No one is entirely rational when it comes to money. We don’t create and follow a budget or save something every paycheck though we believe it would be in our best interest. We know we need a financial plan but put off the work involved; somehow it never happens. We spend too much out of recklessness or exuberance, or too little out of guilt. Our money behavior often causes shame.
It’s worth thinking about money as something with which you have a complex relationship. Your money (and more broadly your personal finances) is not a fixed entity, but rather a complex of data points, challenges and opportunities you circle around, interact with and have feelings about. You make decisions about money that impact your financial situation and these impacts in turn reciprocally affect your feelings and future behaviors. And it’s a relationship that evolves over a lifetime.
Here are three key things to know about the psychology behind our personal relationships with money:
- Emotion plays a huge role.
- Anxiety and avoidance create a vicious cycle.
- Psychologically, you can’t entirely escape your family and your past.
Emotion and money
The most important emotions in relation to money are fear, guilt, shame and envy. It’s worth spending some effort to become aware of the emotions that are especially tied to money for you because, without awareness, they will tend to override rational thinking and drive your actions.
What’s there to be afraid of? The possibilities are as varied as there are individual stories. But common fears include the fear of not having enough, the fear of looking stupid, the fear of provoking envy and the fear of being exposed or humiliated.
Guilt and shame are not the same emotion. Guilt has to do with feeling bad about a negative impact you’ve had on others, while shame is a feeling evoked when you let yourself down or don’t live up to your own sense of what’s right.
You might feel guilty because you have more than your friends, or you haven’t been particularly charitable, or you’ve had money come too easily.
Shame is one of the most common and powerful emotions associated with money and personal finance. It is a prime reason people avoid doing what they know they should. It’s natural to want to avoid exposure in relation to something you’re ashamed about.
Here are just some of the possible versions of shameful feelings related to money:
- I don’t have enough money.
- I’ve avoided thinking about finances.
- I’ve avoided doing what I’m supposed to do about finances (creating a safety net, planning for retirement, sensible budgeting).
- I’m really ignorant about all of this.
- I spend too much.
- I buy stuff when I’m unhappy.
Shame interacts with avoidance to create a vicious cycle. When you’re filled with shame the natural tendency is to avoid facing whatever is making you uncomfortable. That avoidance itself leads to additional shame and more avoidance. Next thing you know your taxes are overdue and it’s six years since you decided to finally make that appointment to see a financial planner and it still hasn’t happened.
People who avoid tackling financial necessities often label themselves a procrastinator and assume they are just lazy or undisciplined. That’s pejorative, judgmental and not helpful. The psychological dynamics of avoidance underlie what we tend to call procrastination. We’re hard-wired to deploy various kinds of avoidance maneuvers when encountering something that is anxiety provoking or uncomfortable. The tricky thing is that in the very short run, avoidance works to reduce anxiety. Because it works, you’re inclined to do it again in the same circumstance.
Here’s how it unfolds. You’re thinking about sitting down and taking a hard look at your financial situation and creating a realistic financial plan. But just thinking about it makes your anxiety level rise, because you’re afraid you will not be able to face the reality that, for example, you have nowhere near enough saved for your kids’ education. That anxiety leads to avoidance. You postpone the task and distract yourself. At that moment, your anxiety level immediately drops, giving you positive reinforcement for the avoidance. You repeat this cycle over and over. But each immediate drop in anxiety doesn’t quite bring you back to the previous baseline level of distress. And over time, your overall level of anxiety increases and increases.
Contrast this pattern with confronting the dreaded task. As you face the facts, your anxiety temporarily increases. If you stay with it, however, the overall level of anxiety will steadily decline. You have to tolerate that short-term increase in distress to benefit from the long term decrease in anxiety. In the end, the lesson is reality is always your friend.
Other emotions that come into play with money include envy, greed, over-excitement and a social psychological phenomenon known as “jumping on the bandwagon.” Some of these are more relevant in the realm of professional investing as opposed to personal finance.
Mental health and mental illness
One in three Americans is likely to experience one of the following mental health problems in their lifetime: alcohol use disorder, major depression, bipolar disorder or ADHD/ADD. Each of these illnesses can have a significant effect on personal finance.
Excessive use of alcohol or other substances leads to poor judgment, inattentiveness to finances, employment jeopardy and secretiveness.
Depression can cause careers to stall or even job disability. Depressed people are often unable to face financial responsibilities because of lack of energy or sense of purpose.
Bipolar disorder is especially tricky. Current prevalence estimates say that 2.4% of the population suffer from this genetically influenced condition. It’s possible that there are many more who have sub-threshold or very mild versions that are never diagnosed. People with a mild expression of bipolar disorder genes can experience barely detectable “hypomanic” states in which they have increased energy, decreased inhibitions, exciting plans, are easily overstimulated and increase their spending. Many creative and successful people do exceedingly well in these states of mind. But it’s a good idea to avoid trips to Costco lest you come home with a new television and treadmill as well as five pineapples and a lifetime supply of ibuprofen.
Adults with Attention Deficit Disorder (ADD or ADHD) are usually misunderstood. The name is a misnomer. Rather than an attention deficit, they often have the ability to hyperfocus, or pay intense attention. But only to tasks that really interest them. They have the ability to screen out what’s tedious or mundane. Details and repetitive tasks are easily overlooked (think bills piling up, envelopes unopened). For these individuals, delegating day to day financial management is often the best course. But they may be great at grand-scale planning.
Family and childhood influences never end
Every family has its own particular psychology of money. What can be talked about, who should be in control, what money responsibilities are assigned to what gender, how important money is or is not.
Additionally, there are always stories about money that are part of a family’s identity. Maybe a serial entrepreneur grandfather lost the family fortune, sparking an excessive conservatism in subsequent generations. Or a brilliant parent was seen to have been cheated out of her proper destiny.
You may have experienced subtle pressures to right the wrongs perpetrated by or suffered by previous generations. Or you may feel internal pressure to oppose the family money mentality. If you’re the first in your family to succeed you might want to give back to the rest of the family and neglect your own financial needs.
How to harness money emotions
Emotion isn’t all bad. It tells you what you’re passionate about, what really matters to you. It makes you feel alive. Anxiety isn’t all bad either. Mild to moderate levels of anxiety are motivating. Harness them to tackle what you need to face and know that you will feel better when you’ve done so.
The key is self-awareness. Much of our emotional world is unconscious. But it’s not that hard to access if you know what to look for and have a blueprint for the kinds of emotions and family stories that can influence your personal relationship with money.
Author: Prudy Gourguechon