Psychology of Money: How Our Emotions Affect Our Finances

Money, an essential aspect of our lives, goes beyond its tangible form. It holds a deep connection with our emotions, influencing our financial decisions and shaping our financial well-being. In fact, a study performed by Nobel Prize-winning psychologist Daniel Kahneman found that we make financial decisions based 90% on emotion and only 10% on logic.

Financial therapist and wealth counselor Marilyn Wechter further illustrates this through philanthropy. “Philanthropy isn’t just a strategy to reduce your tax liability, but a wonderful thing to do that’s usually motivated by emotion,” she said. The act of giving exudes happiness in the benefactor, even if it requires some sacrifice on their part.

Much like this example, understanding the psychology of money is crucial for gaining control over our finances and achieving long-term financial success. Let’s delve into the intricate relationship between emotions and money and explore how our psychological tendencies can impact our financial lives!


Do you practice retail therapy?

Emotional spending, often referred to as “retail therapy,” is a prevalent coping mechanism employed to alleviate feelings of sadness, stress, or other negative emotions. The act of purchasing items may provide temporary relief and a fleeting sense of well-being. However, relying on material possessions to fill emotional voids can initiate a destructive cycle of overspending and financial instability. The consequences become evident when the dreaded credit card bills arrive.

To break free from this detrimental pattern, it is crucial to develop healthier coping strategies. Engaging in physical activity, practicing mindfulness, or seeking emotional support are effective ways to cultivate a more balanced and constructive relationship with money.


One of the common emotional traps we often fall into is the allure of impulse spending to satisfy our immediate urges and desires. The exhilarating feeling of acquiring something new can provide a temporary high, but it frequently results in remorse after the purchase. To effectively manage this behavior, it is essential to grasp the psychological factors influencing our spending habits, including the need for validation. By gaining this understanding, you can take proactive measures to restrain your impulse spending.

A helpful strategy is to be intentional with your purchases and practice a waiting period of at least 24 hours before committing to significant expenses. This delay allows you to reassess the necessity and importance of the purchase, reducing the likelihood of impulsive decisions. During this time, reflect on whether the item truly aligns with your long-term financial goals and values.


Are you following social media accounts that frequently highlight their travel destinations and luxurious possessions? Humans are prone to comparison, and the age of social media has only amplified this tendency.

Witnessing others flaunting their extravagant lifestyles can evoke feelings of inadequacy, ultimately leading to excessive spending and financial strain. However, it is crucial to remember that each person’s financial journey is unique, and genuine financial success arises from aligning our actions with our individual financial goals.

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Engaging in self-examination is an effective way to prevent jealousy from influencing our financial decisions. It involves being completely honest and removing the influence of others’ opinions from the equation. By doing so, we can transform jealousy into motivation. Instead of fixating on what others have, shift your focus towards your own progress and cultivate a sense of gratitude for what you have achieved.


People who are more prone to guilt are also more inclined towards altruism. In the best-case scenario, this altruistic inclination motivates us to share our abundance with others through charitable contributions. However, in the worst-case scenario, it can lead us to spend money that we actually need for ourselves on others.

To prevent such situations and maintain a healthy balance, it is essential to establish limits. One effective way to avoid going overboard is by setting budgets for specific expenses, such as when giving Christmas or birthday gifts. By implementing a budget, we can ensure that our generosity aligns with our financial capabilities and responsibilities. Remember, being mindful of our own needs and financial limitations does not diminish the value of our altruistic intentions.


Emotions such as anxiety, shame, or fear can significantly contribute to financial procrastination and avoidance of money-related responsibilities. Failing to address these emotions and neglecting financial issues can have severe consequences for our long-term financial well-being.

We have the ability to overcome these obstacles and regain control over our finances. It starts with acknowledging and addressing the underlying emotions that hinder our progress. Seeking professional help and guidance is a valuable step in this process. In Singapore, there are various reputable financial advisers available, such as Singapore Financial Planners, Expat Advisory Group, Providend, and Synergy Financial Advisers. It is important to find an institution that aligns with your specific needs.

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In conclusion, our emotions and financial lives are deeply intertwined. By understanding the psychology of money and acknowledging the impact of our emotions, we can empower ourselves to make prudent financial decisions. Let’s embark on this journey of self-awareness, resilience, and financial empowerment, one step at a time.

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