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What Do Emotions Have to Do with Financial Decisions?

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Every day, we make decisions about food, finances, clothes, and the list goes on. No wonder decision fatigue is such a big topic in the field of psychology

As investors, we make decisions to feel better as well. Being in on the ground floor of investing in Apple, Green Mountain Coffee, or any rising investment builds our confidence and makes us feel smart and savvy. We like it when our investments go up. On the flip side, opening investment statements when our total is going down has the opposite impact on our emotions.

Greed is often talked about in relation to money. This is the only emotion that is openly discussed as impacting financial decisions—usually other people’s decision making. Though greed is an accepted emotion to discuss relative to money, it is not the only emotion.

Yes, emotions are prevalent in decision making. However, we seldom discuss our emotions around money when dealing with friends, family, and, most importantly, our spouses. To change our financial life for the better, we have to look at the larger picture and all the emotional implications of dealing with money. Doing this, we can understand ourselves and our motivations, which enhances our experience around money.

 

How do emotions effect our financial decisions?

Our emotions can help us and our emotions can hurt us. When the stock market goes down, we may get out of an investment as a knee jerk reaction to fear of loss. We may panic when the unexpected car repair bill comes our way, thinking “There goes the vacation, new clothes, or sports activities I was looking forward to.” Or even worse, we may spend more money, thinking “Must be time for a new car, outfit, etc.”

Making purely emotional decisions when it comes to finances can cause more damage to our financial lives than it appears in the moment. When dealing with emotions, we tend to reflect only on how we feel in the moment, and getting to feeling better is the priority. We all do it. That does not mean it is good behavior.

 

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So, how can we bypass our emotions (while still respecting them)?

Part of expanding your money knowledge is learning about your very real emotions around money and ensuring that you are not making financial decisions based on those emotions. The best way to do this is to remove yourself from stressors—good and bad—before making a financial decision. When you are not under financial stress, or when you can take some time to get centered and reflect, dig below the emotion and ask yourself:

  • What feeling do I have now about my finances?
  • What step(s) do I want to take around my finances? Why?
  • What feeling do I anticipate if I take the action(s)?
  • What emotion am I trying to avoid?

Finally, delay any action for at least 24 hours. The pause in time often allows for the impulsive reaction to dissipate. Then, you can use more of your rational mind and money experience to help fine tune the decision.

Emotions matter when you are making financial decisions. They just should not be the major motivation for a financial decision, unless you clearly can acknowledge the reason why your feelings should outweigh the rational and financial facts.

Taking the time to ask yourself the above questions will help you sort out your reasoning for financial decisions. You can understand your emotions and pattern of money moves as a way to know yourself better. Most importantly, you will be more grounded and more at peace with your financial life.

Want to Read More? Start with any book by Olivia Mellan, Lynne Twist or Jerrold Mundis

Learn More? www.MoneyPeace.com

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