The S&P 500 closed at record highs this week and has nearly doubled since its March 2020 lows thanks to low interest rates, unprecedented government stimulus and the expected proliferation of vaccines.
Markets are steaming ahead as earnings and demand for services and products expand. The U.S. consumer has more cash at their disposal than at any time in recorded history, which is of course fueling the increase in inflation. As we all look forward to our collective future, we recognize there are some things we can control – our personal spending and behavior – and some things we cannot control – a pandemic that morphs and complicates our lives.
As your financial advisors, we know (and you know) that mental state is often intertwined with financial wellbeing and spending patterns. A 2020 study on mental health and personal spending found that 3 out of 4 Americans emotionally spend in some capacity – to feel happier or as a means of escapism – and emotional spending is often followed by feelings of regret and shame.
Emotional spending occurs when we buy things we don’t need or maybe don’t even want, in order to ease or numb a whole spectrum of emotions from stress or sadness to happiness and celebration. While it’s common to treat yourself to (fill in your guilty pleasure here) when you’re feeling down or up, frequent emotional or impulse spending can sabotage your long-term financial plan and turn true, sustainable happiness into an elusive goal.
And so, because the advisors at Charter Oak genuinely care about the success of your financial plan and, more importantly, your happiness – below are five main emotional spending triggers to start being mindful of, along with proven techniques for taking control of your spending habits.
- Jealousy: spending to keep up with your peers, spending if someone gets an item you’ve wanted for a long time. Example: impulse buying new shoes to outshine someone else
- Guilt: spending to feel better if you’ve failed at something. Example: treating yourself to an expensive dinner in order to assuage your guilt.
- Fear: spending to avoid our fears. Example: online shopping to ignore a challenging work project.
- Sadness: buying new items to boost your mood and enjoy the quick endorphin release in your brain. Example: buying a new pair of shoes you don’t need.
- Achievement: over-spending to celebrate achievement of a goal. Example: hosting an extravagant dinner party that your budget cannot afford.
Once you’ve become aware of your emotional spending trigger(s), all the literature (and our personal experience) recommends developing better coping strategies.
- If jealousy fuels your spending, consider a gratitude journal to focus on what you do have.
- If your spending is guilt-induced, examine why you may be feeling guilty and set goals for what you can do to improve.
- If fear is your spending trigger, go for a walk to clear your head and improve your mood.
- If sadness is driving your spending, consider regular exercise for a healthier endorphin rush.
- If achievement erupts your budget, brainstorm other ways to reward yourself such as taking a day off or saving more for the future.
Finally, once you become aware of your triggers and start to upend your emotional spending habits, the following are some money management habits, that will actually make you feel better and more secure about your finances. This is not an exhaustive list and we welcome hearing other money management habits from you, our readers.
- Set specific saving goals and consider why you are pursuing the goals.
- Anticipate future regret over purchases: ask, will I regret having it/not having it?
- Have a long-term financial plan. Nearly all of our clients have one.
- Create a budget. We can share a simple spreadsheet or recommend online tools.
- Set a time each week to go over your finances (put it on your calendar), review spending and where you are over or under budget.
- Use a savings account and track deposits.
- Plan purchases with a shopping list.
As mere financial advisors, we are far from experts on human emotions. We know that work is best left to mental health counselors and psychologists. Yet, we are keenly aware of the power and responsibility our clients have in shaping their financial future. And we know that being mindful of emotional spending triggers is absolutely essential to keeping a financial plan on track for success. It is our pleasure and privilege to serve you and we wish you the best in the remaining weeks of summer 2021.