The influence of emotion on our finances
About the author
Jane Slack-Smith has been named one of the Top 10 Property Experts in Australia by Money Magazine, one of the Top 4 Financial Influencers by Qantas and been awarded the Australia’s Mortgage Broker of the Year twice.
We’ve all heard of the dangers of emotional spending but what about emotional saving? Emotions can wield a powerful influence on our personal finances in a positive way, but they can also have a negative impact on where we sit financially. The good news is, by cultivating a bit of self-awareness you can harness your emotions and ensure they help you achieve your financial goals.
Whether your goal is a big one like saving up a deposit to buy your own home, or a more modest splurge to take off on a much needed holiday the best laid plans can be derailed, if you follow your heart rather than your head.
Our decision-making abilities – from those big life changing financial decisions, to the small “treat yourself” purchases – are strongly influenced by how we are feeling at the time. Marketers know that we are not just buying ‘things’ – we buy (or try to buy!) space, love, happiness, freedom… the list goes on.
Developing awareness and discipline
If you find that your spending is influenced by how you are feeling, you are not alone. The most common trigger for overspending is stress, with 29% of people surveyed splashing out in response to stress.i It’s not just stress causing us to overspend though. In the same survey, sadness was cited by 13% of respondents as a reason for buying up big, with sadness also considered to lead to particularly extravagant purchases.
This so-called “misery is not miserly” phenomenon is backed up by a study where participants who watched a sad video offered to pay nearly four times as much money to buy a water bottle than a group who watched an emotionally neutral video.ii
Getting that warm glow without spending a cent
The best way to counter an emotion led-spending spree is to be aware of how you are feeling and acknowledge that the buzz you get from your purchases is unlikely to last longer than leaving the shopping centre carpark. Think about other things that make you calm and happy that don’t involve spending money, like having a chat with a friend or going for a long walk.
With cost of living increases and interest rate rises putting pressure on household budgets, it’s also a good idea to keep track of your spending and having a set budget with some allocation for the odd splurge will help you put some limits around your spending while not feeling totally deprived.
Keeping emotion out of investing
Negative emotions don’t just cause us to overspend.
Emotions such as envy and greed can drive risk taking behaviours like gambling or investing in ventures where you stand to gain a lot if successful, but could lose the shirt off your back, if the risk does not pay off.
Fear also commonly drives investment decisions but panic selling when the stock market takes a tumble can mean you lock in your losses and lose the benefit of the rebound that inevitably comes over time. Having a plan in place can ensure that you make considered decisions and think through any possible opportunities carefully. Investing is one area where you certainly need to be thinking with your head and not your heart.
Harnessing emotions to help you reach your goals
On the flip side, positive emotions can be a strong motivating force when it comes to personal finances. It has been proven that people save as much as 73% more when they have an emotional connection to their goals.iii
The trick with this is to have something quite tangible that you are hopeful for or excited about, to work towards. Focus on your feelings. Think about how thrilling it will be when you step off the plane and explore your dream destination, or how gratifying it will be to finally pick up the keys and open the door to your new home.
Money is an emotional business and it’s impossible to completely separate your emotions from your finances – after all, we are only human. However, it is worth developing an understanding of how your emotions impact your finances – for worse or for better. Then you can address the things that are having a negative impact and harness those good vibes to achieve your dreams.