4 emotional traps even the most financially aware can fall into

We love the diversity of our client base and one of the most rewarding challenges of being a financial planner is tailoring our service to your individual needs.

However, regardless of your background, education, professional experience, or financial knowledge, it’s likely that emotions play a part in your financial decision-making.

Read on to learn about four emotional traps even the most financially aware can fall into and how you could avoid them to keep your financial plans on track.

1. Saving for saving’s sake

You may have had it drilled into you from a young age that saving is a financially savvy thing to do.

Indeed, building wealth could allow you to pursue your dreams, enjoy a comfortable lifestyle, and bring happiness to your loved ones.

However, saving without clear goals in mind might be a frustrating experience that limits your enjoyment of life.

If you don’t know what you’re saving for, how will you know when you have “enough”? You could end up constantly striving to accumulate more wealth, rather than taking the time to enjoy what you’ve worked so hard for.

Unfortunately, hoarding money in this way is a common emotional trap. Perhaps you believe that your financial worth is directly linked to your self-worth – the more wealth you amass, the more confident you feel about yourself.

Yet, without an end goal, any feelings of accomplishment are likely to be short-lived, as you’ll always be looking to save more.

In contrast, setting yourself short-, medium-, and long-term savings goals, and regularly reviewing your progress, could allow you to celebrate your achievements and enjoy your wealth.

What’s more, there may come a time when you need to shift from a saving mindset to a spending mindset – for example, when you retire and need to draw on the wealth you’ve spent years accumulating.

Read more: Underspending could be just as much a threat to your retirement as overspending. Here’s why 

2. Succumbing to lifestyle creep

If your income rises, it might be tempting to reward yourself with a “lifestyle upgrade”. This could mean spending more on your home, buying a new car, or eating out more.

This “lifestyle creep” – automatically increasing your spending in line with your income – may be the result of conscious changes or it could happen unintentionally over time.

Often, internal feelings of insecurity and negative comparisons with friends, family, colleagues, and public figures can contribute to lifestyle creep. Buying the same watch as your favourite celebrity, or moving to a bigger house than your colleague, might make you feel successful and confident.

Of course, it’s OK to treat yourself from time to time. As discussed above, celebrating successes and enjoying your wealth is just as important as accumulating it.

However, if you let lifestyle creep get out of hand, it could hamper your progress towards your long-term financial goals. This is because, the more of your disposable income you spend on luxuries, the less you’re likely to have to bolster your savings, investments, and so on.

Instead, focusing on your own goals and avoiding comparisons with others, could help you avoid unnecessary lifestyle creep. What’s more, upgrading your lifestyle in moderation while also boosting your savings and investments, could ensure that you benefit from any additional income or windfall both now and in the future.

3. Not talking to loved ones about money

Talking to your loved ones about your finances may feel uncomfortable. Indeed, “money” remains a taboo subject in many households.

There could be many emotional reasons for this. You might feel too proud to discuss your financial situation openly with your family. Or perhaps you find it distressing to talk about how you’d like your wealth to be passed on after you die.

Yet, avoiding speaking to your loved ones about money may be a missed opportunity to make the most of your wealth. For example, you could work together as a family to ensure that your estate is passed on as tax-efficiently as possible. This might include gifting some of your wealth during your lifetime. As such, it may be helpful to discuss this sooner rather than later.

Indeed, talking openly about money could help you understand your loved ones’ financial situations so that you can provide them with support when they need it the most.

What’s more, sharing your financial plans with your loved ones may reduce the risk of misplaced expectations and disagreements.

4. Focusing on avoiding losses over making gains

“Loss aversion” is a common bias that could lead you to be overly cautious about losing money. This means that you typically seek opportunities to avoid loss rather than focus on how to make a gain.

Loss aversion is an extensively researched cognitive bias that means you feel losses twice as intensely as the pleasure of gains.

Unfortunately, this mindset could lead to limiting financial decisions. For example, you might rely on low-risk investments that limit your returns. Or you may make emotional decisions, such as rushing to sell shares when there is a downturn in the market – meaning that you’d miss out on any future potential returns when the markets recover.

We can help you avoid this emotional trap by working with you to set meaningful goals and build a strategy for achieving them, based on numbers and logic. Having a clear financial plan to follow could provide a valuable focus and reduce the risk of loss aversion affecting your financial decisions.

Get in touch

If you’re looking for a financial planner in Bristol who can help you create a meaningful financial plan based on data and logic, rather than emotions, we can help.

Please get in touch either by email at helpme@aspirellp.co.uk or by calling 0117 9303510.

Please note

This article is for general information only and does not constitute advice. The information is aimed at retail clients only.

Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.

The Financial Conduct Authority does not regulate estate planning or tax planning.

The value of your investments (and any income from them) can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.

Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.