NDSU Extension Service - Ramsey County

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The Money and Emotion Connection

The Money and Emotion Connection

 

            Many studies have shown that mood and finances are deeply intertwined and that how people feel about themselves can dramatically influence their success.  Emotional spending – sometimes called “retail therapy” - is common and can cause a big problem if you do it consistently. Too much emotional spending — and even one trip that results in particularly expensive purchase can consistently derail a budget. It’s easy to rationalize spending when you are emotional, because sometimes spending in general, or indulging in a particular purchase, momentarily makes us feel better.

            It’s useful to learn how emotions can alter or affect your decisions — then, you can hopefully avoid making the same spending mistakes over and over again.

            Feeling Sad?  Shopping is called retail therapy for a reason. Buying stuff can make us feel better and chase away the blues, at least temporarily. The problem’s when the credit card bills arrive. Sadness increases the amount of money we're willing to spend and makes us impatient, Harvard University researcher Jennifer Lerner and her colleagues found. When we're sad, we're more likely to give up a larger future benefit to have a smaller benefit right now. Exercise, time spent outdoors, or hanging out with a comforting friend will provide more relief.

            You’re Scared!  Fear can play a big role in our financial lives. Fear of becoming a bag lady can induce us to save. Fear of leaving our loved ones impoverished can lead us to buy life insurance. It has the exact opposite effect of anger, making us exaggerate risks rather than discount them. Fear also causes us to second-guess ourselves, making us abandon a plan of action if it goes even slightly off course.

            When You’re Angry.  Angry people tend to take bigger risks and dig in their heels when their choices are questioned, refusing to admit they made a mistake. Investors do need to take some risk to make their money grow, and being stubborn can help you stick to your budget and investment goals. The trouble comes when you refuse to sell a losing stock or gamble your retirement fund by buying only highly speculative stocks.  Sometimes an objective third party, such as a financial planner, can give you the distance you need to put aside your anger and make more rational choices.

            Feeling Guilty?  Guilt is what we feel when we violate our internal standards. If we value our family but spend too much time working, we feel guilty — and may try to make up for that with expensive presents or dinners out.

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