Financial literacy — the ability to understand how money works in your life — is considered the secret to taking control of your finances. Knowledge is power, as the saying goes, but information alone doesn’t lead to transformation.
In putting financial literacy above all else, many in the personal finance industry have decided that repeating the same facts about how much money folks should have in their emergency savings account will, somehow, change people’s money habits. This approach doesn’t account for our human side: the parts of us that crave connection, new experiences, and fitting in as members of our communities. Most of our decisions around money are emotional; no amount of nitty-gritty knowledge about interest rates will change that.
As a financial therapist, I’ve seen spending behaviors driven by emotions and not logic time and time again. One young couple that came to see me was so caught up in having the “perfect” wedding that they put a large cash gift meant for a house down payment toward their wedding venue. Another client whose parents had saved for them to attend a state college debt-free confessed that they took out private student loans to finance a semester abroad; they’re now paying a hefty monthly bill. Another family put a pricey Disney trip on a zero percent interest credit card, telling themselves (and me) they’d pay it off before the interest rate skyrocketed, only to procrastinate on paying it down and owing nearly 22 percent in interest on their trip over several years.
These people weren’t doing anything “bad.” They were doing what most of us do: making money-related decisions based on feelings. In my work, I help people understand how their emotions are driving money decisions, assess if their money is going where they want it to go, practice financial self-compassion, and know when to ask for help. Here is what I tell them.
All decisions are emotional
It’s imperative to understand that emotions drive most decision-making. For example, we know we shouldn’t read on our phones in bed because it’s bad for our sleep quality, but we do it anyway. We know we should move our bodies regularly for our physical and mental health but still let exercise become another chore that we put off. The same is true when it comes to money: We know we should spend less than we earn and save for the future, but many people find it really hard to do that.
An individual’s relationship to money and the emotions it brings up starts when we’re young. When we’re children, our brains are sponges, soaking up information. We take in what our peers have (for example, their toys or clothes), what our caregivers say (like arguments about bills), and what’s being marketed on TV, and make meaning of them. According to Cambridge researchers, people have developed some fundamental concepts related to financial behaviors by the time they are 7 years old.
A person who grew up in a household hearing things like You can’t take it to the grave, so you might as well spend it when you’re alive from parents who splurged on clothes and toys when tax refund season came around might be inclined to spend money quickly as an adult. Alternatively, if a child absorbed messages that talking about money was “rude” or that people who made a lot of money were “greedy,” they might grow up to feel guilty about going into a lucrative field, or struggle to talk to their partner about money.
To better understand your relationship with money, think about how money makes you feel. What emotions come up when you make a credit card payment, get a tax refund, or have to negotiate a deal at work? Do you feel calm and confident? Or do you feel anxious and avoidant? Maybe you feel a pleasant rush of adrenaline — or maybe it depends on the scenario.
Spending a week jotting down the emotions you associate with different financial situations as they happen is a good first step in sorting out where you’re starting from. Document how you feel when you’re shopping online, Venmoing a friend for drinks, opening bills, or getting your paycheck. At the end of the week, go through your notes and see what patterns emerge that might tell you something about your relationship with money. Whether you discover you’re uncomfortable asking your roommate for their portion of the rent or realize you experience a lot of anxiety the day after a big shopping trip, that’s good information to have about yourself.
Budgeting so often backfires
Budgeting is heralded as the cornerstone of being “good” with money. However, many classic budgeting rules just aren’t practical for a lot of people. Traditional wisdom in the world of personal finance dictates that no one should spend more than 30 percent of their income on housing. But did you know that “rule” comes from a 1979 Department of Housing and Urban Development guideline that capped public housing at 30 percent of a renter’s income? The ”30 percent rule” isn’t even based on our personal finances.
In high-cost-of-living areas, spending 30 percent or less on housing is laughable. For example, someone earning $67,860 (the average salary for a college-educated person in the US) in New York would bring home $4,120 monthly after taxes. According to the 30 percent rule, they couldn’t spend more than $1,236 per month on rent. That might be doable in a place like Buffalo, New York, but if they live in a higher-cost-of-living area like Brooklyn, where the average rent was $3,124 in February 2022, the 30 percent rule just isn’t applicable (especially if you make less than $67,860, which is the case for many people).
Not only are these budgeting categories outdated and unrealistic, they also don’t make room for the reality that people want to enjoy life. So often in the personal finance world, consumers are told what to cut: lattes, dining out, vacations. But we all need joy, rest, small pleasures, and self-care — things that often involve spending money.
The bigger problem, though, is that making budgeting mistakes comes with shame. Lots of people say they have some kind of plan in place for budgeting, while others say they don’t bother because they are living paycheck to paycheck. The people who do want to budget may try out a plan from a personal finance expert, only to “fail” by overspending in a specific category.
Then a shame spiral kicks off. They think, “I’m so stupid for overspending. I can never stick to a budget.” This reminds them of all the other times they’ve made money missteps, such as forgetting to pay a bill on time or maxing out a credit card when they were younger. These memories serve as further “proof” in their minds that they are bad with money. This experience, coupled with their other negative experiences with money, can lead them to give up on budgeting altogether.
I’m an advocate for tracking your spending and ensuring that you aren’t spending more than you earn, but I don’t think it needs to involve sticking to percentages that won’t work for most people.
I recommend tracking your spending for a few weeks so you can come up with an idea of what money is coming in and going out of your household, and automating this process by connecting your financial accounts to an app like Mint or Personal Capital is even better. These tools allow you to easily review your spending history over a longer period (like 90 days), and will automatically categorize your expenditures for you, so you can see how much money you’re putting toward things like food, housing, utilities, entertainment, loans, and transportation.
Seeing exactly where your money is going can help you create realistic financial goals based on your actual spending habits, not what one finance professional says your life should look like.
Practice financial self-compassion
Kristin Neff, a psychologist and specialist in the branch of positive psychology called self-compassion, defines self-compassion as extending grace to yourself using three elements: self-kindness, common humanity, and mindfulness. Common humanity is the idea that the “human experience is imperfect, that we are all fallible” — that is, that flaws, mistakes, and disappointment are universal — and mindfulness is a “nonjudgmental, receptive mind state” where you observe your thoughts and feelings with curiosity.
Financial self-compassion, then, is the ability to recognize that we all make financial mistakes and that’s okay. Unlike personal finance advice that chides individuals for messing up, practicing financial self-compassion can help folks be easier on themselves.
To see how financial self-compassion works in practice, imagine you were late on a credit card bill. You could use financial self-compassion by first practicing some mindfulness. Taking a few rounds of deep breaths, you could extend kindness and common humanity to yourself by saying, “While it’s not ideal, it’s also not the end of the world that I missed the due date on that credit card bill. We aren’t taught this in school, and a lot of the jargon is confusing and overwhelming. I’m not alone in making a money mistake.”
Once you’ve practiced financial self-compassion, keep the positive momentum going. Put that credit card bill on autopay, and set a reminder on your calendar to peek at your credit card statement at least once a month.
Don’t let shame stop you from asking for help
Money shame happens when we make a mistake and tell ourselves that we are bad people because of the error. It can be especially intense because people tend to keep so much of their financial lives private. In the absence of open conversations, people tend to assume that others are savvier than they are, and judge themselves for not doing better financially. One of the most common sentiments I hear as a financial therapist is, “How does everyone else know what to do with their money but me?” When we experience financial shame, it can make it hard to ask for help, learn about money, or take necessary steps to improve financial well-being.
Researcher and author Brené Brown has found four things that help alleviate shame: personal vulnerability, critical awareness, reaching out, and speaking shame. In my work, I’ve discovered making meaning of the mistake, social support, and labeling the personal vulnerability to be powerful steps toward eliminating money shame.
Let’s say you went a little wild holiday shopping for folks, and it was only after getting home from Target and TJ Maxx that you understood exactly how much you spent (too much). In this instance, you could use shame-alleviating techniques like this: “It makes sense that I overspent on holiday gifts for loved ones [personal vulnerability]. After not seeing many family members for two years, I got excited and spent more than I planned [making meaning of the mistake]. I can ask a friend who knows I’m working on spending less to come with me to return these items [social support], and enjoy giving smaller gifts instead.”
There are many ways you can ask for financial help. You can start with free resources, like listening to podcasts about money or checking out some personal finance books from the library. (Just prioritize finding an expert who doesn’t chasten their audience. A few I’d suggest starting with: Berna Anat, Amanda Holden, or Chris Browning.) If reading and listening isn’t enough, and you’re still unsure about what you need to do with your personal finances, you could think about taking a free or low-cost online course from a source like Clever Girl Finance or Ellevest. Online courses cover everything from budgeting to loan repayment to investing.
Finally, if you need more financial professional guidance and hand-holding, consider finding a fee-only financial planner who has experience helping people with the emotional side of money. A financial therapist can be a good option, too.
Celebrate your money wins
In my financial therapy work, I invite clients to share instances where they were “good” with money, and they often give examples like saving up for a vacation, opening up a retirement account, or paying down a credit card. Once I’ve listened to what they’ve done, I ask them to share feelings associated with those positive financial actions; I’ve heard answers like “calm, proud, powerful, excited.” When you are working on creating a healthy relationship with money, don’t forget to pause and give yourself credit.
Since experiencing money shame often clouds our ability to celebrate the times when we’ve made positive choices, I recommend that all people working on a financial plan include little ways to spend their money that will bring them genuine joy and allow them to take pride in their wins. Maybe you don’t get the latte every day, but you treat yourself to one weekly. Or if you are working on saving for a down payment, you might consider every $1,000 you put in savings as a milestone worth honoring.
Celebrating financial success is powerful. When we celebrate our progress along the way, it reinforces that we are capable of improving our relationship with money. Research has found that the more frequently we experience a sense of progress, like a “small win,” the more likely we are to continue that positive behavior. And when it comes to finances? The more we celebrate those kinds of wins, the more it confirms that we can all be good with money.