The Psychology of Money

Taking a rational approach to managing your wealth

by Cathy S. Butler, CFP, CRPC, Morgan Stanley
Cathy S. Butler

Wealth is a complex concept, and the myriad perceptions, biases and emotions you have around money can affect the financial decisions you make. Understanding these dynamics and developing strategies for making objective decisions about money can help you manage your wealth more wisely.

Understanding Your Feelings About Money
Exploring your relationship with money—what it means to you, and what you hope to accomplish with it—can help you focus on managing your wealth to achieve your goals.

Your feelings, beliefs and attitudes toward money may be influenced by many factors, including how your parents handled money and your education. They can also be shaped by your conceptions (or misconceptions) about money. For example, “You need money to make money” or “I can’t be financially successful because my parents weren’t.”

You may not realize it, but your emotions can have a powerful impact on your spending. If you’re feeling sad, buying things can make you feel better, at least temporarily. If you’re angry, you might take bigger risks or make less rational decisions. There may even be occasions where feelings of guilt cause you to try to make up for mistakes by spending money. 

Taking stock of your feelings about money—and how they affect your spending—is an important first step to not only making more rational, informed financial decisions, but imparting good money habits to your children.

Changing How You Think, Feel and Act 
Here are three tips for improving your relationship with money:

  1. Learn to differentiate between wants and needs. Recognizing the difference between what you want and what you need can help keep your spending aligned with your current financial situation, as well as your overall financial objectives. Every buying decision you make affects your ability to achieve financial security. 
  2. Talk to your family. Having meaningful conversations about money is an essential part of any family wealth management strategy—especially as an increasing number of families are sandwiched in the role of caring for both their children and their parents. Talking about money can be an empowering first step to forming a healthy relationship with wealth, and families that succeed in this are better equipped to find ways to use their financial capital to leverage the value of their family, intellectual and social capital. You might start by talking about what money means to you, why you’ve worked hard to acquire it, what responsibilities come along with it, and what your family hopes to achieve with it. 
  3. Identify your goals and set realistic expectations. Defining your goals—and developing a wealth management strategy that aligns with those goals—is another way to change how you think about money. Setting goals and tracking your progress over time also helps you set realistic expectations about your financial future. And, keeping sight of your long-term vision through the ups and downs of the markets and the highs and lows of life can help you stay the course.

Money can enhance your life, but it can be detrimental if your world revolves around it. The key to long-term wealth is finding the balance. If you need help getting started, a financial advisor can help facilitate family conversations about money and help you make informed, rational decisions about your wealth. PM 

Cathy Butler is a financial advisor at Morgan Stanley Smith Barney LLC in Peoria. She can be reached at or (309) 671-2873. For more information, visit