Creating a solid financial plan is not just about the numbers; it’s about understanding and managing the emotions tied to your money. Many common money mistakes stem not from a lack of financial knowledge but from the challenge of keeping emotions in check.
In an ideal investment plan, success would be purely logical—following sound principles like asset allocation, diversification, and strategic portfolio construction. Theoretically, this should lead to steady growth and compounding returns over time.
However, investors are not machines; they are people with emotions. Recognizing how emotions influence financial decisions and learning to manage these emotions is crucial to your success. Read on for helpful insights into the emotional aspect of your financial choices so you can boost your confidence in both your day-to-day financial decisions and your long-term wealth-building strategies.
The Money Script
Do you sometimes feel like the discipline to make rational and well-thought-out financial decisions has escaped you? Because no matter how hard you try, you just can’t seem to stick to it. Rest assured, there are others who feel the same way. These feelings are not uncommon and are most likely due to the emotional and psychological baggage we all carry relating to our money, otherwise known as our money scripts. And, as with most of the baggage we’ve lugged into our adult lives, these scripts usually start forming at a very young age.
Though we may not be aware of it, we spend our childhood picking up on how our parents and other significant role models relate to and handle money. Over time, our brains are subconsciously trained to respond in similar ways. If your parents were confident in their ability to make wise investments, you will likely face investing with confidence as well. Contrarily, if you experienced your parents scrounging to get by and often quarreling over expenses, you may experience some pretty strong feelings of guilt when making certain purchases.
The seeds of money scripts are planted in childhood, watered by observation, and eventually grow to influence your emotional beliefs about finances as an adult. For this reason, it is vital to be intentional and diligent in talking to your kids about money and modeling healthy financial behaviors. It is just as important to take the time to examine yourself and understand your money script and how it influences your financial behavior.
The Negative Side of Money Scripts
To be fair, not all money scripts are bad. Some behaviors we learn plant seeds for beneficial emotions about finances. However, other behaviors, such as money avoidance, focus on financial status, or the idolization and even worship of money, can be flat-out detrimental. Unhealthy emotions and belief patterns can lead to all kinds of financial problems, such as financial infidelity, compulsive buying, pathological gambling, and financial dependence. Certain money scripts have been tied to lower levels of net worth, lower income, and higher amounts of revolving credit.
Those may sound extreme, but have you ever let panic during a market downturn take your focus off of your long-term investing plan? Have you ever been unable to make a decision because you were paralyzed with worry and anxiety about the future? Have you ever wreaked havoc on your budget for the momentary high of acquiring something you really wanted? All of these behaviors stem from your personal money script.
Money Scripts Can Be Changed
We often think that if we had more money, we wouldn’t have any problems. But we have money problems because of how we approach money, not necessarily because we don’t have enough. This is good news! We might not be able to drastically increase our income, but we can learn to control our attitudes and perceptions. Our money scripts may be ingrained from childhood, but they are not permanent. With a focused and concerted effort, they can be changed.
The first step you must take in overcoming your money script is to identify it. To do this, you must become aware of your emotional responses to common financial situations. Begin to stop and notice your emotional responses to these common experiences:
- Earning money
- Buying things
- Saving for the future
- Budgeting and tracking expenses
- Making financial decisions
- Volatile markets
- Healthy markets
- Meeting with a financial professional
- Thinking about your financial future
How do these things make you feel? Anything that elicits strong emotions warrants further reflection. Keep in mind that negative emotions are not the only ones that can harm your financial life. Some positive emotions, like optimism and self-confidence, can bring about negative results if unwarranted and left unchecked.
How to Manage Emotional Money Decisions
The key to changing your money script and developing healthier money habits is learning to control your emotions. You can also build some new, healthy habits that protect you financially and incorporate them into your life. Habits and disciplines such as taking advantage of automatic savings, investing through your bank or employer’s retirement plan, scheduling regular family budget meetings, and enlisting the help of someone reliable to keep you accountable are great places to start. Eventually, you will learn how you respond to emotional triggers and you can then take steps, like mandating a “cooling off” period for yourself, before making any decisions.
Finally, you need to be willing to forgive yourself when you make mistakes. Leave the past in the past and move forward with the new knowledge you have gained. Choosing to forgive yourself for past mistakes frees you up to be more effective with your new tools. As you begin to collect victories, both big and small, you will likely find it even easier to extend forgiveness.
Work With a Trusted Partner
Choosing a financial advisor is a decision that requires careful thought, and your level of comfort with your advisor is key to your success. At Center for Wealth Management, we believe that financial planning is a continuous journey, which is why we are committed to being by your side every step of the way. If you’re ready to see how we can support your financial journey, we invite you to schedule a free introductory meeting online, call (248) 220-4321, or email me at firstname.lastname@example.org.
Justin Williamson is a senior partner and co-owner of Center for Wealth Management, an independent, fee-based wealth management company in Troy, Michigan. Justin has been serving clients in the financial services industry since 2001. He spends his days helping his clients achieve their financial goals and make the best decisions for their families so they can spend time on what they love and experience financial peace of mind. Justin is known for his dedication, integrity, personal touch, and ability to simplify complex issues. Justin specializes in serving engineers and other professionals who are close to retirement or recently retired and helping them maximize their benefits and create a retirement plan they can rely on. He is a seasoned public speaker and presents at numerous corporate events each year on retirement planning, Medicare, Social Security, and other financial topics. Justin has a bachelor’s degree in Business Administration majoring in Personal Financial Planning from Central Michigan University and is a CERTIFIED FINANCIAL PLANNER™ practitioner.
Outside of work, Justin enjoys spending time with his family. He and his wife, Corinne, have five children between them ranging in age from sixteen to twenty years old. Justin lost his first wife, Heather, to brain cancer in 2020, and thus has experienced firsthand the emotional, mental, and financial challenges spouses and children go through when dealing with such a tragic situation. Outside of work, Justin enjoys coaching or attending baseball, softball, powerlifting, and basketball events, traveling to new locations, and spending time at the family cabin at Higgins Lake. Learn more about Justin by connecting with him on LinkedIn.