Money Mindset: How Emotions Drive Your Financial Decisions
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. 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 aren’t immediately obvious.
This article will guide you through these emotional influences and provide strategies to manage them effectively, empowering you to make financial decisions that are 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 research showing that financial decisions are driven approximately 90% by emotions and only 10% by logical reasoning. (For my fellow economist nerds, you can review the study here:https://www.jstor.org/stable/1914185.)
This statistic challenges the traditional idea that financial management is primarily about numerical analysis. Instead, it highlights the powerful role emotions play in shaping financial behavior and underscores the importance of understanding the psychology of money as part of true financial wellness.
Emotional vs. Numerical Issues in Financial Decision-Making
It is essential to differentiate between emotional money issues and numerical financial issues when making financial decisions.
When I work with clients, we examine any financial decision—whether upcoming or already made—by first identifying what is within their control versus what is outside their control.
For example, you can control how you respond to new expenses or budgeting challenges. You cannot control broader economic forces such as market downturns or inflation. Distinguishing between these factors reduces unnecessary stress and helps focus your energy where it can be most effective.
Once you’ve identified what is within versus outside your control, you can determine whether you’re dealing with an emotional issue or a numerical one.
How to Work Through Emotional Money Issues
For emotional issues, it’s important to understand where resistance or fear may be coming from.
Is there a past experience this situation reminds you of? If so, does it make sense that you feel the way you do? Often, the answer is yes—it makes complete sense.
With that understanding, you can give yourself some grace. Of course you feel that way.
From there, you can ask yourself whether those fears or feelings are warranted given your current circumstances. Is your belief actually true? What else could be true in this moment?
How to Approach Numerical Financial Issues
If you’re not dealing with an emotional issue but a numerical one, the strategy is different.
You want to run the numbers, evaluate your options, make a plan, and then work the plan.
That said, if you run the numbers and still encounter resistance, you’re no longer dealing with a purely numerical issue—it’s emotional again.
Controlling Money Stressors: The Student Loan Debt Example
Student loan debt is one of the most common emotional financial stressors I see, particularly among my attorney clients.
While you can choose your repayment strategy or consider refinancing, you cannot change the interest rates set at the loan’s inception or control broader legislative decisions affecting repayment options.
At the time of this writing (August 2024), federal student loan repayment plans were under injunction by two separate courts, with the issue likely to be decided by the Supreme Court. This is a clear example of something outside your control.
By focusing on what is within your control—educating yourself, evaluating available options, and seeking expert guidance—you can manage student loan debt more effectively without taking on unnecessary stress.
But what if you’ve been taught that all debt is bad and must be paid off as quickly as possible?
That strategy may work for a typical college graduate with $35,000 in debt, but it doesn’t always work for attorneys carrying mortgage-sized law school debt.
Even when student loan debt feels emotionally overwhelming, it’s important to run the numbers and choose a repayment strategy that supports your broader financial plan. That strategy may not involve paying off loans as aggressively as possible if doing so undermines other financial goals.
The key is balancing the numbers with how you feel—and making decisions with awareness of your emotional bias.
Client Example: Emotional Triggers and Financial Decisions
Consider a client whose past trauma of having a car repossessed heavily influenced her approach to debt repayment.
She prioritized paying off a low-interest car loan over higher-interest debt, and it wasn’t immediately clear why. Through discussion, it became evident that the emotional impact of her prior repossession was driving her decision.
Once she processed that experience, she was able to reevaluate her priorities and ultimately felt comfortable shifting her focus to higher-interest debt, allowing her to use her money more effectively.
This example illustrates how unresolved emotional experiences can shape financial behavior, often at the expense of efficiency.
The Positive Influence of Emotions on Financial Decisions
While emotions can complicate financial decision-making, they can also lead to deeply satisfying choices when they connect us to our values.
Emotions guide decisions that reflect personal priorities and ethical standards, enhancing overall life satisfaction.
Examples include investing in meaningful experiences for your children, prioritizing health or education spending, or choosing community-oriented opportunities. These decisions may not always optimize financial efficiency, but money spent in alignment with your values rarely feels wasted.
When Numbers Meet Emotional Resistance
How can you tell when you’re dealing with an emotional issue?
Even when the numbers clearly outline an optimal course of action, you may feel resistance. That resistance is often a signal that something emotional needs attention.
For example, the numbers may suggest investing surplus funds rather than paying down a low-interest mortgage early. But if fear of debt pushes you toward paying it off anyway, that emotional driver deserves recognition before finalizing your decision.
This doesn’t mean the numerical answer is always “right.” Sometimes emotions need to be acknowledged or even accommodated in order to move forward.
This is why financial wellness work is so important—and so fascinating. It’s not just about the numbers.
Navigating Emotional Resistance in Money Decisions
To navigate emotional resistance effectively:
Acknowledge emotional influence: Recognize when emotions are impacting your decision and identify potential bias.
Understand the source of resistance: Determine whether the issue is emotional or numerical and what factors are within your control.
Run the numbers and decide: After addressing the emotional component, evaluate the numbers and notice how you feel about the outcome.
Mastering your money mindset requires more than understanding emotional dynamics—it requires practical strategies for managing them.
By acknowledging the role emotions play in financial decisions, you can make choices that are both financially sound and aligned with your values, improving both financial and emotional wellness.
What’s Next in the Financial Wellness Series?
In the next installment, we’ll explore default money beliefs and spending patterns, how they influence financial behavior, and how to change them.
If you’d like help thinking through an emotional or numerical money issue, you can schedule a free consultation.
Schedule a free consult if you’d like help thinking through either an emotional or numerical issue with your money.
About Jessica Medina
Jessica Medina is an Accredited Financial Counselor who helps attorneys improve their money mindset and financial wellness.
She is a former lawyer who graduated from Columbia Law School in 2004 as a single mom of twins with over $200,000 in student loans. After working in Biglaw and later as Senior Counsel in the Division of Enforcement at the U.S. Securities and Exchange Commission, she left government service to teach lawyers how to use their money to finance their dream lives.
Jessica is also the host of the monthly podcast Beyond Biglaw: Money Management for Lawyers.
If you enjoyed this article, join the community of lawyers seeking better personal finance advice at:
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