The Warning Signs of a Personal Financial Crisis

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Last week I wrote about the gravity of the increased risk of suicide after experiencing a personal financial crisis. This underscores the seriousness with which we all need to approach making financial decisions, especially those involving high-risk, speculative “investment opportunities.”

What can a person do to mitigate the potential of becoming mired in a life-shattering financial crisis? While in many ways I am unqualified to address this huge topic, I can offer some suggestions that could be helpful.

The first and most logical action is financial literacy – gaining a basic understanding of how money works. One essential concept is “Don’t spend more than you make.” Borrowing because of overspending one’s income is the headwaters of most financial catastrophes.

While borrowing for investment purposes has its place, it must be done with great care. Certain investments, like futures contracts, buying on margin, or options, inherently involve leverage and should make up only a portion of a diversified portfolio. The most popular investments for which people borrow are real estate and business opportunities; there is plenty of information available on how to do this sensibly. I don’t recommend ever borrowing to purchase investments like stocks, bonds, mutual funds, or commodities.

Learn the difference between an investment and a speculation, and don’t speculate with more than you can afford to lose. An investment is usually an unexciting, long-term hope for modest returns. A speculation is usually a volatile, emotionally intense, short-term hope for an exponential return that is supposed to quickly make you rich. Speculating with significant amounts of your capital or with borrowed money is a recipe for financial disaster.

Logic usually isn’t helpful when dealing with compulsive financial behaviors. If you understand the logic behind the advice above, and you still have a compulsion to borrow and “roll the dice” on a speculation, real estate property, or business, then the issue is probably emotional. The more strongly you hear “can’t miss,” “sure deal,” and “guaranteed” running through your mind, the more alarmed you have the right to be. Unfortunately, warnings like this paragraph are not going to help change behavior when the causation of the need to speculate is a deep emotional wounding.

Most personal financial crises have their roots in emotional wounding and trauma. While the visible tip of the iceberg is a poor financial decision, the unseen bulk is some type of trauma and unresolved emotional pain. Until this is gently uncovered and resolved, the speculative behavior will not stop.

Reaching a point of considering suicide is a clear sign of the depth of someone’s emotional pain. Poor financial decisions – even major ones – can eventually be overcome. However, that is not something that a person in deep emotional pain can see or believe. The part of them that sees suicide as a solution has a good intention of wanting to soothe and end the pain for those deeply hurting vulnerable parts of themselves.

If you are unable to change a cycle of hurtful financial behavior like going “all in” on a speculation or borrowing for the funds to do so, the best course of action is to get curious about the pain that underlies the behavior. And if your first response to this suggestion is to deny that you are in pain, that’s a good indication that you are in a lot of pain.

Working with a therapist or financial therapist can be extremely helpful in guiding you to discover the core of your behavior and help to heal the parts of you that are in such deep pain. While asking for help is hard, it could save your life.

Rick Kahler, MS, CFP®, CFT-I™, CeFT®, CCIM, is founder of Kahler Financial Group, a Rapid City, SD-based fee-only Registered Investment Advisor.

The Warning Signs of a Personal Financial Crisis

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