Are Emotions Making Your Financial Decisions?

by Rick Kahler

When it comes to money, our emotional and logical brains are rarely in sync with one another, so we don’t always make the best financial choices. So, how can we use both emotions and logic to make smarter money decisions?

For example, perhaps I read several articles on financial health. One says that living on less than I make is fundamental, another recommends saving at least 20% of my paycheck to retire with a comfortable income, and a third advocates paying off credit cards monthly. I am doing none of those things.

Approaching the problem logically, I create a spreadsheet of income and expenses. This shows me I am overspending my income by 5% and gradually accumulating credit card debt. I decide I need to do something now to change this.

Increasing my income today is not an option, so I need to cut 5% just to break even and another 20% to fund retirement accounts. This is not an easy task. I notice a lot of difficult emotions as I look line by line at my expenditures and imagine what I could reduce or do without. I research creative ways of getting what I value for less money. I decide to sell my late-model car, pay off the loan, and buy an older one. I reduce my rent by splitting costs with a friend. In short order, I reach my goal of living within my means and fully funding my retirement plan. While it wasn’t easy, and I have a lot of sadness over some of my cuts, I have even greater feelings of satisfaction, joy, and hope for my future.

Easy, right? It can be when our emotional and logical brains are in sync with one another. The problem with this scenario is that when it comes to money, they rarely are in sync. Research shows that 90% of money decisions are made strictly emotionally. To be clear, the odds suggest that not every emotional money decision is a poor one. However, the most consistently successful money decisions have both an emotional and logical component to them.

While I don’t have research on what percent of all money decisions don’t serve us well, we do know that almost 50% of Americans would need to sell something to come up with $1,000. Most of us live hand to mouth, having no significant emergency reserve, much less a nest egg of savings for retirement. This strongly suggests that the majority of Americans’ money decisions are made with the rational mind offline. The logical process described above for creating financial health is hard for most people and almost impossible for some.

How can we make better money decisions? Decades of learning about the brain and money psychology have taught me that it requires a transformative process that integrates our rational thinking and our emotions. One of the strongest metaphors for that process is the transformation of Ebenezer Scrooge that Charles Dickens describes in A Christmas Carol.

To make sound money decisions, we really need to become present, to be aware of our emotions but not controlled by them. This allows us to make decisions more objectively with logic and rationality that respect and acknowledge our emotional as well as practical needs. That integration helps our emotions support strong financial decisions rather than sabotage them. It is the key that unlocks the door to financial wellness.

• Do You Have a Relationship With Debt?
• The Emotions Behind Buying Stuff
• How Financial Wellness Differs From Wealth
• Using ROI To Make Better Financial Decisions
• The Truth About Rational Financial Behavior

Reviewed January 2024

About the Author

Rick Kahler, MSFP, ChFC, CFP, is a fee-only financial planner and author. Find more information at KahlerFinancial.com. Contact him at Rick@KahlerFinancial.com or 343-1400, ext. 111.