions are a constant presence in our lives. Accept past financial mistakes and move forward with new, informed decisions. Professional advice can help mitigate fear and enhance decision-making. Learning from past mistakes is crucial; each setback is an opportunity to gain insights and improve your financial literacy.
- Focus on the Future: Instead of dwelling on past financial losses, focus on new, promising opportunities. Let go of past mistakes and look ahead. Create a forward-looking financial plan that includes setting realistic goals and identifying steps to achieve them. This proactive approach keeps you focused on future gains rather than past losses.
- Break the Cycle: Avoid repeating the same mistakes and expecting different results. Seek expert advice, review your situation, and make informed changes. This might mean consulting a financial advisor, attending financial workshops, or using financial planning tools to reassess your strategy. Doing something different can help you break unproductive patterns and create new, more effective habits.
- Invest in Financial Education: Building a solid foundation in financial education can empower you to make better decisions. Engage in continuous learning through books, online courses, and financial news. This ongoing education will help you stay informed about best practices and emerging trends, making you more confident and competent in managing your finances.
Investing time in financial education and learning how to manage our finances are crucial for making better financial decisions. This is why Article 26 is creating the first personal finance platform that powerfully leverages the connection between mental and financial health. We provide equitable and accessible personalized financial literacy paired with direct money management tools, aiming not only to increase users' knowledge but also to instill better behaviors and habits, leading to improved financial capability. By addressing the emotional aspects of financial decision-making, we help users achieve greater financial stability and peace of mind. As we continue internal development, let's also continue our internal financial development; check out the resources below for information related to the given tips and more!
Resources:
Banzai
FDIC Money Smart
Nerd Wallet
Sources:
Financial-psychology-emotions-financial-decisions
Understanding the Mental-Financial Health Connection
