Are Emotions Running Your Finances?
Article written by Scott M. Kahan in Stroll Chappaqua - October 2023 Magazine
You might do your research, keep a budget spreadsheet, and have every intention to approach your finances with a level head. But here’s the problem. When taking action, we rely 99% on rational decision-making and 1% on emotions. And it’s that 1% that triggers us to act.
That means no matter how carefully you’ve thought through money, you’re bound to get swayed by fear, guilt, anxiety, desire—any number of emotions you might not be able to account for. Here’s how they can show up and how to keep them from running your finances.
PURCHASE DECISIONS: IDENTIFY WANTS VS. NEEDS
Many of us get hijacked by emotions when we make purchases. We buy based on how we feel. We want things we feel we deserve—or we want to keep up with our peers. That leaves us vulnerable to acting in conflict with our best interest financially.
Before you buy, ask yourself: is this a want or a need? Wants are emotional. Needs are rational. Distinguishing between the two helps take emotion out of the driver’s seat so you can make smart decisions. With higher interest rates, can you afford that new car or extension on the house? Does that trip you’re itching to take in the wake of the pandemic make sense right now? Are you using emergency funds to renovate the bathroom or relying on credit cards to finance your lifestyle?
Good financial planning frees you from the tyranny of emotion. Identify first: what are your needs? What are your long-term goals? Do they include future purchases, like college or retirement? How much money do you need to save for them? Once your priorities are clear and you’ve set a plan to reach them, you can indulge your wants—as long as you stay on track.
INVESTMENT DECISIONS: BEWARE OF FEAR
Investing can be an emotional roller-coaster for many people. The markets have been volatile these last few years. Fear is driving people’s choices. And that’s not a good thing.
Like many investors, fear of loss might drive you to sell off your holdings—but only after the market hits bottom. Fear of missing out on gains might make you buy again—but you wait until the market is nearing or over its top, trying to stay safe. It’s virtually impossible to generate positive returns that way.
If you’re making investment decisions based on the news cycle, reacting to one dire forecast after another, consider this: how reliable are those forecasts? Perspective is important. Inflation may be higher today, but it’s come way down. The economy is better than anyone expected a year ago. The markets will always drop but always come back to set new highs. Bull markets are longer than Bear markets, and investors are always rewarded for not panicking. Your best bet is to stay the course and stay invested. Focus on the long term rather than worrying about chasing the market’s performance.
Emotions are powerful, but recognizing them can help loosen their grip. Pausing to ask yourself,” Why am I doing this?” can shift your mindset, freeing you to approach your finances clearly.