How to fix your emotional relationship with money – and why it matters

After a somewhat challenging few years for everyone in the UK, you could be feeling a little worried when it comes to your money.

Indeed, the Covid-19 pandemic, followed by a cost of living crisis that saw inflation rise to 10.1% in the year to January 2023, might have put undue strain on your wealth overall. A study published by the Yorkshire Times predicts one-third of Brits will use their savings to navigate the rising cost of living in 2023. 

What’s more, your investment portfolio may have seen a brief downturn in 2022.

As you may be aware, the way you handle your money could be linked strongly to your emotional state. You may spend more when you’re stressed, or perhaps even over-save, making life harder for you and your family than it needs to be.

Here are some key elements of your finances that could be dominated by your emotions, and how to re-think your relationship with money in the long term. 

 

Opening up about your cost of living concerns can help alleviate worries

First, the cost of living crisis is placing a heavy burden on many people.

When placed under financial pressure, fear and doubt could begin to creep into your mind. You could be asking questions such as: “do I have enough to maintain my lifestyle?” and, “what happens if costs stay this high forever?”

Indeed, this line of thinking can lead to a phenomenon called “inflationary psychology”, in which individuals overspend when costs are high, in anticipation of them rising even higher. For instance, you might fill your petrol tank as often as you can, even when it’s not empty, for fear fuel prices will increase further.

While this is an understandable mindset, overspending now could lead to further financial stress later. Whereas, sticking to your regular expenditure as best you can might steady the ship, despite your emotions tempting you to overdo it.

Similarly, a January 2023 Guardian report reveals that, in a survey of 600 couples’ therapists, one-third reported an increase in arguments sparked by the cost of living crisis. Emotions can run high when your shared finances experience turmoil, and can lead to rifts forming between you and your significant other.

So, opening up to your loved ones about your concerns could be constructive. Instead of focusing on being “right”, perhaps it’s time to step back and look at the evidence, rather than your knee-jerk reaction.

Allowing emotion to control your financial decisions is easily done, but may not produce the outcome you need in the long run.

 

More than half of investors admit to emotional investments they now regret – but evidence-led investing can help

With or without a cost of living crisis on our hands, managing your money can be a more emotional process than you’d think.

When it comes to investing your wealth, it’s important to understand your attitude to risk, and how it might affect your emotional relationship to your investment portfolio. 

Your attitude to risk can be defined as how you feel about your investments’ potential for profit and loss. Ask yourself: “do I feel anxious about the value of my assets fluctuating?” 

If you feel constantly worried about your investment portfolio’s performance, a low-risk profile might suit you best. Alternatively, if you are more open to fluctuations if there’s a chance of higher profits, you might wish to speak to your adviser about creating a higher-risk portfolio. 

Whatever your preference, it’s vital you understand how your feelings play a part in where you put your money. This is what Barclays refers to as a “cycle of investor emotions”, with stages including:

• Reluctance to take any financial risk before you invest
• Excitement and optimism about yielding a profit once you’ve purchased your investment
• Desperation and panic when an investment dips in value
• Indifference and reluctance to continue investing, where the investor becomes apathetic and risk-averse, and finds themselves back where they started. 

If you’ve found yourself stuck in this loop before, you’re not alone. A study by Magnify Money found two-thirds of participants had made “emotional investments” they now regret.

Luckily, evidence-led investing can help.

With the input of a seasoned expert, you can invest based on:

• Market forecasts formulated by state-of-the-art software
• Cashflow modelling software that helps you set long-term financial targets for your investment portfolio
• The long-term observation of market trends.

Of course, the value of your investment can go down as well as up, and you may not see positive returns. Nevertheless, with the above factors in mind, you can place your knowledge, and the independent advice you receive, above your emotional temptations when you invest your wealth.

 

Working with an expert can help you rethink your emotional relationship with money

Ultimately, it’s almost impossible to separate your emotions from your financial decisions – especially if you’re trying to do so alone.

Having a seasoned financial expert with years of industry experience on your team can be hugely beneficial when you’re trying to make decisions based on information, not emotion.

Your Chancellor financial adviser can:

• Discuss your emotions surrounding your wealth, be it stress, excitement, worry, or optimism
• Help you come to terms with how your emotions have affected your decisions in the past
• Work with you to make evidence-led choices that may further your goals
• Create a bespoke financial plan that brings you peace of mind.

Whether you want to focus on your investments, inheritance, your retirement fund, or any other matter close to your heart, we can help you make objective decisions that bring you closer to your goals.

 

Get in touch

To get started on your goals-oriented financial plan that combines your head and your heart, email info@chancellorfinancial.co.uk, or call 01204 526 846 to speak to an adviser.

If you’re already a client here at Chancellor, contact your personal financial adviser to discuss any of the content you’ve read in this article.

 

Please note

This blog is for general information only and does not constitute advice. The information is aimed at retail clients only. 

The Financial Conduct Authority do not regulate cashflow planning. 

The value of your investments (and any income from them) can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance. Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.