Financial Psychology Center

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Alex Melkumian

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What do you do when you want to be in a holiday mode but your wallet doesn’t?

It’s a week away from thanksgiving. The entire family is planning on getting together at one of the family member’s houses and I already know we are going to talk about how well everyone is doing, especially financially. After thanksgiving, it’s immediately Christmas. It’s about who has the biggest Christmas tree, who has the most decorations. As someone in America’s middle class, Christmas decorations around the house is not my first concern.

Anyone have a similar experience? Turning the holidays into a competition of who can afford more? In moments where family and love is more important, is money what we really want to focus on? In regards to interpersonal relationships with close friends and family members, or intrapersonal relationship, financial standing plays a dangerous role. In addition to these malignant comparisons, this holiday season is also hit with inflation where basic needs have gone up in price. In a time where financial stress could reach its peak, how do we manage our own emotions to prevent being consumed by clash of pride, guilt, and shame – we are about to find out!

In an article by Liz Frazier, a certified financial planner, she mentioned how “between gifts, travel, parties, food, donations and decorations, Americans are spending more than ever to keep up with their holiday traditions.”1 She continues that this is “especially true for parents of young children. ”1 When the entire nation is suffering from an all time high for consumer debt, it is heart wrenching to see the dilemma many people are facing during the holiday season. They also showed that 26% of adults were willing to receive no gifts, 25% of them preferring no gift exchanging, and lastly 15% of them abandoning the travel to go see their family.1 All of these statistics demonstrate the urgency to change the mindset people have towards holidays in order to prevent an enormous amount of financial stress to be piling up on different population groups.

There are a couple of tips that can be employed to prevent being crushed by the additional financial stress this season brings to us. First and foremost, it is important to acknowledge these financial fears, stress, and anxiety that you are feeling. Not only is it natural to feel this way in this day and age, it is important to remind ourselves that we are not alone in this. Lonesome, for some, may be the stem of the struggle – leading to the inability to ask for help. These emotions are entirely valid regardless of one’s socioeconomic status. Furthermore, a willingness to seek professional advice can further advance one’s capacity to overcome these anxious feelings throughout this season. Nonetheless, organization and a clear goal are equally necessary in managing one’s emotional state. Organization can help with understanding what needs to be done, and what doesn’t. On the other hand, our attainable goals can be the landmark to embody our values and beliefs.

Traditions do not need to end. Family gathering do not need to end. What needs to end, the financial self-sabotage during holidays.

  1. Frazier, L. (2020, December 16). Financial stress of the holidays cause many to rethink traditions. Forbes. Retrieved November 15, 2022, from https://www.forbes.com/sites/lizfrazierpeck/2019/11/14/financial-stress-of-the-holidays-cause-many-to-rethink-traditions/?sh=4cc76ef03b1e

 

 

 

 

 

 

 

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Dealing with Post-Pandemic Financial Upheaval

The pandemic’s daunting psychological challenges are largely behind us. Now it’s time to deal with the financial challenges. These are uncertain, upsetting, unprecedented economic times. Savings are being eroded by inflation and stock market losses. Credit card debt is growing more costly due to rising interest rates. Just keeping a roof over one’s head is harder due to skyrocketing rents and home prices. And many businesses still struggle with tight labor markets and troubled supply chains.

Financial advisers are full of advice for weathering today’s challenges, but Bottom Line Personal asked Alex ­Melkumian, PsyD, financial psychologist and founder of the Financial Psychology Center, how to handle the psychological impact of 2022’s economic upheaval…

Inflation

Inflation eats away at the value of our savings, leaving us all worried about whether we’ll be able to pay our bills in the future. It can seem like an unstoppable, invisible force that is robbing us and potentially putting our survival at risk. That’s why inflation causes widespread anxiety and even outright panic.

What to do: Break down your budget into needs and wants. You need to pay your utility bills…you want to take a trip to Europe. If you’re middle class or wealthy, there’s a good chance that even steep inflation won’t truly threaten your ability to pay for your needs. Do some quick calculations to prove to yourself that your needs are safe. Just doing that can help you overcome inflation-driven anxiety and panic. Inflation that forces you to scale back spending on your wants might make you unhappy, but unhappy is very different from anxious and panicked.

Next, consider whether there’s anything you could do to boost your earnings until inflation eases. If you’re retired, maybe you could take a part-time job…if you’re still working, maybe you could apply for better-paying jobs—hiring remains strong in many sectors—or earn some extra money on the side. Remind yourself regularly that you’re earning this money to offset inflation’s erosion of your savings. This should give you a sense that you’re taking control of the situation—a lack of control is a big part of the reason inflation can trigger such powerful anxiety and panic.

Rising Interest Rates and Credit Card Debt

The Federal Reserve has increased interest rates repeatedly in 2022 as it attempts to confront inflation. Rapidly rising rates can be a big financial blow to anyone who has significant amounts of credit card and other variable-rate debt. Just one year ago, you could find credit cards with rates below 15%, but these days many charge 20% or more.

The financial solution to rising interest rates is obvious—pay off variable-rate debt quickly. But the psychological solution requires greater nuance.

Aggressively paying down credit card debt can be like going on a crash diet—most people who attempt it make progress for a while, then backslide and end up right where they started or worse. The crash-diet approach to paying down debt often fails because most people who are deep in credit card debt got there due to a long-term overspending habit. Shifting suddenly from this chronic overspending to extreme frugality triggers a sense of deprivation…and that only increases the drive to overspend.

What to do: If you’re a chronic overspender trying to pay down debt, include a “mandatory splurge” in your monthly budget. In other words, require yourself to spend some predetermined amount, perhaps 2% to 5% of your budget, on something that you want but don’t need. This monthly splurge can prevent the deprivation mindset, similar to how a “cheat day” is helpful for many dieters. Potential exception: Avoid mandatory splurges if you have credit card debt not due to chronic overspending, but because of a single unexpected event, such as uncovered medical bills.

Stock Market—and Maybe Real Estate—Losses

The S&P 500 lost nearly 20% of its value in the first half of 2022, and many analysts are predicting further declines ahead. Like inflation, a bear market is a force that threatens our savings. Unlike inflation, there’s an obvious option for investors who want to take control of these losses—they can sell their stocks and leave the market. Trouble is, that can be a costly mistake—investors who flee the market often miss the subsequent rebound.

Meanwhile, home values are showing signs of weakness and could fall in value in many parts of the country as well.

What to do: Take psychological control of declining stock values by deciding to not take your money out of the markets until stocks rebound. When you’re tempted to abandon stocks, remind yourself that selling locks in recent losses…while not selling means short-term losses can’t affect you. Since World War II, the average bear market has lasted less than 12 months, so patient investors usually can simply wait it out.

If you’re retired or unemployed and must tap your investments to pay your bills, trim your budget so that you don’t have to sell more stock than absolutely necessary. Tell yourself you’re making a choice to live frugally for a year or two as a way to contain your stock market losses—framing frugality as a personal choice helps avoid the deprivation mindset mentioned above.

If falling real estate values are a major worry, tackle a relatively inexpensive DIY home-improvement project that will make your house a more pleasant place for you to spend time. This can provide a useful reminder that our homes are, first and foremost, a place for us to spend our lives with the people we love. Their resale value is secondary.

Unfair Division of Economic Winners and Losers

There are winners and losers in any economy, but the line between those groups has seemed especially stark lately. Some sectors and businesses that could easily transition to remote work flourished during the pandemic and its aftermath…others floundered because they were forced to shut down during the worst days and/or they couldn’t obtain the employees or supplies they needed in the aftermath. It’s perfectly understandable if people who find themselves on the wrong side of that divide look at their neighbors who prospered and think, This isn’t fair. Interacting with people who are doing well financially adds to the pain of those who are struggling. There’s a saying in the world of financial psychology—“compare and despair.”

What to do: When you catch yourself thinking, It isn’t fair, tell yourself, No, it isn’t fair…but it also isn’t over. The pandemic didn’t create winners and losers…it created winners and people still fighting for their wins. This isn’t a football game where the clock has hit 0:00—you haven’t lost until you decide to leave the game.

Tap into your feisty side to combat the defeatism that unfair setbacks can foster. In the business world, people sometimes speak of “peacetime CEOs” and “wartime CEOs.” Many executives are effective peacetime CEOs—they can run their businesses well when seas are calm and things are normal. But we’re not living in calm, normal times. Right now, your career—and your business, if you’re an entrepreneur—require you to be a wartime CEO. The pandemic and the post-pandemic economy have gotten some hits in—how will you hit back? Framing the current economy this way can break the victim mentality and help you fight for the win that still might be within your reach.

This article first appeared on BottomLineInc. https://bottomlineinc.com/money/financial-planning/dealing-with-post-pandemic-financial-upheaval

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Earning and Inflation

People hear the word inflation and their shoulders drop – no one celebrates when their economy is suffering from inflation. It is a word thrown around quite often in the media as well as our daily conversation sometimes. We know it hurts our wallets and can also influence our mental state; however, that is the extend of what people. Maybe it is a reflection of the lack of financial education that is offered to the public or rather just the fear that is ingrained in people towards finances. Regardless of the reason, it does not stop inflation from affecting our relationship with money, others, and ourselves. But it is definitely possible to maintain a strong and sustainable relationship with all the key factors in having a healthy lifestyle all around – we’re talking mentally, physically, financially, psychologically, etc. Let’s get right into it.

The international monetary fund defined inflation as something that “measures how much more expensive a set of goods and services has become over a certain period, usually a year”.1 In other words, inflation shows how much the prices have increased compared to the previous year. Compared to last year, the U.S. Labor Department published data marking an 8.3% increase since last October.2 But it’s not just in the States, inflation is seen worldwide in 2022.3 Given this information, it is obvious that most, if not all, of us have to deal with the hurdle of inflation. The difficulty surrounding this whole topic is that despite the increase in prices for basic goods, one’s earning rarely increases. John M. Bremen in an article by WTW explain this is because of several reasons. One of them being how wages are sticky.4 This implies the difficulty in increasing and decreasing wages despite societal changes and therefore the lack of changes when it comes to inflation. The mismatch between workload / income and good prices can foster a toxic and unhealthy relationship with money, potentially leading to behaviors such as hoarding.

On the other hand, mismanaging of finances and emotions especially during a financially tight time can affect the relationship with the loved ones such as family members, and partners. The financial underlying reason can vary from case to case, a common one stems from the inability to acknowledge and respect each other’s emotions associated with money. Some may claim that finances and emotions should be completely separated and should not interact. Not only is it ignorant to the nature of humanity, it is rather impossible. Feeling a certain type of emotion is inevitable, especially in times of stress. The problem does not lie in the mere fact that we feel those things, but rather the way people go about it.

This is easily applied to one’s relationship with oneself as well. Unlike relationships with others, a relationship with yourself is a unique one where it acts as a foundation for many other relationships. The distinctive understanding and realisation about ourselves stem from this unique relationship and it is crucial to not let money be in the middle of that. Many struggle with detaching self-worth from money as the social hierarchy is comprised of systems where money plays a large role in. The mismatch between earning and what one can afford can lead to chronic stress and anxiety, on top of other physiological symptoms.

When people say not to stress about money but there’s so much to stress about, what is there to do? Although there isn’t one magical solution to have stress disappear, managing one’s emotions can promote financial behavior that is aligned with your values and beliefs. By doing so, it creates a neutral outlook on money while negating the hostility that it potentially can bring.

References:

 

  1. Fernando, J. (2022, October 21). Inflation: What it is, how it can be controlled, and extreme examples. Investopedia. Retrieved October 25, 2022, from https://www.investopedia.com/terms/i/inflation.asp
  2. Current US inflation rates: 2000-2022: US inflation calculator. US Inflation Calculator |. (2022, October 13). Retrieved October 25, 2022, from https://www.usinflationcalculator.com/inflation/current-inflation-rates/#:~:text=The%20annual%20inflation%20rate%20for,at%208%3A30%20a.m.%20ET.
  3. Buchholz, K., & Richter, F. (2022, October 20). Infographic: The global inflation outlook. Statista Infographics. Retrieved October 25, 2022, from https://www.statista.com/chart/27480/projected-annual-inflation-by-country/
  4. Bremen, J. M. (2022, April 12). Why salary increases do not keep pace with inflation. Willis Towers Watson. Retrieved October 25, 2022, from https://www.wtwco.com/en-CA/Insights/2022/04/why-salary-increases-do-not-keep-pace-with-inflation#:~:text=Wages%20are%20sticky,before%20determining%20long%2Dterm%20implications.

 

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When Money Catches Up to Ageing

Retiring. Buying a cozy house somewhere warm. Spending days by the beach, reading a book. Now, that is an ideal plan after retirement. However, I’m sure most of you already know this type of future is not only unrealistic but is becoming more and more difficult to achieve financially. While retirement can be a bittersweet moment for many, it can also bring a new set of stress and anxiety, mostly related money. Without a steady income, the lifestyle one can have starts to look different; however, that does not necessarily mean one is better than the other. In our society where working is valued so highly, what kind of condition are we going to be living under? Let’s find out.

The concept of retirement, although may sound relieving for many, can also be an exhausting thing to map out. Dan Doonan, the executive director of the National institute on Retirement Security, writes in his article, “Today, the U.S. retirement infrastructure largely is based upon individuals saving on their own for retirement during their working lives”.1 In order for the public to benefit from such structure, it becomes a requirement for the people to have a great amount of savings by the time they retire. However, the problem lies in the mere fact that many Americans do not realise how much they should be saving up right now. With inflation hitting hard, it almost sounds like an impossible ask for citizens to build up the savings they need to live a certain lifestyle they aspire to have after retirement or even to maintain the current way of life.

In addition to increases in product costs, there’s also the mere fact that our life expectancy is longer. This insinuates that unlike the previous generations where one only had to save up for 10, 15 years after their retirement, some may even be in a position to need money 30 years after retirement.2 Furthermore, many companies are leaning towards removing “defined benefit pensions”.2 These pensions were very helpful for workers to plan their retirement as it guaranteed a certain amount of money after retirement without reflecting our market’s ups and downs.2 These social changes in addition to simply the increase in costs makes it harder for the current working generation to have a good lifestyle after retirement.

These worries can compound even way before entering the golden age. It can manifest itself through overworking tendencies to compensate for the fact that it has become much more difficult to maintain the same way of life after retirement. On the other hand, the worries and exhibit itself through intense stress and anxiety towards finances and the inability to fully detach from work even during rest. These propensity for experiencing financial stress can be psychologically, emotionally, and physically draining.

What can we do? What should we do? Despite the simplicity of the question, it stands on a compounded narrative our society and culture creates surrounding money and retirement. Clearly, planning ahead is and continue to be a good idea. But beyond the practical, it is crucial to evaluate one’s emotional relationship with money. The logical mind cannot function without the emotional aspect – same goes for money.

When retirement is supposed to be the beginning of a new chapter, who wants to be worried about money and a million other things? We all deserved to have the lifestyle we have been working hard towards, right?

 

  1. Doonan, D. (2021, September 1). Stark and growing economic inequality fuels retirement insecurity. Forbes. Retrieved October 4, 2022, from https://www.forbes.com/sites/dandoonan/2021/09/01/stark-and-growing-economic-inequality-fuels-retirement-insecurity/?sh=36b5b7466632
  2. Borzykowski, B. (2022, September 21). The Ultimate Retirement Planning Guide for 2022. CNBC. Retrieved October 4, 2022, from https://www.cnbc.com/guide/retirement-planning/

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A student with debt, synonymous life with debt?

“This is how student loan debt became a $1.7 trillion crisis”

“The Student Loan Crisis Is Worse Than You Think”

“Stories of the student-debt ‘hamster wheel’ borrowers can’t escape”

“I took $20,000 in student loans and now owe $50,000”

These horror headlines are not scarce in the current day and age America. Many university and college students are drowning in debt without any sustainable system in the country to help them through the process. As many students are getting ready to move onto the next step, graduating students are becoming extra concerned regarding all the debt payments to be made for the next years to come. As if deciding the path for after an undergraduate degree is not stressful enough, these debts never reduce in amount – the only thing they do is to continue to accumulate interest over the years. The Education Data Initiative reports a total of $1,620 trillion for the federal loan balance which accounts for 92% of student loan debt.1 For a student attending a public university, $32,880 is the average amount borrowed.1 When academic and financial worries clash on top of unexpected obstacles in life, the stress can manifest itself psychologically, emotionally, and even physically – its effects are exponential.

The problem is multifaceted and lies within a variety of systems that exist in this world. For example, school tuition has significantly increased in the past 30 years. When you compare the tuitions in 1991 to 2021, the average tuition has increased by two holds where it used to be averaging $4,160 and $19,360 in public four-year colleges and private institutions, to $10,740 and $38,070 respectively.2 Another source has even claimed an increase of 68% in the total price of tuition, fees, room and board at a public four-year college.3 On the other hand, not only household income has not doubled in the same 30 years. Due to this major discrepancy between revenue and expenses, more and more houses had started to rely on federal financial aid. Obviously, the student debt crisis is also driven due to fact that the number of people attending colleges and universities have increased.3 However, that does not explain the immense amount of strain and pressure this has on young adults.

Financial stress is overwhelming for grown adults with life experiences. It can become profusely stressful for those that just graduated from a university or college. This immense pressure may play a large role in deciding what one can or should do and don’t irregardless of one’s dreams and goals. When the financial situation has its own path, many are forced to align their goals with it in order to support themselves financially, rather than pursuing their true dream.

How do you avoid student debt? This is a tricky question – it is quite difficult to completely remove the component of receiving federal aid. At the end of the day, it is a useful tool when used with care. One thing a student can do is to have a financial counsellor to discuss their future plans before the debt is ‘suddenly’ due. Having a plan A in addition to a contingency plan can be a useful way to prepare for the future. Financial stress can be an extremely uncomfortable and scary mindset to be in while attending school. We all wish there was one magic thing that can be done to remove the negativity and the strain regards finances; however, there isn’t one. This also means there are multiple right ways of approaching one’s problem. Paying attending to emotions while dealing with finances is a big step in the right direction, despite what some might believe about the level of compatibility between money and emotions.

  • Taking to a professional
  • Always have a plan A, plan B, and plan C if possible
  • Do not shy away from the numbers. Know your financial status.

This advice is most certainly not the only ones nor will it work on everyone. However, it is a general starting point that can potentially help navigate one’s borrowing experience better than expected. No one should have to pick between knowledge and money.

 

  1. Hanson, M. (2022, August 28). Student Loan Debt Statistics [2022]: Average + total debt. Education Data Initiative. Retrieved September 27, 2022, from https://educationdata.org/student-loan-debt-statistics#:~:text=43.0%20million%20borrowers%20have%20federal,financial%20quarter%20(2021%20Q4).
  2. Dickler, J., & Nova, A. (2022, May 6). This is how student loan debt became a $1.7 trillion crisis. CNBC. Retrieved September 28, 2022, from https://www.cnbc.com/2022/05/06/this-is-how-student-loan-debt-became-a-1point7-trillion-crisis.html#:~:text=Americans%20now%20owe%20more%20in,medical%20debt%20or%20payday%20loans.&text=Every%20year%20millions%20of%20new,borrowers%20struggle%20to%20exit%20it.
  3. Whistle, W. (2021, June 28). What is driving the $1.5 trillion student debt crisis. Forbes. Retrieved September 28, 2022, from https://www.forbes.com/sites/wesleywhistle/2020/09/01/what-drives-the-15-trillion-student-debt-crisis/?sh=46d4a1ea7aec

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Inflation is Making Our Financial Mental Health Deflate

State of the economy/inflation

What a world we live in – the second the media mentions inflation, we become hyper aware of every one of our spending habits, for right reasons. Disproportional increase in cost and spending is stressful for many, especially those living within a tight budget. What makes it even worse is the uncertainty that is at the bottom of all of this. The lack of direction of the economy, decrease in costs, and confidence in ourselves can lead to a downward spiral mentally, financially, and even physically. When the status quo is broken personally and financially, what do you do? How do you react? Today, we try to answer these questions without letting them overwhelm us.

Inflation, in simple terms, happens due to our economy’s reflection of increase in production costs which then causes a noticeable increase in costs of products.1 Furthermore, when the demand is much greater than the supply and the buyers are willing to pay for them, a rise in costs also occurs.1 A common example where one can see the waves in prices would be the housing market. Not only does it reflect the demand, but it also flows with what the economy of the time is experiencing. In even simpler words,

Inflation = raising prices

To be completely frank, it damages everyone’s wallets which can be backed up by a couple of reasons. To begin, the value of our money decreases as buyers are unable to purchase what they are used to.2 It is financially demoralizing. Furthermore, it inevitably leads to a decrease in one’s savings. When income remains constant while spending increases, savings is the next place we go to.2 Finally, cuts have to be made. With a tight budget, some may leave out products or activities that are not an absolute necessity in order to cover necessary costs, such as food, housing, education, etc. Although never a good sentiment, it is quite obvious that inflation is not beneficial to the consumers.

Emotionally, it takes a toll on us also. When the money we have is devalued, it can lead to stress and anxiety which can manifested through physical symptoms.3,4 The stress of not knowing when it’s going to end and how much the prices are going to rise creates a world view where you are in survival mode against economy in the midst of uncertainty. There is no clear-cut solution nor a single decision that can be made to alter the circumstance to maintain the ongoing financial situation.

Management of financial stress is one of the key factors to create a healthy and adaptable mindset in times of emergencies and uncontrollable changes in society. The acceptance of economy’s cycle without feeling weakened is one of many ideologies that we can adapt to prevent the cycle of overthinking and self-doubt. When one’s value of money is decreased, many find it difficult to dissociate it with self-worth. In a society full of narratives that wrongfully support the interdependence between self-image and money, it is our goal to detach them as separate entities and be grounded in our values and beliefs.

At the end of the day, the economy may be able to decrease the value of the money we have, but it should never be given the power to depreciate our self-appreciation or self-care.

 

References:

  1. The Investopedia Team. (2022, August 10). What causes inflation and who profits from it? Investopedia. Retrieved September 19, 2022
  2. Williams, G. (2022, July 29). Why is inflation bad? 3 effects of inflation. Forbes. Retrieved September 19, 2022
  3. Fielding, S. (2022, August 1). High inflation rates impact almost every aspect of our lives, including Mental Health. Verywell Mind. Retrieved September 19, 2022
  4. Financial Consumer Agency of Canada. (2019, March 28). Government of Canada. Canada.ca. Retrieved September 19, 2022