The past few months I have written about the link between stress, health, and finances. I would like to continue the discussion by focusing on how stress can impact your financial decisions and discuss some strategies to help mitigate the impact stress can have on your finances.
Stress can have many sources and it can impact our decision making process. When it comes to your finances, a poor decision can have lasting effects, further increasing stress levels. We have all heard of the fight or flight reactions, and stress can initiate these reactions, and this, in turn can affect our decision making process. We can, for example, fight by becoming aggressive and impulsive. Or we can be influenced by flight which may lead us to feelings of denial or a desire to disengage. Finally, we may freeze. In such cases, we may be incapable of making any decisions.
When faced with any of these situations, we are not acting in a rational way. We are being influenced by our emotions. To help ourselves and to bring our finances back into perspective, we can prepare a “What if” plan long before the stress occurs. This will become a playbook to follow during challenging moments of our lives.
The first step is to create a financial plan that outlines your goals, timelines, risk tolerances, and the reasons why you started investing or bought an insurance policy. You and your advisor can use this plan to determine if the original rationale is still valid and discuss why it is or is not.
Secondly, we can create a Stress Management Intervention Strategy (SMIS) that records your potential stress triggers and your potential reactions to them. At this point it is very important to be honest with yourself. If not, the process becomes less effective. Like the financial plan, this will be referenced by yourself and your advisor to help determine if stress may be affecting your financial decisions.
Thirdly, we can create a Panic Prevention Plan (PPP). This document is a note to yourself to outline actions to take if you find yourself wanting to make changes. The purpose again is to remind yourself of the original intention and provides an action plan to step back and look at the bigger picture. If changes still should be made, you can rest assured that you made a calm, rational decision by essentially telling yourself to take a deep breath and look at the facts.
I hope that this process has given you something to think about. If you want to know how to implement this 3 step process into your own finances, please feel free to contact me.
Financial Advisor & President