Finances FYI Presented by JPMorgan Chase
Most Americans rate financial concerns as one of the top stressors in their lives.
In addition to daily decisions at the grocery store or the gas pump, we also have to manage investments and long-term financial plans.
But what happens when a personal emergency hits or the market misbehaves? In those moments, it’s easy to let fear set in and drive us to make panicked decisions.
With a little bit of planning, however, you can avoid letting fear control your finances.
Why We Respond to Financial Fears
We may think of our financial decisions as practical, fact-based choices, but in reality, we usually allow emotion to drive our money moves. Fear and panic are two of the biggest influences on our financial psyches.
Personal History
Your personal history with money plays a huge role in how you respond to financial uncertainty. If you grew up struggling or made financial mistakes, you’ll relate differently to financial volatility than others might.
You can’t change your financial past, but you can reflect on and understand it. Dig deeper into that past by asking yourself these questions:·
- What does my relationship with money look like? Am I more of a saver or spender? Do I trust myself with money?
- Do I trust a stable income, or am I always looking for the catch?
- Am I generally a risk taker? Do I behave the same way when it comes to money?
- Who do I trust for accurate financial information? The news? My friends?
- When I was growing up, did my family frame money as good? Bad? Evil? The ultimate goal?
Answering these questions ahead of a panic will help you contextualize your financial mindset during stressful situations.
Cognitive Biases
In addition to our personal relationships with money, several cognitive biases make it more likely that we’ll react to financial stress with panic or fear:·
- Losses hit harder than gains. Losing $100 makes a bigger emotional impact than gaining $100.
- “Now” is more meaningful than “later.” We’d rather have the perceived stability of making less money now than wait to make more money later.
- Frame of reference matters. Losing 95% of an account’s interest sounds bad even if it actually translates to a gain based on your original principal. Headlines are great at framing everything in negative terms.
How to Avoid Panic-Driven Decisions
When financial fears do pop up, make sure you take a breath and follow these steps before you make any rash money moves.
Understand the Psychology
Knowing that your financial fears might be mostly internal (even if external circumstances are contributing to the situation) can help you stay more rational during the decision-making process.
Go through the list of cognitive biases and personal financial history factors to see which elements might be impacting your mindset. If you can identify the reasons your fear is overblown, you’ll be able to tame it.
Identify the Emotion
Financial fears are real, but our desire to make big money moves is often related to other emotions and concerns, too.
Is buying more stock only about the market swing? Is dipping into retirement funds really just about that new car you need? Why do you actually want it?
Feeling stuck at work, adapting to life changes like children going off to college, or seeing peers take lavish vacations are all emotionally uncomfortable scenarios that can prompt complicated feelings.
Before you try to fix your discomfort with financial decisions, identify other mental and emotional factors that may be driving you.
Address the True Concern
Once you’ve identified the variety of feelings involved in your mindset, try to address the non-financial elements first.
If you’re feeling like that retirement money would fund a great, social-media-worthy vacation, take a smaller trip first. If you’re panicking that the stock market is eating your kids’ college funds, sit down to make a list of highly-ranked state schools that would affordably meet your kids’ needs.
By taking tangible steps to quell parts of your fear and panic, you’ll likely calm down enough to evaluate the financial pieces with a more rational mindset.
Make Proactive Financial Moves
After you’ve avoided financial missteps this time, make sure you’re set up for future success by regularly monitoring your financial situation.
Don’t wait until you see alarming headlines to check on your accounts and investment strategy. Go over your daily budget once a month and your investments twice a year.
You can do this independently or with a financial planner, but the key part is that you do it. If you’ve recently evaluated your financial position, you’ll be less likely to panic when unexpected issues hit.
Write Down (and Reference!) Your Plan
Ultimately, the best way to avoid making fear-based financial decisions is to have a proactive financial plan in place.
Once you’ve developed a strategy, make sure to write it down (along with any important benchmarks you’ve set for buying, selling, or adjusting your strategy). Putting the plan down in black and white makes it far easier to weather ups and downs along the way.
Next time financial panic sets in, all you’ll have to do is follow the plan without getting emotions involved.
Finances FYI is presented by JPMorgan Chase. JPMorgan Chase is making a $30 billion commitment over the next five years to address some of the largest drivers of the racial wealth divide.
