Making financial decisions based on fear leads to bad outcomes. Anyone who has ever been too afraid to open their monthly credit card statement knows this to be true.
Here are three common financial fears that could be holding you back;
The fear of being judged for your financial mistakes.
The fear of taking risk.
The fear that you will never be successful with money.
Let's review how to overcome each of these fears.
Financial fear is real
Money is a scary subject for a lot of people. A little bit of fear around money is healthy, but for a lot of us, that fear has turned into daily anxiety. Fear and anxiety can consume you to the point where you spend more time worrying about money problems than coming up with solutions.
All fear is learned. Babies aren't born with the fear that they will spend their whole life living paycheck to paycheck. Financial fear is something we pick up along the way in life.
The good news is that if fear is learned, it can be unlearned.
The fear of being judged for your financial mistakes
Money is a deeply emotional issue. People feel so much pressure to make good financial decisions that they end up conflating their net-worth with their self-worth. If people have made bad financial decisions in the past, they often feel ashamed.
Shame is a powerful emotion. Financial shame keeps people from opening up and talking about money problems for fear of being judged by their financial mistakes.
This fear of judgment causes people to keep their problems to themselves. They bottle up that fear and never get exposed to new ideas about managing their money. As a result, they keep making the same mistakes and get increasingly worse outcomes.
The fix for this fear is simple, but it will be difficult for a lot of people. You need to start talking about money, including your mistakes with other people.
Step one is simply admitting to yourself that you have made financial mistakes and that you want to turn things around. Write down on a piece of paper some of the worst financial mistakes you've made, what problems those mistakes led to, and what you would do over if you had a chance.
The next step is to actually talk about your money problems with other people. Preferably with people you trust and that care about you. They don't have to be money experts. Maybe you learn some useful tips from them, but the primary goal to start is to just use them as a sounding board and get used to talking about money.
Once you rip the band-aid off and start talking about your money problems, the final step is to talk to people who can help you fix those problems. Ideally, this would be a financial advisor who will design a custom financial plan based on your goals and circumstances. If you can't afford a financial planner, there are lots of educational resources out there that can help you better manage your money.
Whoever you take advice from, remember to ask yourself these three questions before acting on it.
1. Is this person a credible and accurate source of information?
2. Is this advice relevant to my current situation?
3. Am I the intended audience for this advice?
The fear of taking risks
Many people have a fear of taking risks and investing their money. They feel better if they stick their money under their mattress or in a bank account where they can see it. While it is essential to have a certain amount of cash set aside in an emergency fund, at a certain point, you need to start taking risks if you want to build wealth.
The fear of taking risks makes some people play it safe, which ironically is riskier than actually taking risks.
Let’s say you have $100,000 in cash that you want to save and, you were considering two options.
Option 1: Invest in the stock market with expected returns of 7% per year.
Option 2: Save your money in a savings account and earn 2% interest per year.
After 30 years:
You would expect to have $811,650 if you invested in the stock market.
You would have $182,121 if you kept your money in a risk-free savings account.
These are only your nominal returns. Let’s look at the expected real returns, assuming 2% inflation each year:
You would expect to have $446,774 if you invested in the stock market.
You would have $100,000 if you in the risk-free savings account.
Inflation has eaten away all of the interest you earned in the risk-free savings account.
To avoid the “risk” of investing, you would have given up $336,774.
Over the long term, the greatest risk you can take is not taking any risk at all.
Here are some tips to help banish the fear of taking risks with your money.
Set aside at least 3-6 months' worth of living expenses in cash.
Don't risk money you might need soon. Taking risks with your retirement money is smart, taking risks with your rent money is reckless.
Try not to check your investment account balances often and don't follow day to day news about the stock market.
Use risk assessment tools to help determine the appropriate amount of risk you should take based on your personal situation.
Reduce your risk through proper diversification.
Consider working with a financial advisor or coach who can help you manage the stress of investment risk.
Finally, if the idea of investing still scares you start small. Who says you need to invest all of your money at once? Investing even $25 per month will have a positive impact, and without sending you into a panic every time the market dips.
The fear that you will never be successful with money
All financial fears stem from a fundamental fear that you will never be successful with money.
If you are struggling financially, it's easy to fall into the trap of believing that how it is today is how it will always be. This belief set up a self-fulfilling prophecy. If you don't have hope that things can get better, what is the point of making better financial decisions?
When I was in my early 20s, I had a mountain of student loan debt. I had just graduated with a degree in economics, and the only work I could find was the minimum wage job I had in high school.
There was a brief time that I was afraid that I would never be able to pay that debt off. I was so afraid of my debt that I couldn't even bring myself to look at my monthly statements. I was like a child hiding under the covers from the scary debt-monster in my closet, hoping that if I didn't look, it would go away.
Of course, the debt did not go away. The only thing I accomplished by ignoring it was missing payments, hurting my credit, and strengthening the belief that I would never pay this debt off.
It wasn't until I found the courage to take my debt head-on that my situation began to improve. That was my financial low point, and every day since my financial situation has gotten better.
Here is a three-step plan to banishing your fear of never being successful with money:
You need to find your "Why." Ask yourself why it's important for you to turn your finances around, this will act as your north star when things get difficult.
Define what financial success looks like to you. Start by simply finishing the following sentence, I will feel successful with money if...
Build a plan to achieve your definition of financial success. Adding a timeframe makes it a plan. "I want to be debt-free" is a wish. "I want to be debt-free in 5 years, and I'm going to use the avalanche method to pay off my debt" is a plan.
Banish your financial fears by meeting them head-on
The awful thing about fear is that it creates self-fulfilling prophecies. Making decisions based on fear leads to bad outcomes. Luckily, since financial fear is something we learn, it is also something we can unlearn.
The only way to overcome any fear is to confront it head-on.
If you're afraid of being judged for your past financial mistakes? Start talking about money with the people who care about you the most.
Terrified of investing your money in risky assets? Dip your toes in the water by investing just a few dollars and only risk money that you will not need in the short term.
Or are you simply afraid that you will never be successful with money? Write down why it's important for you to be successful with money, define what that success looks like, and put a plan in place to guarantee that success.
The people who take their fear head-on and make courageous decisions not based on what they can lose, but what they can gain will be successful with money.
If you're ready to master your money, don't forget to enroll in my video-based personal finance course, "Millionaire In The Making: The 30-Day blueprint" Click here to enroll.
This article is for informational purposes only. It should not be considered Financial or Legal Advice. Not all information will be accurate. Consult a financial professional before making any major financial decisions.