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Psychology of Money

One of the most important lessons I’ve learned in my career is that financial outcomes are governed by behavior, not knowledge. It has to do with the psychology of money. Our financial success is most influenced by our emotions and feelings, rather than the facts and formulas.

Isn’t that the case with so much in life?

Our emotions are uniquely our own, given our diverse backgrounds, ages, and experiences. So, it’s important to be aware of our emotions and their impact on the decisions we make. At the same time, it’s unrealistic to think we can shut them out of our decision-making process.

Even reasonable people can react poorly to financial circumstances. In The Psychology of Money, the author highlights this reality and explores proactive steps anyone can take to work in tandem with their emotions. Here are two interesting examples.

You’ll Change

I’ve seen this in myself and my clients countless times. Your goals will change. Your work plans will change. Your kids’ plans will change. Thus, it’s important to avoid the extreme ends of planning; don’t make narrow plans that take you down only one path. When life changes happen, be ready to change your plan. Just because you made a decision that worked well under prior circumstances doesn’t mean you must stick with that decision forever.

Getting Wealthy vs. Staying Wealthy

This is a fun one to observe. As people move from wealth accumulation toward financial independence and retirement, their attitudes about money often change in surprising ways. It’s like any other life change – graduating school, getting married, having kids, becoming a homeowner, starting a new job. It’s never quite what you thought it would be. Often, it’s better than what you imagined, yet there are always new fears you didn’t anticipate. You begin to view risk through an entirely different lens. Focusing on stability and dependable income often becomes more important than hitting the great opportunities.

As a financial planning professional, I see it as my role to help each client develop strategies that will enable them to succeed through their unique psychology. Not despite it.

For Further Reading – The Psychology of Money

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