Why, exactly, are emotions connected to net worth? Understanding this connection can give you a competitive edge in wealth-building.
My previous post, Being Sad Is Expensive: How Your Money-Mindset Matters showed how emotions play a crucial role in shaping financial behavior. One potential explanation for why this is comes from the broaden and build theory of positive emotions (BBT), which argues that positive emotions tend to allow a person to grow in such a way that they develop new skills that lead towards greater financial resources. Understanding this connection between emotions and financial resources can give entrepreneurs, business owners, and professionals a competitive advantage in wealth-building and long-term financial well-being.
But, why, exactly, are emotions connected to financial resources? What is actually happening when you move from joy to greater income and net worth?
Instead of assuming that money brings happiness, what if we assume that happiness creates wealth? The idea that money alone leads to lasting happiness has been debunked—especially considering that we live in the richest society in history, yet remain deeply dissatisfied. People quickly adapt to new financial circumstances, so while receiving money may bring temporary joy, the effect is fleeting. In fact, research shows that beyond escaping poverty, additional wealth has little impact on long-term emotional well-being.
So, asking the question again, why should our emotions impact our finances?
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Why should our emotions impact our finances?
Emotions and Financial Time Horizon: The Hidden Link
The BBT framework, developed by psychologist Barbara Fredrickson, argues that positive emotions broaden cognitive awareness and curiosity, leading to an expanded perspective on life and decision-making. Conversely, negative emotions narrow our focus, causing us to prioritize short-term survival over long-term success. In the realm of finance, this means that positive emotions encourage strategic long-term financial planning, while negative emotions push individuals toward short-term, reactionary spending habits.
Financial time horizon refers to how far into the future individuals consider when making financial decisions. Some people plan just a few months ahead, focusing on immediate expenses, while others think decades into the future, prioritizing long-term investments, retirement planning, and strategic capital investing. My recent paper, “The Relationship Between Emotions and Financial Time Horizon,” provided evidence that emotions strongly influence financial time horizon.
The Cost of Negative Emotions in Financial Decision-Making
On the flip side, negative emotions, such as anxiety, anger, and sadness, were shown in our study to be associated with a shorter financial time horizon. Individuals experiencing persistent negative emotions tend to focus on immediate financial concerns, avoiding long-term planning in favor of quick fixes. This can manifest in poor financial behaviors like excessive credit card debt, minimal savings, or impulsive investment decisions.
For instance, entrepreneurs under chronic stress might make rash business investments without considering long-term profitability. Similarly, professionals feeling financial anxiety may delay saving for retirement, focusing only on immediate cash flow needs. Over time, these behaviors compound, leading to financial instability and missed wealth-building opportunities.
Emotions Are a Competitive Advantage in Finance
Understanding that emotions influence financial behavior means that controlling your emotional state can become a strategic advantage. Here’s how professionals and entrepreneurs can leverage this knowledge:
1. Cultivate Positive Emotions Through Goal-Setting and Generosity
Setting and achieving financial milestones—such as hitting a savings goal or paying off debt—creates positive reinforcement, making it easier to maintain a long-term financial mindset.
Generosity is one of the most powerful ways to cultivate positive emotions. By embracing generosity, you naturally extend your financial time horizon as the positive emotions it generates reinforce long-term thinking. As the saying goes, “I have never met an unhappy generous person.”
2. Practice Mindfulness and Stress Management
Since negative emotions shorten financial time horizons, stress-reducing activities like exercise, prayer, meditation, and proper work-life balance can improve financial decision-making.
3. Use Psychological Interventions to Improve Financial Planning
Studies suggest that positive psychology interventions (PPIs), such as writing about your “best possible financial future” or “financial gratitude journals,” can enhance financial planning habits.
4. Surround Yourself with Positive Influences
Entrepreneurs and investors who network with forward-thinking, optimistic individuals are more likely to maintain a long-term perspective on financial growth.
5. Avoid Impulsive Financial Decisions During Emotional Lows
If you’re feeling anxious or overwhelmed, postpone major financial decisions until you can reassess with a clear, positive mindset.
Final Thoughts: Influence Your Emotions, Influence Your Wealth
For entrepreneurs and professionals, financial success isn’t just about spreadsheets, budgets, and investments—it’s also about emotional intelligence. Recognizing how emotions influence financial planning can help individuals build resilience, expand their financial time horizon, and ultimately achieve greater financial well-being.
The next time you make a financial decision, take a step back and assess your emotional state. Are you thinking broadly, setting long-term goals, and investing with a long time horizon? Or are you reacting to short-term stress and launching into a fight or flight behavior that leads towards poor financial health.
By Shane Enete, Contributor
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Prepared by Broadridge Investor Communication Solutions, Inc. Copyright 2021.