Once upon a time in Canada—okay, right now—about 50% of us are losing sleep over our finances. According to FP Canada (2024), money worries are keeping us up at night, leading to depression, stress and anxiety.
Enter Financial Therapy: The Counsellor for Your Financial Plans
Imagine if you could talk to someone about your money worries, just like you’d chat with a therapist about life’s big dilemmas. That’s the magic of financial therapy! It’s a fresh approach that combines finance and psychology, helping you tackle those money-related issues head-on. Think of it as a supportive space to explore your relationship with money and how it affects your financial plan and investment decisions.
Why Financial Therapy Matters
Money stress can impact many areas of our lives, including our relationships with loved ones and our overall mental well-being. Many of us develop unhealthy attitudes toward money that only make things worse. Financial therapy dives into these deeper issues, helping you cultivate a healthier relationship with your financial journey.
Artificial intelligence and an abundance of information have transformed investing, making it easier for individuals to access data and insights. Consequently, investors are increasingly gravitating towards passive strategies, resulting in a decline in the overall cost of investing (Malkiel, 2019). That’s a great thing! The less we spend on investment management fees, the more we keep for ourselves, freeing up funds to pursue other financial goals.
Traditionally, financial advisors were seen as number crunchers and investment experts. However, as AI takes over these tasks and we learn more about human psychology, it’s clear that emotions, beliefs, and biases significantly impact financial decisions. Knowledge and plans aren’t enough; many investors struggle because of their mindset. Understanding these psychological factors can empower individuals to make lasting changes in their financial lives.
After the financial crisis of 2008, the concept of financial therapy was introduced in the US, aiming to humanize the financial planning process and deliver truly human-centric, value-driven advice (Kahler & Smith, 2016). Inspired by this shift, I set out to learn from the best in the industry. How can we genuinely help people, improve their lives, and facilitate lasting change?
Research shows that around 20% of people benefit from regular external financial advice, while the other 80% need more coaching and guidance (Kahler & Smith, 2016). It’s like realizing that some people can ace a pop quiz, while others need a bit more prep time!
Exploring Relationships with Money
Our relationship with money is complex and often shaped by our upbringing, experiences, and societal influences. Some might see money as a source of security, while others might view it as a source of stress or even shame. This relationship profoundly impacts how we approach our financial plans and investment decisions.
For example, if you grew up in a household that emphasized frugality, you might be overly cautious about spending or investing, potentially missing out on valuable opportunities. On the flip side, someone who experienced financial abundance might struggle with impulsive spending or a lack of financial planning.
Did you know that studies have shown that about 70% of lottery winners will blow through their winnings within just a few years? Similarly, a report from the National Endowment for Financial Education found that approximately 60% of individuals who receive large inheritances will spend or mismanage that money within five years (National Endowment for Financial Education, 2013). For some, having money can actually be stressful, leading them to spend it as quickly as possible in an attempt to alleviate that pressure. Understanding these patterns is crucial for making informed financial decisions.
The Role of Cognitive Bias in Financial Decisions
Cognitive biases—those pesky mental shortcuts we all take—can significantly impact how we manage our money. Two common biases that often affect investors are loss aversion and status quo bias.
Loss aversion makes us fear losing money more than we value gaining it, leading to overly cautious investment strategies (Tversky & Kahneman, 1991). This fear can prevent individuals from taking necessary risks that could benefit their long-term financial health.
Status quo bias is another hurdle. This bias makes us cling to familiar patterns and companies, even when they no longer serve our best interests. Investors might hesitate to explore new opportunities or make necessary changes in their portfolios, which can compromise their long-term financial well-being. Financial therapy helps you identify these biases and understand how they affect your decisions, empowering you to make choices that align with your true goals.
What Does a Financial Therapist Do?
So, what can a financial therapist do for you? Here’s how they help you navigate your financial landscape:
- Understanding Your Money Emotions: Just like we have feelings about relationships or work, we also have emotions tied to our finances. A financial therapist helps you identify and explore these feelings—whether it’s anxiety, guilt, or shame—so you can better understand their origins.
- Identifying Financial Behaviours: Some of us may have habits like impulsive spending or an intense fear of spending at all. A financial therapist can help you recognize these behaviours and the underlying reasons for them, especially during life transitions or unexpected financial windfalls.
- Setting Realistic Goals: Whether you want to save for a dream vacation, plan for retirement, or transition your business, a financial therapist helps you set achievable goals and creates a clear path to reach them.
- Improving Communication: Money can be a tricky topic, especially within families. Financial therapists teach you how to discuss financial plans openly and honestly, which can help prevent conflicts and misunderstandings.
- Building Financial Skills: Not everyone feels confident managing money. Financial therapists can educate you on budgeting, saving, and investing—essential skills for navigating your financial journey. With only a handful of financial therapists in Canada, you’ll get personalized attention to develop these skills without any hidden agendas.
How Is Financial Therapy Different from Financial Advising?
Here’s the difference: financial advisors typically focus on the numbers, helping you invest and save for major life goals. They often don’t delve into the emotional side of money. Financial therapists, however, explore both the emotional and financial aspects, helping you understand why you might be struggling and what you can do to change those patterns.
Real-Life Examples: Money Woes to Money Wows
Imagine a family constantly stressed about their financial plans, afraid to spend even on necessities because they’re worried about their future. A financial therapist could help them confront those fears and develop a plan that alleviates some of their anxiety.
Or think about a couple that frequently argues about finances due to different spending habits. A financial therapist could facilitate better communication, helping them understand each other’s perspectives and find common ground.
Conclusion: A Happier, Stress-Free Financial Future Awaits
In short, financial therapy is about understanding the emotional landscape surrounding money. By addressing these deeper issues and recognizing cognitive biases like loss aversion and status quo bias, it can help you manage your financial plan and investments more effectively and lead a more fulfilling life. Whether you’re dealing with financial anxiety, unhealthy spending habits, or family conflicts over money, financial therapy offers tools and strategies to enhance your financial well-being.
So, why not take a step toward a brighter, less stressful financial future? Your financial plans—and your peace of mind—will thank you!
References
FP Canada. (2024). Financial stress and well-being: A 2024 survey of Canadian adults. https://www.fpcanada.ca/docs/professionalsitelibraries/docs/default-source/financial-stress-index/2024-financial-stress-index-report.pdf?sfvrsn=cd9335c7_3
Kahler, R., & Smith, M. (2016). Financial therapy: Theory, practice, and research. Wiley.
Malkiel, B. G. (2019). A random walk down Wall Street: The time-tested strategy for successful investing (12th ed.). W.W. Norton & Company.
National Endowment for Financial Education. (2013). NEFE study reveals shocking truth about wealth. www.nefe.org
Tversky, A., & Kahneman, D. (1991). Loss aversion in riskless choice: A reference-dependent model. Quarterly Journal of Economics, 106(4), 1039-1061.