The Psychology of Money - How Our Emotions Influence Our Financial Decisions

Our financial decisions are not always based on rational thought. Often, they are shaped by emotions that drive us in ways that do not always serve our best interests. Factors like fear, envy, excitement, or a sense of lack of control can lead us to make impulsive financial decisions, sometimes even putting us in risky economic situations. So, how can we understand the connection between emotions and financial decisions? And how can we prevent these emotions from negatively impacting our financial future?

1. FOMO - Fear of Missing Out: The Influence of Friends and Media on Our Money

FOMO (Fear of Missing Out) is one of the strongest emotions when it comes to financial decisions. It appears when we see others investing in opportunities that seem lucrative or achieving financial successes, and we feel a sense of urgency to do the same.
This phenomenon is often seen in investment markets. For example, if we see friends or family making money from stocks or cryptocurrencies, we might be driven by fear that we are missing out on an opportunity. Often, when we act based on FOMO, we make quick decisions based on emotions, not sound financial analysis. As a result, we might invest in the wrong things or spend more money than we can afford.
The solution is to recognize the power of FOMO and plan our financial actions with a long-term perspective. We need to understand the risks involved in any investment and remember that this is not necessarily "the opportunity of a lifetime."

The key points are: FOMO influencing decisions, acting based on emotion rather than analysis, the need for a long-term perspective, and understanding investment risks.

2. Financial Envy: The Impact of Social Status on Our Financial Behavior

Financial envy is a feeling that can lead us to unhealthy financial behavior. When we see others buying a new car, going on luxury vacations, or investing in real estate, we may feel an internal drive to match that level of lifestyle. This envy often leads to unnecessary spending, sometimes driven by the desire to feel equal to successful friends or family members.

The problem here is that we are not always aware that comparing ourselves to others is not necessarily objective. Each person is in a different place financially, and this doesn’t mean that achieving the same things is our goal. Financial envy can lead to spending on things that don’t really fulfill us in the long run and may delay our personal financial growth.

The recommendation here is to develop self-awareness about our personal needs and understand that financial success does not have to be about attaining external standards. Everyone is on a different financial journey, and there’s no need to try to match others

3. Careless Habits: When Fear and Caution Control Our Decisions

Fear is one of the core emotions that causes us to avoid making sound financial decisions. Sometimes, we avoid taking financial risks out of a sense of insecurity, such as avoiding investments that could yield high returns simply because we fear losing money.

People who are fearful of taking risks or haven’t allowed themselves to grow financially might avoid long-term investments, shy away from career changes, or even neglect saving for retirement due to feelings of helplessness. As a result, they may become stuck in a cycle of financial stagnation.

To overcome this, we need to push through these fears and understand that well-calculated financial changes can improve our situation. Strategic investing, long-term saving, and avoiding unnecessary expenditures can ensure long-term financial stability.

4. The Consequences of Lack of Control: When Emotions Shape Our Financial Future

Financial lack of control is one of the emotions that drives us to make impulsive financial decisions. Often, when we feel financially out of control, our emotional response is to make quick decisions or take financial risks just to feel like we have control over something.

For example, if someone experiences a drop in income, they might try to remedy the situation by spending large sums on something they don’t really need, simply to feel like they’re "doing something." The consequence of this behavior is that unnecessary spending only worsens the situation instead of improving it.

To address this, we need to have a clear financial plan, set financial goals for both the short-term and long-term, and seek advice from financial advisors when needed. This can help us regain a sense of control and avoid impulsive decisions.

5. What Can We Do About All These Emotions?

The most successful way to deal with the emotional influence on financial decisions is to develop self-control. To prevent emotions from controlling us, we should:

Create a personal financial plan: A clear budget, short-term and long-term financial goals, tracking expenses, and income.

Avoid comparisons: Be aware that everyone is in a different place financially, and focus on our personal financial journey.

Avoid making decisions out of fear or urgency: Take a moment, assess the consequences of any financial decision, and make sure it’s based on sound judgment, not fleeting emotions.

Consult with a financial advisor: Seek professional help when we’re unsure about what steps to take. A financial advisor can offer solutions that will help us move in the right direction

6. Winning Tips from Financial Winners

If we want to build wealth and stay financially disciplined, it’s crucial to learn from those who have already mastered their finances. Here are some valuable tips from financial winners:

Embrace long-term thinking: The most successful investors know that wealth is built over time. They prioritize patience and resist the temptation to chase short-term gains.

Control your impulses: Recognize the emotional triggers that lead you to make rash financial decisions. Financial winners understand that impulse buying is a detractor from wealth accumulation.

Create and follow a strategy: Top financial achievers don’t make decisions based on emotions. They have a plan, and they stick to it, adjusting only when necessary.

Avoid lifestyle inflation: As income increases, it’s tempting to spend more. Winners resist the urge to upgrade their lifestyle unnecessarily, choosing instead to save or invest the additional funds.

Educate yourself: Continuously learning about financial markets, investing strategies, and personal finance allows us to make informed decisions. The more knowledge we have, the better prepared we are to handle financial challenges.

Stay disciplined and consistent: The key to financial success is consistency. Regularly saving and investing, no matter how small the amount, will result in significant growth over time.

Conclusion

Understanding how emotions influence our financial decisions can significantly improve our financial behavior. By developing self-awareness, creating a sound financial plan, and managing emotions like FOMO and financial envy, we can avoid harmful influences and achieve stability and growth over time. With the right mindset and discipline, we can make empowered financial choices that will lead us to long-term success.