By Tricia Lepofsky, ChFC®
Some of the most common financial mistakes people make are not necessarily due to the inability to manage finances. The real challenge often lies in the ability to control emotional responses to money matters.
In theory, success as an investor hinges on sticking to logical principles. It involves approaching financial strategies, such as asset allocation, diversification, and portfolio construction, with a rational mindset. By doing so, we should witness our investments steadily grow over time—thanks to the power of compounding returns.
But we are not robots; we are people with complex emotions. By understanding how emotions impact your financial decisions and learning to manage them effectively, you’ll feel more confident in your daily financial choices and your long-term wealth-building decisions.
The Money Script
Do you sometimes feel like the discipline to make rational and purposeful financial decisions is too good to be true? Because no matter how hard you try, you just can’t seem to stay the course. These feelings are common and are likely due to the emotional and psychological baggage we all carry around relating to our money. These are our money scripts. As with most of the baggage we’ve lugged into our adult lives, these scripts usually start forming at a very young age.
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 quarreling over expenses, you may experience feelings of guilt when making big purchases or anger when you don’t think you can afford them.
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 also important to take time to examine yourself and understand your money scripts and how they influence your financial behavior.
The Negative Side of Money Scripts
To be fair, not all money scripts are bad. Some behaviors we learn fertilize beneficial emotions about finances. However, other behaviors, such as money avoidance, focus on financial status, or the idolization 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.
Those may sound extreme, but have you ever let panic during a market downturn drive you to sell long-term investments? Or has exuberance over rising stocks enticed you to drain your emergency cash reserve to buy more stocks? 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 in overcoming your money scripts is to identify them. To do this, become aware of your emotional responses to common financial situations. 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 scripts and developing healthier money habits is learning to control your emotions. You can also build some new, healthy habits that shield you financially and incorporate them into your life.
Examples of good habits and disciplines:
- Taking advantage of automatic savings
- Investing through your bank or employer’s retirement plan
- Scheduling regular family budget meetings
- Enlisting the help of someone reliable to keep you accountable
These 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.
Partner With a Trusted Professional
Choosing a financial planner requires careful thought. The comfort you feel with your advisor should be a top priority. Financial planning is a continuous journey, and our team at KFA Private Wealth Group is here to support you every step of the way.
If you’re ready to take the next step, I invite you to schedule a 20-minute introductory call, or get in touch with me via email at tricia@kfapwg.com or call 571-327-2222. Let’s explore if I’m the ideal match to help you on your financial path.
About Tricia
Tricia Lepofsky, ChFC®, is a financial advisor at KFA Private Wealth Group, a registered independent advisory firm founded on the premise of providing conflict-free financial and investment advice. With a background in music education and opera, Tricia transitioned to the financial industry to help people understand what their money can do and feel more in control as they work toward their goals. Tricia is known for her attention to detail and her dedication to her clients and their unique financial challenges. She is passionate about building relationships with her clients and partnering with them as they walk through life’s milestones, keeping them accountable and motivated to pursue their goals. While she serves a diverse range of clients, Tricia uses her background of 18 years in the Washington National Opera and Washington Concert Opera to specialize in serving hardworking, intelligent individuals who have a connection to the arts. In her spare time, Tricia loves to travel with her husband, Mark, hike trails along the Potomac River or in the Blue Ridge Mountains, and support former colleagues by attending live performances of operas and musicals. To learn more about Tricia, connect with her on LinkedIn.