December 8, 2023

Money is Emotional: Harnessing the Big Feelings in Financial Planning

Human psychology and money don’t mix well. Left unchecked, our psychology can easily sabotage financial decisions, behavioral experts said during a panel discussion at CNBC’s Financial Advisor Summit.

“When it comes to money, we all go crazy,” says Brad Klontz, executive director of YMW Advisors in Boulder, Colorado, and founder of the Financial Psychology Institute.

“The miracle is that anyone gets it right,” he added.

For example, the human brain is wired to make long-term loss-making choices, such as buying high and selling low, buying out of “fear of missing out,” or falling into a herd mentality, said Klontz, certified financial planner and member of CNBC’s board of financial advisors.

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These shortcomings do actually have some truth to them. Experts say many evolutionary processes can be traced back thousands of years to those that occurred on a species-wide scale or more recently at the individual level in early childhood. Parents, culture and socioeconomic status are powerful forces in shaping money attitudes from an early age, they say.

Plus, the expert added, feelings of shame, such as thinking we have too much or too little money, are common.

The root of this tendency, Kranz says, is to compare yourself to others in your “tribe,” thereby fostering a sense of the need to “keep up with the times.” So when those numbers don’t mean much for overall well-being, households can put too much emphasis on accumulating any amount of wealth—maybe it’s $1 million or $5 million.

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“The number itself needs to be very personal,” Preston Cherry, founder and president of Concurrent Financial Planning in Green Bay, Wisconsin, says of financial goals.

“It’s different for everyone. It’s kind of like a fingerprint, so it’s pretty unique,” added Cherry, CFP and member of CNBC’s Financial Advisory Council.

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Furthermore, in a digital world of cashless payments, money is becoming increasingly abstract. This can make it difficult for kids to develop good money habits, Klontz said, because our brains better understand concrete examples.

When buying expensive items, such as vacations, parents can set a good example for their children by creating a savings plan and showing how it works. For example, they can set aside a certain amount of salary over six months to meet goals, teaching important financial concepts like delaying gratification and saving for the future, Klontz says.

More broadly, money remains a “somewhat taboo” topic, whether we’re talking to other people (whether it’s a spouse, child, friend or parent), or when thinking about our own lives, Cherry said.

“The more we have healthy conversations (about it) … I think we can have better outcomes with money and what we do with it,” Cherry said.