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Even … While the Housing and Market Indicators are Recovering!

By Rick Kahler MS CFP® http://www.KahlerFinancial.com

Two economic indicators suggest that the US economy is recovering from the recession.

The housing market is almost back to 2006 levels in most areas of the country. We’ve also seen record highs for the Dow Jones stock index.

The Money Magazine Survey

Yet, according to a recent survey by Money magazine, many people still feel anxious about their finances. They may be more optimistic about their own current circumstances, but still worry about their future or about the economy in general.

This continued anxiety despite a rosier economic outlook may not seem logical. When you take a closer look, however, it makes perfect sense.

Why the Anxiety?

For one thing, people who suffered job losses, foreclosures, or other financial setbacks during the recession haven’t necessarily recovered emotionally even if they have recovered economically. Like other traumatic life experiences, painful financial experiences can leave lasting emotional damage.

In addition, even those not directly affected financially by the recession were affected emotionally by the alarming economic headlines. Our brains have evolved to react to threats with immediate action, so these news reports triggered a fearful urge to “Do something now!” Unfortunately, some investors panicked and “did something” by selling out of the stock market at the bottom. This may have reduced their anxiety in the short term, but it increased anxiety in the long term as they wrestled with when to get back into the market. Even some who did nothing still experience a lingering sense of anxiety and stress.

Still Filled with Angst

Now that the news is better, though, why aren’t we over all that angst?

For one thing, our brains don’t respond to good economic news in the same immediate way they do to fear-inducing news. A headline like “Dow hits record high” doesn’t give our brains a jolt of happy hormones equal to the shot of fear we get from “Dow hits new low.”

What we do relate to personally are changes that affect us directly, like cash in our pockets, a pay raise, or an observable increase in our purchasing power. Many people aren’t necessarily seeing those affects right now.

Example:

To illustrate this, two of the most significant economic indicators—the housing market and the stock market—don’t affect the vast majority of us on a daily basis. Unless you are buying or selling a home, you don’t really notice or care about real estate values. Gas, food, and consumer goods prices affect the average household the most.

The same is true for the stock market. Some 53% of Americans don’t have any money invested in stocks at all. Even if you do, an increase in the overall value of your retirement account isn’t likely to change your immediate cash flow. And if you haven’t received a raise in several years or can’t find a good job, your reaction to news of a record stock market high is likely to be, “So what? Things still aren’t that good for me.”

To reduce anxiety, then, what we really need is an improvement in our personal circumstances. That change may be a tangible financial one like finding a better job or getting a raise.

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Assessment

It also can be a change in focus. You might choose to pay less attention to things you can’t control, like news reports about the economy. This gives your brain less exposure to information that feeds its fear. Another option might be to focus on what you can do: building up an emergency fund, paying down debt, or cutting spending in order to contribute more to a retirement account. In that way, you can turn anxiety in your favor, using it as a motivator to improve your financial situation.

Related:

• More on Money Psychology
• On Financial Therapy Rising
• Publications Related to Behavioral Finance, Economics and Money

Conclusion

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Filed under: Research & Development | Tagged: behavioral economics, Money Anxiety, money psychology | 1 Comment »