Investing is an intimate experience because it involves risking a significant amount of your money for a potentially uncertain future. For many people, the anxiety that comes with their finances has the potential to influence their financial outcomes. Considering that investment decisions are linked to future wealth, it’s only logical that emotions would impact these decisions positively or negatively. In this article, we’ll explore common factors that can affect financial decisions and provide guidance on how to embark on the path toward economic well-being.

Factors That May Influence Your Investment Decisions

Individuals who have had negative experiences with money are often negatively impacted by these experiences throughout their lives unless they take steps to address the issue. The road to financial well-being is full of potential pitfalls.

This section will explore how these experiences can affect people’s financial decisions.

The Cycle of Debt and Shame

During times of crisis, people often turn to their credit cards, which can lead to significant regrets. In fact, by early 2022, 75% of Americans who purchased a home during the pandemic were experiencing buyer’s remorse.

Jonathan Satovsky, CEO and Chief Behavioral Coach of Satovsky Asset Management notes that “debt and overspending are two of the most common challenges in America. We tend to overdo everything, often leading to regret, shame, and depression.”

Many people find paying for things that bring temporary happiness easier, leaving them to deal with the emotional aftermath later. Alternatively, some individuals ignore their feelings until they spiral into debt.

Discrimination and Financial Trauma

Investing can seem even more daunting for those who struggle with fundamental financial decisions. The possibility of losing money can make it seem like too much of a risk, particularly for communities that have experienced financial trauma. Discrimination based on race and gender can compound these challenges, especially for those from lower-income backgrounds.
The persistent financial struggles resulting from these challenges are known as financial trauma. This anxiety is reflected in the lower investing rates among historically disenfranchised groups such as Black and Latina women. According to a survey by CNBC and Momentive, 59% of Black women and 48% of Latina women reported not having invested in any assets, compared to 34% of White women and 23% of White men.
This gap can be attributed to several factors, including a need for intergenerational wealth and limited access to credit and funds. However, opting out of investing can reduce retirement savings and investment gains.

The Fear of Being Burnt (Again)

Fear can be a significant factor in people’s financial decisions, mainly when that fear is based on past experiences. For example, since the Great Recession, the percentage of Americans who invest in stocks has dropped from 62% to 58%. Charles Bender, President of Fiduciary Wealth Management, explains that experience can significantly drive people’s actions. If someone lost money investing in the past, it could have the same effect as touching a hot stove: they’ll be afraid to reinvest.
This fear can be so intense that even short periods of decline in the stock market can trigger fearful reactions. Bender explains that many people believe the stock market is rigged against retail investors, a genuine belief that can keep them from investing correctly.

Fear Of Missing Out

FOMO, or fear of missing out, can significantly impact investment decisions. Daniel Sleep, JR, CPA, and Certified Tax Coach, noticed some of his clients investing out of FOMO in the early days of the crypto craze. However, when tax season arrived, they appeared to have lost interest in their investments and needed help logging in to their accounts. A study from the University of Colorado at Denver also found that FOMO has affected the stock market since 2010, causing investors to take on more risk than usual and leading to overconfidence in their ability to make informed decisions. FOMO can cause people to invest outside their expertise, leading to emotional decisions that can harm their investments. In short, while the allure of high returns can be tempting, fear of missing out can lead to irrational decision-making and should be cautiously approached.

Lack of Financial Education

According to Charles Bender, approximately 80% need more financial plans or clear, achievable financial goals. This estimate is close to the findings of a 2022 Schroders study, which determined that only 23% of Americans have a financial plan that they are following. However, the difficulty in achieving financial literacy is not for lack of effort. Some individuals may have fewer educational resources available, making it harder for them to develop the financial discipline required for investing. According to André Stewart, CEO of InvestFar, a person’s spending habits are often shaped by their upbringing, their household, and the environment they are exposed to. If someone grows up in a home or social circle that does not prioritize saving or investing, it is less likely that they will engage in those behaviors themselves. If someone was never taught financial discipline or given guidance on investing, it might be more challenging for them to develop those skills and incorporate them into their lives.

Ways to Feel More Secure When Managing Your Finances

Although challenging, establishing healthy money habits can have long-term benefits. Consistently saving, following a budget, and investing in historically well-performing assets can help you get ahead.

Here are some tips to help you take control of your finances:

Talk to Your Family and Friends

Money is often sensitive, but ignoring financial concerns won’t help. Being open with your loved ones and community allows you to draw from a more excellent pool of knowledge.

Talk to your family and friends about their past experiences with money. This can give you insight into your financial habits. You may even learn budgeting tips and investment resources more tailored to your situation than generic advice from online sources or financial “experts.”

Avoid Comparing Yourself to Others

You might be thinking, “Easier said than done.”

It’s natural to compare ourselves to those around us to assess our progress in life. Furthermore, financial advice often focuses on aspiration, with articles about how someone retired at 35 or made their first million through a unique investment strategy.

However, when it comes down to it, what matters most is your progress.

“Don’t compare yourself to others. We are all unique individuals, even identical twins. The only person you should measure yourself against is yourself,” advises Stewart.

The good news is that when you’re competing with yourself, the only winner is you.

Understanding the Investment Landscape

Knowing you’re not alone on your investing journey is essential. Creating a community of like-minded individuals can help you better understand the investment landscape and find a sense of belonging.

Social media has made it easier than ever to connect with people. You can join Facebook groups focused on specific communities, such as LGBTQ+ individuals, Black women, and Latinx folks interested in investing. You can also connect with finance experts on LinkedIn and TikTok, but verify their credentials before taking any advice. Finance podcasts such as “Bad With Money” and “The Fairer Cents” can also help you gain financial literacy.

Creating a Budget That Works For You

Ignoring your finances can have long-term consequences, so tracking your expenses and identifying areas where you can cut back is essential. Consider using an automatic tracking app or a budgeting spreadsheet to manage your finances, and explore different budgeting methods to find one that suits your needs.

Setting Financial Goals

Writing down your financial goals and keeping them in a visible place can be a powerful motivational tool. Whether you want to save for a dream trip or become debt-free, having clear goals can help you stay motivated. If you need help staying accountable, consider working with a financial advisor or counselor who can help you identify blind spots and find a tailored investment strategy.

Financial Therapy for a Deeper Understanding

If you’re struggling to get on the right financial track, consider working with a financial therapist. Financial therapy can help you overcome negative money habits and address financial trauma from childhood or adulthood. The Financial Therapy Association has a directory of therapists, and services such as BetterHelp offer sliding-scale fees and financial aid for those who can’t afford traditional therapy.

The Bottom Line

Personal finance is called “personal” because emotions almost always influence the choices we make with our money. Over time, it is possible to overcome potentially harmful feelings to make choices that will benefit you. Start by feeling comfortable talking about money and finding educational resources that reflect your situation. After that, start tracking your money and look for a simple budget that works for you. Don’t hesitate to ask for help if you need it. And always remember that any step in the right direction is big.