Finances and Emotions

Financial Decisions and Maslow’s Hierarchy of Needs

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https://ournextlife.com/2017/05/03/freedom/freedom-maslow-needs

 

The hierarchy of needs has been around since 1943 and is something that you probably learned about in middle school. Although it usually pertains to how someone decides to satisfy their needs more generally, it is easy to see how our money minds also follow this same structure.

This hierarchy is typically represented by a pyramid, with physiological needs at its base and psychological/personal needs being built on that base. We can use this pyramid to consider how we handle our financial decisions and in what order. Before moving up the pyramid, everyone must take care of their physical needs (shelter, food, clothing) first. After your basic needs are met, you now have a high degree of control over what is most important to you.  Someone more focused on their safety needs would spend more on insurance than an expensive sports car. Or, if you are more focused on self-esteem needs, perhaps you are shopping and spending unnecessarily to meet that need. The bottom line is that everyone is different in what they want to spend money on.  Awareness of your needs and how you value each type of need is the best way to make strong financial decisions based on your personal, psychological, and financial situation.  

 

The Feelings Wheel Defined

Psychologist Robert Plutchik developed the wheel of emotions to visually represent the core emotions we all have and how they interact.  You are, at all times, in an emotional state.  Throughout your day and with each and every financial transaction you make, you are operating within an emotional state. These emotions may not be very intense and can be barely noticeable, but they are ever-present.

Plutchik-Wheel-of-Emotions-1-scaled.jpg https://innobatics.com/wheel-of-emotions/

Plutchik’s wheel of emotions can help us better understand our different emotional states and how they interact with our finances.  Emotions can influence your financial decision-making in a major way. Understanding your emotional state at any given time can help you decide if you are in a good emotional space for making financial decisions.  Have you ever heard of "retail therapy"?  This is a great example of how an emotional state impacts our financial decisions. 

For example, financial markets are driven by fear and greedLinks to an external site.  -the sentiment of markets drives the news and media cycles which in turn permeate the thinking of the entire economy and public perception. This has an impact on your financial decisions, even if the fear or greed is not congruent with you personally – You hear things, read things, and then it becomes part of your thinking.  Let's say a rash of break-ins happens near you. Your emotional state of fear and the desire to satisfy your safety needs might lead you to purchase a new home security system. This is your emotions driving financial decisions.