Emotion regulation and financial health

What is emotion regulation and why is it important to my finances?

Emotion regulation is the process by which people control the emotions they have, when they have them, and their behavioral response to those emotions. This means that emotion regulation can help you determine your response to an emotion, your non-response to an emotion, or determine your internal response to an emotion.

Our ability to exert control over our responses to emotions has been linked to better mental health outcomes like lower levels of depression and anxiety. This ability also has a bearing on what kinds of financial behaviors we engage in, financial decisions we make, and our relationship with our money more generally. In fact, research has linked strong emotion regulation skills to higher levels of financial well-being.

So, what does emotion regulation look like in real life?

Someone with strong emotion regulation skills is able to consciously acknowledge and react to emotional states, and these reactions are likely to be aligned with the individual's overall values and characteristics. For example, someone may begin to feel anxious at the news of a dip in the stock market. If this person is skilled at emotional regulation, they will acknowledge their anxiety and then make a decision about what to do in response based on rational thinking, their knowledge of the situation, and their values. Their response will likely to be leave their money alone, knowing that fluctuations in stock prices are normal and expected.

In contrast, someone with weaker emotion regulation skills will be consistently at the mercy of their emotions - unable to control responses to high or low moods. These individuals are also more likely to engage in self-destructive coping strategies like excessive spending, drinking, or overeating in response to their emotions. If the person noted above were less skilled at emotional regulation, they may feel anxious, and decide to sell off their stock at the low price in order to relieve their anxiety in the moment and prevent feeling this negative emotion again in the future.

And how does this affect my finances?

Simply put, emotion regulation comes into play any time we want to prioritize a long-term goal over a short-term desire. In the realm of personal finance, the application of this concept is nearly endless! Do we make an impulse buy now, or save the money for a down payment on a house? Do we keep more money in our paycheck, or divert it to retirement savings? Should we stay at a comfortable yet low-paying job, or go out on a limb applying for other higher paid positions? To make a decision in all of these scenarios, we use emotion regulation skills.

We know from research that people in negative moods tend to seek out more self-gratification and rewards than people who are not in negative moods. Studies also show that negative moods tend to lead people to prefer immediate, short-term rewards over larger long-term ones. Essentially, being in a low or negative mood can prime you to make poorer financial decisions than you otherwise might! Developing the ability to recognize your mood and its impact on your behavior can be crucial to developing and maintaining healthy finances.

If you consistently find yourself struggling with prioritizing your long-term goals and values over short-term desires, you're not alone. Speaking with a financial therapist about strategies to strengthen your emotion regulation skills can help you get your financial life back on track.