Financial psychology: Creating a balanced relationship with money

Karen Weisgerber, PhD, lead consultant at Cambium Consulting Group and private practitioner in Newton, MA, works with higher net worth clients and often sees emotional conflicts related to finances.

Financial issues consistently cause stress and anxiety in individuals, according to the “Stress in America” Survey, issued annually by the American Psychological Association (APA). Yet, the topic of money is seldom raised in public and in the therapy room. However, some psychologists cite the relevance of financial matters to a person’s overall well-being.

According to Traci Cipriano, JD, Ph.D, assistant clinical professor, Yale University School of Medicine, our experiences, beliefs, values, and external social and cultural forces have an influence on our relationship with money. “Most life decisions have a financial component,” she said, noting, though, that most people are not comfortable talking about finances.

Cipriano said therapy might help people think through their beliefs, values, and goals regarding money. “If they are having trouble meeting their goals, what barriers are in the way?,” she said. “Can the person do something differently? [Psychologists help] in dealing with the barriers as opposed to helping people manage their finances.”

Karen Weisgerber, PhD, lead consultant at Cambium Consulting Group and private practitioner in Newton, MA, works with higher net worth clients and often sees emotional conflicts related to finances. She noted that feelings fuel concerns, but individuals need to determine if there is a real threat, such as bankruptcy, or if the response is strictly emotional “Couples may not necessarily align but they need to assess the real implications,” she said.

According to Weisgerber, the first step is to bring awareness to the issue, clarifying values regarding money and determining their origin. “Some people have never learned how to manage money,” she said. “Upbringing and home values have a bearing on your attitudes toward money.”

When treating couples, Weisgerber aims to help them create greater fluidity and ease in the decision-making process and reduce guilt, fear, and conflict. She encouragies the couple to develop more understanding of their finances by mapping out cognitive patterns.

External factors, such as a windfall inheritance or large lottery win, can cause financial distress, especially in these days of social injustice and inequity. Weisgerber said, “It can cause complexity in social relationships. Some people are not sure if they should tell another that they have money.”

Financial issues can also plague older citizens who are moving from generating income to retirement. “There is anxiety about allocating money with no control over their income stream,” she said. “A tremendous dip in the economy can create issues.”

In her research at the University of Maine, Sarah Newcomb, Ph.D, director of financial psychology for Morningstar, found that focusing on a “mental time horizon” can have a positive impact on financial well-being.

She asked, “How far into the future do you plan before things get fuzzy?” She said that the more long-range planning an individual does, the better their emotional health. “If you plan 10 years ahead, you tend to have more assets, higher net worth, are a better saver, and report more positive emotions with regard to finances,” she said.

Sarah Newcomb, Ph.D, director of financial psychology for Morningstar, found that focusing on a “mental time horizon” can have a positive impact on financial well-being.

On the other hand, short-term thinking tends to increase spending, impulsivity, and debt, according to Newcomb. “Extreme short-term thinking could result in living in an environment of chaos and lead to making myopic decisions,” she said, adding that the relationship between the mental time horizon and financial stability depends on the feedback loop, which can have positive or negative effects based on external factors.

Attitude also factors into financial health, Newcomb said. “Confidence in our ability to bounce back has a huge impact on financial well-being. If you have no confidence that you could handle a situation, there’s a greater likelihood of developing anger, sadness, hopelessness, and stress rather than joy, peace, satisfaction, and pride when it comes to money,” she said.

Newcomb suggested that, rather than catastrophizing, an individual should remind themselves of a time when they bounced back after a crisis.

For those experiencing significant financial difficulties, Newcomb recommended dual therapy with a psychologist and a financial advisor. “The psychologist is trained to address mental habits and the financial advisor’s job is to focus on financial products and services and could help put clarity and detail into plans for the future,” she said.

Kathleen Cairns, PsyD, private practitioner in West Hartford, CT, said that “parental programs,” i.e., the lessons we learn as children from our parents, impact our relationship to finances. For instance, those who grow up in a home where bill collectors are continually knocking at the door will learn this is how to deal with finances. People will feel comfortable with not having money in the belief that this is the norm, she said.

Those whose parents lived paycheck to paycheck will repeat this behavior when they become adults, according to Cairns. Parents who paid their bills on time, acted responsibly with money, and managed to save teach their children to replicate that behavior. “We unconsciously live in the same financial state as when we were children,” Cairns said.

Cairns helps clients with financial struggles by showing them their behavioral pattern and asking probing questions to prompt awareness. “We look at expenses and income and examine what you can do without. I point out that you can make a choice – be in debt or live within your means. Some people do break the cycle,” she said.

In 2021, a steering committee filed a petition to form a Financial Psychology Division, citing a need because of the pattern of stress caused by monetary issues in the general public.

Cipriano said there is a lot of value in understanding more about our relationship with money and how it affects our life. “If such a division increases our knowledge, it might be a good idea,” she said.

Weisgerber agreed, noting that the topic of money is so complicated that extra training is required to effectively address the issue. “Treatment goes beyond cognitive behavioral therapy. It’s worth understanding what’s unique about this aspect of psychology,” she said. “Right now, there’s no unified way to learn this niche.”

According to Newcomb, psychologists could do so much in identifying mental barriers around our ideas of what’s possible. “There is a huge need for financial empowerment,” she said. “Being able to have a healthy relationship with money and understanding of how money works is important.”