Let's Talk About Money...Mindset

This is the first installment in a new financial wellness series exploring the non-mathematical aspects of your finances, something I specialize in as an Accredited Financial Counselor. And this edition centers on an often-neglected, yet vital aspect of financial management — your 'money mindset.'?

The emotions influencing your financial decisions can significantly affect your financial health, sometimes in ways that might not be immediately obvious.?

This newsletter edition will guide you through these emotional influences, providing strategies to manage them effectively, thus empowering you to make better financial decisions more aligned with your goals and in service of your emotional well-being.?

The Dominance of Emotions in Your Financial Decisions

It may surprise you, but Nobel-prize winning psychologist Daniel Kahneman conducted a study that showed financial decisions are driven approximately 90% by emotions, with just 10% based on logical reasoning. All my economist nerds can check out his study here: https://www.jstor.org/stable/1914185?

This startling statistic challenges the traditional notion that financial management is predominantly about numerical analysis. Instead, it shows the significant impact emotions have on your financial behaviors, emphasizing the need for a deeper understanding of this dynamic to achieve true financial wellness.

Emotional vs. Numerical Issues in Financial Decisions

It is essential to differentiate between emotional and numerical issues when making financial decisions. With my clients, whenever we are discussing a particular financial decision (whether it’s one to be made or one already made) I emphasize the importance of recognizing the elements within your control versus those outside it.?

For example, while you can manage how you respond to new expenses or budgeting challenges, macroeconomic conditions like market downturns or inflation are beyond your control. Distinguishing between these two types of factors – those within our control versus those outside our control – helps minimize unnecessary stress and focuses your efforts where they can be most effective.

And then once you’ve identified the things within versus outside of your control, then you can determine whether you’re dealing with a purely emotional issue or a numerical one.

For emotional issues, it’s important to understand where the resistance or fear may be coming from. Is there a past experience that reminds you of something? If so, does it make sense that you’re feeling the way you’re feeling? Often the answer is…of course, it makes sense.

With that understanding, you can now give yourself some grace. Of course you feel that way.?

And then ask yourself whether those fears/feelings are warranted given your current circumstances. Is your fear or belief true? What else could be true in this moment?

If you’re not dealing with an emotional issue, but rather, a numerical one, then the strategy is different.?

You want to run the numbers and evaluate your options. You want to make a plan and work the plan.

Of course, as discussed below, if you run the numbers and still encounter resistance, then you no longer have a numerical issue on your hands…it’s back to emotional!

Controlling Money Stressors: The Student Loan Debt Example

Let's take a closer look at student loan debt—a significant financial burden for many of my attorney clients.?

While you can select your repayment strategy or consider refinancing your loans, you cannot change the interest rates set at a federal loan's inception or influence overarching legislative policies affecting student loan repayment options.

At the time of this newsletter (August 2024) student loan repayment plans are under injunction by two separate courts and the issues will likely need to be decided by the Supreme Court.

This is a great example of something outside of your control!

By focusing on aspects within your control, such as taking advantage of any relief available and educating yourself about the different options (or asking an expert!) you can manage this debt more effectively without the stress of worrying about factors well outside your zone of influence.

But what if you’ve been taught at all debt is evil and you have to pay off everything as quickly as possible?

That strategy may work for a typical college graduate with $35,000 of debt but it doesn’t always work for mortgage-size law school debt.

So even if student loan debt feels like a huge emotional burden, it’s important to run the numbers and decide on a debt repayment strategy that works for your overall financial plan…and that may not mean paying them off to the detriment of other financial goals.

Of course, it’s a balance between the numbers and how you feel about it, so best to make a decision understanding your emotional bias.

Client Example: Emotional Triggers and Financial Decisions

Consider another emotionally charged case from my practice, where a client's past trauma of car repossession heavily influenced her overall debt repayment strategy.?

This client prioritized paying off her low-interest car loan over higher-interest debts, and it wasn’t clear what was driving that decision until we discussed her feelings.

After reflecting on the traumatic emotional effect that having her prior car repossessed had had on her, she was then able to process how she wanted to approach her new debt repayment strategies.

After more discussion, she finally felt comfortable prioritizing the higher interest debt so she could use her money more effectively.

This example vividly illustrates how past emotional experiences can shape current financial behaviors, often at the expense of financial efficiency.

The Positive Influence of Emotions on Decision-Making

While it's true that emotions can complicate financial decision-making, they also have the power to lead to good decisions when they help us tap into our deepest values.?

Emotions guide us towards decisions that fulfill our personal and ethical standards, enhancing life satisfaction and ensuring our financial choices resonate with our personal beliefs.?

For example, choosing to invest in expensive, but culturally significant summer camps for your kids or prioritizing health and education spending are decisions heavily influenced by values like community and wellbeing.

And at the end of the day, money spent on our values will never feel wasted.

When Numbers Meet Emotional Resistance

How can you tell if you really have an emotional issue on your hands?

Even when the numbers clearly outline the best course of action, you might find yourself resisting…and that’s often a sign.?

This resistance often stems from unaddressed emotional issues that need to be processed before the numbers can feel good.

For instance, if calculations show it's more efficient to invest surplus funds rather than pay down a mortgage early, but fear of debt drives you to prioritize the latter, it's crucial to recognize and address this emotional barrier before finalizing your financial decision.

That’s not to say the numerical answer is always the right path, sometimes the emotions are so strong they need to be satiated in order to make any progress.

This is why this work is so important and fascinating. It’s not just about the numbers!

Navigating Emotional Resistance

To effectively navigate this:

1. Acknowledge Emotional Influence: Recognize that your emotions are impacting your decision, despite the logical evidence and make sure you account for any bias that may be affecting your decision.
2. Understand the Source of Resistance: Is this an emotional or numerical issue and if so, are the factors at play within or outside your control?
3. Run the Numbers & Decide: Once you’ve addressed the emotional side of the issue, run the numbers and see how you feel about the results.

Mastering your money mindset involves more than just understanding the emotional dynamics; it includes developing effective strategies to manage these emotions.?

By acknowledging the role of emotions in your financial decisions and learning to control their influence, you make more informed, rational financial choices that are more aligned to your values and priorities.?

This approach not only enhances your financial wellness but your emotional wellness, too.

What’s Next?

Stay tuned for the next newsletter where we will explore the default money beliefs and spending patterns that end up affecting your financial behavior, and how to change them for the better.

Schedule a free consult if you’d like help thinking through either an emotional or numerical issue with your money.

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Jessica Medina is a former lawyer turned Accredited Financial Counselor on a mission to help attorneys create the financial freedom they need to do big things. She graduated from Columbia Law School in 2004 as a single mom of twins with over $200,000 in student loans and went straight to work at a Biglaw firm. After eight years she switched roles and became Senior Counsel at the Division of Enforcement at the United States Securities and Exchange Commission.

She left the government to work in an area of the financial industry outside of the securities world and now teaches other lawyers how to use their money to finance their dream lives.

She’s also the host of the monthly podcast Beyond Biglaw: Money Management for Lawyers.

If you enjoyed this article, make sure to join the community of lawyers looking for better personal finance advice at https://www.jessicamedinallc.com/email