It’s common sense that you shouldn’t make important decisions when you’re feeling angry, sad, stressed – or any other polarizing emotion.
Because as we’ve all experienced, our temporary feelings can significantly cloud our judgment and cause us to make decisions that we normally wouldn’t.
But are we always consciously aware when the decisions we’re making are emotional?
When it comes to our personal finances, emotions may play a much larger part in our decision making than we realize or want to admit. There’s no question about it – money is inherently very emotional.
After all, our money enables us to support the people we love, realize our dreams and feel safe and secure. On the other hand, many people feel stressed out or overwhelmed when it comes to managing their finances.
No matter where you lie on the emotional spectrum, taking control of your finances starts with understanding how your emotions may be impacting your financial decisions. Here’s a look at five ways:
1. Jealousy: They say comparison is the thief of joy. But it could also be robbing you of financial stability. It’s natural to experience feelings of jealousy, resentment or inadequacy when you see others driving expensive cars, buying homes in trendy neighborhoods or Instagraming National Geographic-worthy pictures from their latest extravagant vacation. But for all you know those Joneses might be sustaining their lavish lifestyle with debt. If you dwell on what you don’t have instead of focusing on your goals then you’ll never be able to afford the lifestyle you idealize.
2. Regret: Everyone has made at least one money decision they would like to take back. Whether it’s as small as spending too much on a designer outfit you weren’t really crazy about or as large as procrastinating on saving for retirement, our regrets can prevent us from making important financial decisions for fear of making the same mistakes again. But mistakes should be considered a great learning opportunity. With each misstep comes the ability to improve our financial literacy and course-correct!
3. Guilt: Maybe you had to tell your child ‘no’ again, maybe you’ve found yourself hiding shopping bags from your spouse or maybe you just received a large inheritance you feel you don’t deserve. “Money guilt” can creep up in many different ways and it becomes unhealthy when it affects our ability to make rational decisions about our money. But on the bright side, guilt can also act as a strong indicator that your spending isn’t aligning with your values or priorities, and can therefore be a helpful warning sign.
4. Sadness: If money doesn’t buy happiness why do so many of us head to the mall when we’re feeling low? Studies have shown that when we’re sad we become impatient and are willing to spend more. As a result, we’re far more likely to give up a larger future benefit (secure retirement) for a smaller, immediate benefit (new shoes!).
5. Overconfidence: Confidence and optimism are positive qualities for any investor, but if not kept in check they could lead to risky and detrimental financial decisions. Too much confidence can cause you to take chances based on a hunch or gut feeling, instead of taking an objective look at the numbers.
The important thing to take away is that your emotions are a critical piece of your financial success because they help you identify your priorities. And only then can you create a financial plan to achieve them. The trick is harnessing the emotions that help you stay on track to achieve your goals and managing the emotions that could derail you.