Our relationship with money is rooted in the past, while being played out in the present. It is naturally complicated, deeply personal, and very emotional
Many years ago, a financial planner in the UK narrated an incident to me. Her best friend was asked by another close friend—prefaced politely with ‘if you don’t mind me asking’—“what was your bonus this year”. The lady was shocked and clamped up, and replied tersely after a few moments of considered silence, “much less than I expected or deserved”.
The person who posed the question was a schoolteacher who was just curious to know about other work environments. There was no malice or judgement in her questioning. In fact, they were a close knit circle of friends who cared for each other. But the one who was reluctant to reveal the details believed that everyone wanted to know the details to take advantage of her. This stemmed from the fact that her family tended to take her for granted as she was financially well-off, and it was always assumed that she would pick up the tab for a meal, show up with expensive gifts, and be obliged to lend money when asked.
Our beliefs about money are deeply subconscious and play out emotionally in all circumstances; and while our relationship with money is often connected to our early understanding of money, it still cannot be generalised.
Let’s say two siblings grew up in a household where the parents struggled to make ends meet. One sibling never really outgrew her scarcity relationship with money and even though is earning well, finds it difficult to splurge and is always saving for the quintessential rainy day. The other sibling has moved in the opposite direction and loves to splurge because she never got the opportunity when growing up. Same parents, same household, same gender, but different impact. Yet, both can trace their behaviour to the environment when growing up.
Our emotions don’t always reveal the complete understanding of our financial situation and are often misleading
Our relationship with money is not cut and dry. It is rooted in the past, while being played out in the present. Hence it is naturally complicated, deeply personal, and very emotional.
I was listening to a Ted Talk by a financial mentor where he cited an example to show how our emotions often control our financial decisions and are often indicative of something much deeper. One of his clients was a critical care nurse who struggled to save. He suggested that she begin tracking her expenses. After a few months, they sat down and she was astonished at how much money she spent on expensive fashion—clothes, shoes and bags. After conversing with her for a long while, it came to light that she shopped when her confidence level was low; and most of her purchases were to impress her friends who, in her eyes, were more successful than her. It made her feel valued and boosted her confidence. Just recognising this put her on the right track and she began to question herself whenever she felt the need to go shopping.
On this very subject, I am reminded how our portfolios too are an embodiment of emotions. This was explained to me by a friend, Felix Pakki. “My entire portfolio isn’t simply the market value of my investments. It represents the tangible value of my work, skills, knowledge, earning capacity and the enabler of my dreams. This is why it encapsulates the entire gamut of emotions – anxiety, stress, fear, greed, hope, happiness,” he said. But while Felix acknowledged the role of emotions, he was quick to say that our emotions don’t always reveal the complete understanding of our financial situation, and are often misleading.
A big misconception about money management is that it is all about math. That is wrong. So many issues cannot be answered by just looking at the excel sheet. And it is precisely this that makes us indecisive.
Let’s look at how disastrous a decision would be if based solely on money to the exclusion of how it impacts us emotionally.
“I got a job offer that is paying me amazingly more, should I take it?”
Does the job ensure that you spend days travelling, away from your spouse and young children? Won’t that make you feel sad? If it is a toxic workplace, are you ready to cope with being constantly stressed? Won’t an extremely long commute tire you out and leave you physically drained? If the potential for high pay-outs is linked to commissions, would you not be much more anxious? Your mental peace, emotional health and physical stress is also taken into account, not just the money factor.
Math helps you in making the right decisions, when considered in conjunction with emotions. Let’s say you have narrowed down on a rental apartment. You like the location because it is aspirational. The neighbourhood makes you feel safe. The proximity to school or work brings you a great deal of relief. And the spacious size of the apartment makes you happy. While emotionally, this ticked all the boxes, your ability to afford the rent could be the deal breaker. On the other hand, you may think the rent is frightfully expensive, but if you put your current portfolio and cash flow in an excel sheet, the numbers may indicate that it is well within your reach.
It is perfectly fine to have emotions around money. We can’t avoid them. And they should not be removed from the financial decisions we make. Instead, use them to understand your values, fears and desires. You can achieve this by being mindful about how your emotions are guiding your decisions.
Our personal history has a profound influence on how we handle money. Our first money memories begin with money. Answering these questions will help in understanding the emotions and reasoning that is jeopardising our financial future.
What are some of the positive experiences with money that you experienced growing up?
It could be a gift from someone you love. Or money you earned from helping someone. Maybe you saw your parents celebrating a windfall.
What are some of the negative experiences with money that you experienced growing up?
Some see their family lose money in a business or in the stock market and get very risk averse. Others see parents fight over money and associate money with discord. A common one is lending money to someone who refuses to return it. These experiences scar us and affect our attitude towards money.
Who has influenced most of your money decisions till date?
Often family or friends, even though they have our best interests in mind, cannot be helpful guides if they don’t have knowledge, perspective and objectivity.
How did your caregiver view money?
Think of the person who cared for you most of the time when you were a child. If they were to finish this sentence: “Money is……”, how would you complete it for them? It could be scarcity, luxury, security, peace of mind, stress, the root of evil, the root of inequality, and so on. Even if you struggle to verbalise it, you will have some sense or feeling of their attitude towards money
By Larissa Fernand, Behavioural Finance Expert