Beyond Numbers: How Emotional Intelligence Shapes Your Financial Future

Financial planning is often associated with number crunching and data analysis. However, what truly holds the power to shape our financial future is our level of emotional intelligence. Emotional intelligence involves recognising, understanding, and managing our own emotions while also tuning in to the emotions of others. It encompasses various skills such as self-awareness, self-regulation, motivation, empathy, and social skills. Individuals with high emotional intelligence can effectively manage their own emotions and navigate social interactions and relationships with ease.

So why is emotional intelligence so vital in financial planning? Let's face it, making financial decisions can be tough. Powerful emotions like fear and greed often influence our choices, and without a good level of emotional intelligence, we are more likely to succumb to these emotions. Our level of emotional intelligence impacts every aspect of personal finance, from having difficult money conversations with our partners to recognise when we are overspending to cope with difficult emotions.

A study by Nobel Prize-winning psychologist Daniel Kahneman revealed that 90% of our financial decisions are driven by emotion, with only 10% based on logic. Low emotional intelligence can lead individuals to avoid financial planning altogether. Feelings of shame and guilt about past financial decisions, coupled with the desire to impress others and maintain appearances, can result in excessive debt and spending beyond our means.

Emotional intelligence holds particular importance in the world of investing. Market crashes and fluctuations can evoke fear, panic, and anxiety, even amongst seasoned investors. During times of uncertainty and stress, our ability to maintain healthy levels of emotional intelligence is put to the test, and mismanaging our emotions can have devastating consequences.

For instance, fear and anxiety often drive individuals to sell investments during a market downturn, despite data indicating this may not be the wisest long-term decision. Conversely, greed can tempt us to take on excessive risk by investing in volatile assets we don't fully understand.

In his book "The Psychology of Money," Morgan Housel notes, "Success in investing doesn't correlate with IQ. Once you have ordinary intelligence, what you need is the temperament to control the urges that get other people into trouble in investing."

However, those with high levels of emotional intelligence are better equipped to manage the emotional rollercoaster of investing and make sound decisions even in volatile times. They understand that market crashes are part of the investing process and are less likely to panic-sell at a loss. By cultivating emotional intelligence, understanding own emotional triggers, and staying composed, investors can achieve long-term financial success. In fact, a study by Vanguard found that the true value of a financial planner lies in their ability to reassure clients during market crashes and empower them to stay the course. Historically, this has led to better overall returns.?

Low emotional intelligence can hinder individuals from embarking on an investing journey altogether. One significant reason is a psychological trap known as "loss aversion," which people are more susceptible to when their emotional intelligence is lacking. Loss aversion refers to the tendency to strongly prefer avoiding losses rather than acquiring gains. In other words, the pain of a loss is felt more intensely than the pleasure of an equivalent gain. This bias significantly impacts decision-making, including financial choices.

By developing emotional intelligence skills such as self-awareness and self-regulation, we can recognize and manage emotions in a healthy and productive manner. We can make decisions based on our values and priorities, rather than reacting solely based on emotions. In conclusion, emotional intelligence is essential for effective financial planning, helping us make rational decisions, manage emotions during market fluctuations, and build a solid foundation for long-term financial success.

Summary

• Emotional intelligence is a crucial factor in financial planning, even more so than number crunching and data analysis.
• Emotional intelligence involves recognising and managing emotions, both our own and others, and encompasses skills like self-awareness, self-regulation, empathy, and social skills.
• Emotional intelligence is important in financial decision-making as it helps us avoid impulsive choices driven by fear or greed.
• By developing emotional intelligence skills such as self-awareness and self-regulation, we are better equipped to make decisions based on our values and priorities, rather than reacting solely based on emotions.