Are You Emotional About Money?

Are you emotional about money? Have you ever purchased something just because your friend had it? Or bought a new outfit after an awkward social event?

Don’t worry, you’re not alone. According to Nobel Prize-winning psychologist, Daniel Kahnemen, Ph. D., people are more likely to make financial decisions based on their personal perspective and feelings rather than using an intentional spending plan.

While making emotional money decisions is common, when feelings play too important of a role, they can lead to overspending, debt accrual, missing bill payments, and other unfortunate occurrences.

So how do you know if you’re using feelings with money and how can you avoid making emotional money decisions by creating a conscious spending plan?

How To Tell If You Are Emotional About Money

The first step to avoiding emotional spending is to figure out whether and when you’re making impulsive decisions. To determine this, you’ll want to consider your spending habits, your credit, and the amount of money you save versus the amount that you spend.

1. Review Your Spending Habits

Track your spending for an entire month to see where your money is going. For each purchase, think back to how you felt when you spent that money. Did you get good or bad news just before? Did you buy something big without properly thinking about it? Have you fallen into the habit of using retail therapy?

To track your spending, you could write down every time you spend, but it takes time and is subject to human error. Another way to track your money is by using a digital tool. When choosing a tool, be sure that it takes all your checking, savings, credit card, and investment accounts into consideration.

One option is the Axos app, which offers Personal Finance Manager, a digital spending tracker that’s accessible at any time and usable with any account, whether it’s with Axos or not. In fact, an Axos account isn’t required.

2. Check Your Credit

Your credit helps reveal emotional money decisions. Do you have unpaid debt? Are you only making your minimum credit card payment? Have you purchased things on credit that you couldn’t have bought with debit?

To gauge whether your use of credit is being driven by emotions, check your score regularly. The factors that affect your credit score can change in a moment, so for each change in your score, think back to the situation and context. Try to remember the emotions you were feeling.

There are services that allow you to check your credit score, but you may have to pay for them. To avoid the charge, use free Credit Score Monitoring in the Axos app. You can see your score anytime, 24/7, and it’s updated twice a month.

3. Track Spending vs. Saving

Being aware of each time you buy and why is another way to identify emotional spending. To gain this perspective, you can compare the amount you’re spending to the amount you’re saving. Take the total amount you bought for the month and subtract this from your monthly income. That’s the amount of money you’re saving.

There’s no correct answer to what this ratio should be; it’s dependent on how much you want to save and other financial goals. However, according to NerdWallet, a good rule of thumb is to put away about 20% of your income.

If you’re trying to identify emotional money decisions you’ve made, see if your savings percentage is lower than that 20% mark. Where’s that money going? How do you feel differently about spending than you do saving?

How to Begin a Conscious Spending Plan

So you figured out you’re an emotional money decision-maker, now what?

To explain some of the best tips and tricks for dealing with feelings as they relate to finance, Derek Hagen, Financial Therapist, provided some insight.

Hagen advises starting with an accepting and objective mindset when discovering your emotional spending habits. Don’t judge yourself or try and force yourself to say ‘no’ to buying overall, because being too harsh on yourself won’t make a habit last.

Instead, be attentive to every money decision you make. One of the reasons emotions are taking over your financial decisions is that transactions are happening too fast for you to actively recognize them. This is where an intentional spending plan can come into play.

A conscious spending plan is used to bring attention to every financial decision that is made, no matter the size. Hagen provided a few strategies to help create a plan:

1. Put space between the impulse and the action.

As mentioned above, sometimes money is spent before you even realize it. To combat this unconscious spending, Hagen recommends that you pause before purchasing. It’s fine to decide that you’re going to buy something, but before you swipe your card, take a breather. You don’t need to talk yourself out of it, just pause for an hour, or maybe even a day if it’s an expensive item.

Because feelings come and go, by waiting for a bit, you can take yourself out of the emotional context surrounding that decision and use a more rational mindset. This practice is known as mindful spending.

2. Keep your receipts.

Another trick suggested by Hagen, is to keep your receipt from every purchase. Read the receipt closely. Look at the exact amount you spent and what you spent it on.

Remember, you shouldn’t be trying to judge or scold yourself for spending the money. All you want to do is be aware of your financial decisions and create a spending plan.

3. Think about your future self.

Often, people look back at their past selves and wonder why they didn’t act differently, but how often do you consider your future self?

Hagen advises that you think about how your future self will feel about the financial decision you’re making in the present. This thoughtful exercise brings you out of the moment and may allow you to consider things in a more neutral light.

Start Down the Path Toward Improved Financial Health

Working toward a healthy financial lifestyle can be complex. Use these tips to discover how your money decisions may be influenced by your emotions, how to avoid such decisions, and how to create a spending plan.

Axos wants to help you make more rational financial decisions. Check out more personal finance tips and view tools to help you develop your spending plan in the Axos mobile app.

Are You Emotional About Money?

This blog was published by Axos Bank on December 6, 2023.