The short version
- Negative emotions around money can lead to a lack of planning or continued poor choices throughout your life.
- Your socio-economic status growing up can also influence your future financial outcomes.
- FOMO is a driving factor in many investors' lives, and often not for the better. It can create an overly-confident approach to choosing investments.
- Financial discipline among Americans is improving, mostly due to the effects of the pandemic.
Factors that can affect your investing decisions
When people have a negative history with money, it tends to continue to affect them negatively throughout life if the problem isn’t addressed. And the path to financial wellbeing is paved with landmines.
In this section, we’ll dive into just how those conditions can influence what people do with their money.
The debt and shame spiral
If there’s anything that we’ve learned from the past few pandemic years it's that times of crisis often leave us reaching for our credit cards. And big credit card purchases often turn into big regrets.
In fact, by early 2022, 75% of Americans were experiencing buyers' remorse over their pandemic-era house purchases.
“Debt and overspending are two of the most common challenges in America," says Jonathan Satovsky, CEO and Chief Behavioral Coach of Satovsky Asset Management. “We have a tendency to overdo everything and that often leads to regret, shame, and depression.”
Many times it feels easier to pay for the things we want that might bring us a moment of happiness, leaving us to deal with the feelings later. Or, for many of us, we keep ignoring them until we’re in a spiral of debt.
Discrimination and financial trauma
For people who are unable to feel comfortable with making basic financial decisions, more complex questions around where to invest can be even more difficult.
After all, with investing, there’s always a chance you could lose money. For those who can’t afford to lose, investing can seem too intimidating to consider, period. This is particularly true for the communities most likely to be affected by financial trauma.
59% of Black women and 48% of Latina women — both historically disenfranchised groups — responded as having not invested in any asset at all. This is in major contrast to 34% of white women and 23% of white men who reported the same.
"As a POC who grew up in the U.S, life is challenging because of racial and gender-based discrimination,” says Layla Acharya, creator of EdWiz.org, an online courses portal. While those forms of discrimination were hard to bear by themselves, she says, they compounded with being from a lower economic background.
“The set of persistent financial struggles is called financial trauma,” she says. “Investors coming from low-income families experience more anxiety over money and difficulty in making financial decisions.”
This anxiety can be clearly seen if you look at who is investing and who isn’t. According to a survey by CNBC and Momentive, 59% of Black women and 48% of Latina women — both historically disenfranchised groups — responded as having not invested in any asset at all. This is in major contrast to 34% of white women and 23% of white men who reported the same.
There's a handful of reasons for this gap. We can point to lack of intergenerational wealth, and limited access to credit and funds as two major ones. However, opting out of investing comes with a major opportunity cost in reduced retirement savings and investment gains down the road.
The fear of being burnt (again)
Just like shame due to past poor money decisions affects your current life, so does any fear you’ve built up from larger economic concerns. For example, today only 58% of Americans own stocks. Before the Great Recession, 62% invested in stocks.
“Past experience is a significant driver in [peoples’] actions,” says Charles Bender, President of Fiduciary Wealth Management. “The reason you don't touch a stove is that it's hot. Well if the person invested just once in their life and lost money, it has the same effect as the stove does a lot of times.”
That’s why even short down periods in the market can trigger fearful reactions, Bender explains. “If you were to ask most people, they would say the stock market is rigged against retail investors. The ‘being rigged part’ is all emotional and it keeps them from investing properly."
Fear of missing out
FOMO is another strong driving force behind many investment choices. Daniel Sleep, JR, CPA, and Certified Tax Coach tells of his experiences during one of the early crypto crazes:
"As a CPA working with small businesses, I remember when the crypto craze first hit,” he says. A few of his clients jumped on board with the trend early — he chalked these instances up as FOMO investing. But once tax-time rolled around, he noticed that these clients were strangely mum about their investments.
"They didn't even know their logins to check anymore,” he says. “When it crashed shortly after investing in it, they just wanted to forget about it.”
FOMO has been impacting the stock market since 2010 by increasing investors' willingness to take on risk. FOMO also causes investors to be overly confident when they really shouldn’t be.
A study from the University of Colorado at Denver, found that FOMO has been impacting the stock market since 2010 by increasing investors' willingness to take on risk. FOMO also causes investors to be overly-confident when they really shouldn’t be.
“FOMO causes people to invest outside their circle of competence, understanding, or true risk appetite,” says Satovsky. “Everyone loves an upside, but the pain of loss or fear of missing out leads to emotional decisions, and when emotions are high, rational thinking goes out the window.”
Lack of financial education
Charles Bender guesses that about 80% of people don't have financial plans or clear achievable financial goals. He’s pretty close. A 2022 Schroders study found that only 23% of Americans have a financial plan that they’re following.
But it's not for lack of trying. Some people are just closer to the back of the starting line when it comes to educational resources.
“Everyone has a foundation for how they spend money,” says André Stewart, CEO of InvestFar. “This is generally formed by your upbringing, your household, and the environment you’re surrounded by. If you grow up in a household or are surrounded by friends that don't believe in saving or investing, then there’s a good chance you’re not investing at all."
If you were never taught any financial discipline nor shown the ropes of the investing world, it’s probably going to be a lot more difficult for you to dive into it or stick with it if you do.
Steps you can take to feel psychologically safe when handling your finances
Despite the challenges, practicing healthy money habits has long-term rewards. When you regularly save, stick to a budget, and invest reasonable amounts towards historically well-performing assets, you can get ahead.
Here are a few tips that can help you start taking back the reins on your money.
Talk to your family and friends
Money is often a culturally-taboo subject, but nothing good comes out of sweeping your financial concerns under the carpet. Sharing honestly with your loved ones and those in your immediate community allows you to pool your knowledge resources.
Simply talk to your family members and friends about how they were raised to think about money. This can give you some clarifying insights about your own financial habits. You may even pick up some budgeting tips and investment resources that are more relevant to your situation than those from generic websites and so-called financial gurus.
Stop Comparing yourself to others
Maybe your next thought after reading the header above was “easier said than done.”
It’s human nature to compare ourselves to other people around us as a way to gauge how we're doing in life. Not only that, but financial advice is often centered around aspiration. It enticed readers and would-be investors with articles on how so-and-so was able to retire by 35 or who made their first million through a unique financial strategy.
At the end of the day though, it’s not about them. It’s about you.
“Do not compare yourself to others. We are all unique individuals in our own right, even identical twins. The only person to measure yourself against is you,” says Stewart.
The good news is: When it's just you in the race, there can only be one winner (that's you!).
Understand where other investors come from
While you shouldn’t constantly compare yourself to others, finding a community of similar people can help you understand that you’re not the only one going through this. For POC, LGBTQ+, low-income, and other underrepresented groups, having a sense of community can also help you feel a sense of belonging.
Thanks to social media, we’re more connected than ever, and it’s become easier to connect with others. Try the following:
- Look for like-minded Facebook groups. There are tons of interest groups out there founded by and made for LGBTQ-identifying people, Black women, Latinx folks and other communities who are interested in money and investing. You can easily filter by community identifier, group size, and location.
- Connect with people on LinkedIn and TikTok. Through these platforms, you'll be able to find finance experts from every community who have lots of knowledge and experience to share. Just make sure the advice you're getting is legit. (Start here: How to find legitimate investing advice on social media)
- Listen to finance podcasts. Finance podcasts have made it much easier to passively gain financial literacy. Finance podcasts like Bad With Money, The Fairer Cents, Money For the Rest Of Us, Brown Ambition and Queer Money all tackle the complicated topic of investing and personal finance within the larger context of an unequal financial system.
Find a budget that works for you
Even the most financially savvy of us don’t make the best money moves every single time. Life gets in the way. However, ignoring your money altogether is only going to harm you in the long run.
To get started, you need to be aware of where your money goes. By tracking your expenses, you can see where you’re potentially overspending and find places where you can cut back.
If, for example, you find that you’re spending $200 on streaming subscriptions each month, but you’re not using all of them, you’ll be able to direct some of that money elsewhere.
If you want to get your hands dirty, you can make a good ‘ole budgeting spreadsheet. But if the thought of manually tracking your expenses turns you way off, don’t worry! There are plenty of automatic tracking apps to choose from. Most of them let you simply link your spending account and they’ll organize the transactions for you.
You can also peruse different budgeting methods to see which one appeals to you the most.
Set and remember your goals
If you’ve never thought about what you’d like your money to go towards outside of your regular bills, now is the time to start. Having money goals and writing them down in a place you can see them daily is a surprisingly powerful motivational tool.
They can range from checking off a bucket-list trip to being debt-free by a certain age. The clearer you can visualize your goals, the more motivating they can be.
If you find you can’t maintain these goals on your own, Satovsky recommends a financial advisor or counselor. “[Having this] accountability and discipline can help you see blind spots that you may never observe until it's too late,” he says.
More: How to find a financial advisor you can trust
Consider working with a financial therapist
Many people struggle for years to get on a financial track. If you've tried all the budgeting apps but they're just not sticking for you, or if the thought of talking to your family about money makes you want to give up altogether, you're not alone.
Your problems might just stem from someplace much deeper. And that's okay.
Financial therapy developed back in the ‘70s and has now evolved into its own discipline. The purpose of financial therapy is to help people overcome negative money habits they learned from childhood or trauma-inducing relationships in adulthood such as abusive partners.
“Getting therapy is the best way for healing from financial trauma,” says Layla Acharya.
The Financial Therapy Association has a directory of therapists that you can work with. For general therapy, Acharya recommends BetterHelp, which has therapists who offer their services on a sliding scale plus financial aid for people who might not be able to afford traditional private therapy.
The bottom line
Personal finance has the word “personal” for a reason. The decisions we make are almost always affected by our emotions — including and especially the choices we make with our money.
There are ways to overcome potentially harmful emotions and make choices that will benefit you over time. Start by getting comfortable talking about money, and finding educational resources that reflect your situation.
From there, start tracking your dollars and look for a simple budget that works for you. And don't be afraid to ask for help if you need it. And remember — any step in the right direction is a big one.