Personal Finance 

3 Ways Fear Can Harm Your Finances

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FEARWe don’t often think of fear as something that can negatively impact our finances. However, our fears and biases can wreak havoc on what’s happening with our money.

You might not realize it, but fear might be having a negative effect on your money. Here are 3 ways that fear might be harming your finances:

1. Fear of the Truth Can Slow You Down

One of the hardest things to do is face the truth about your finances, especially if you are in debt. Daniel Egan has a graduate degree in Economics from the London School of Economics, and studied psychology as well. He worked for Barclays in the Behavioral Finance division, and is now with Betterment. “Once you get past what people think of as a management amount of debt, it can be extremely uncomfortable to look at it.”

Egan says that this fear can put your finances on hold, since you are afraid to face the situation, and you might put off getting out of debt. If you aren’t able to face the truth about your finances, you can improve the situation.

2. Fear Prevents You from Taking Action

We hear about being paralyzed with fear, and this applies to money as well. Egan says that fear of the stock market might keep you from investing effectively. He also points out that fear of the results of certain actions, like asking for a raise, can harm your long-term wealth potential. “This is one of the areas where there is a lot of experimental and observational evidence,” Egan points out. “Fear plays a role that is a little more subtle in these cases. We are afraid to ask for what we think we are worth.”

3. Fear of Risk Leads to Missed Chances

While you need to manage your investment risk, it’s also important not to be so afraid that you miss out on certain chances. “The perception is that the stock market is too risky,” Egan points out. “So you never get invested, even though it would be appropriate.” He also points out that there are risks involved in keeping your money in a “safe” place. “Inflation is a risk,” Egan says, “but many people don’t recognize it.”

Even more disappointing is when you leave the stock market too early. People tend to jump ship when the market is sinking — even though this is the opposite of what you should do. “The problem with buy low, sell high from a behavioral perspective is that you are supposed to be buying when it’s scary for you to do so,” Egan says.

However, you do need to be aware that this can be a double-edged sword. You can’t be so afraid of missed chances that you end up making moves out of desperation. Don’t let your fear of being too afraid lead you to invest in a scam.

When You Should Be Afraid

While it’s true that fear can harm your finances, it’s not always bad to use fear as a mitigating factor. In some cases, excessive exuberance can be problematic as well. There is such a thing as taking too much risk. You want to have just enough fear to temper your situation if you have a high emotional risk tolerance. A healthy amount of fear can also help you protect your portfolio long-term with the help of appropriate diversification.

Egan also points out that a little uncertainty and fear about the future can be healthy for your finances, when properly directed. “People don’t like to think about negative life events,” he points out. “But you need to. You need to be a little afraid of what will happen if you aren’t ready.”

As a result, Egan suggests estate planning, as well as building an emergency fund. “Identify these problems in advance. You have a better chance of having a more calm conversation, and a better ability to plan.”

(Photo: Kevin B 3)

{ 5 comments, please add your thoughts now! }

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5 Responses to “3 Ways Fear Can Harm Your Finances”

  1. Oh lord, isn’t this the truth! Fear is definitely the reason people never succeed at doing what they want or need to do.

    The thing is, I don’t think fear itself is necessarily bad. It’s when we try to avoid it. For instance, we don’t want to look at our finances because we are afraid of what we will see and the fear it will bring.

    If you just face the fear, look at where your at, cry if you have to, and than keep going, you will be much better off. The point is, don’t ignore the fear, don’t let the fear stop you, and don’t run from it either.

  2. bloodbath says:

    I am afraid of debt so I have none except for my mortgage – this is good.
    But I’m also afraid of risk and investing and I have made poor decisions bailing out when I should have stayed invested. Over a 35 year period I estimate I lost out on on over 1 million dollars by being too careful.

  3. Jim M says:

    I am constantly battling my aversion to risk with the knowledge that some losses along the way are inevitable – even for storied investors like Warren Buffett. Thanks for the article.

  4. Shirley says:

    I THINK I have just enough fear of risk to be reasonably careful in most everything I do.

  5. TRE says:

    I used to be afraid to face my debts. What most people don’t do is identify the “why” behind why they are afraid. Believe it or, not, it’s not the same reason for everyone. My “why” was that I did not like to look at large numbers. If I owed $7,000 for something that was overwhelming for me to think of paying back in addition to my other debts, student loans and daily living; however, when I break the payment up into smaller pieces, it’s more reasonable. If I make it my goal to pay back $1,000 for every 3 months its only $333.33 p/mth. If I divide that into 4 weeks, its only $83.25 p/wk. I find this more manageable and less stressful. It also helps to know a lot of your debtors will work out payment plans with you and even settle. It does take you initiating a phone call though!

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