Emotions. They are good indicators when it comes to better understanding your relationships or enjoying your life, but they aren’t so useful when it comes to making financial decisions. Basing your finances off of an emotion — whether it be anxiety, anger, fear, or even excitement — can have devastating consequences. It’s not just that you have to learn to manage your finances without using your emotions, it’s best to understand why these emotions get in the way of sound financial decision making.
Let’s look at how some emotions play a negative role in our financial lives, and some ways to overcome the overwhelming sense of emotions to make more sound financial decisions.
Psychologists say that it is never a good idea to make a decision out of anger. This is especially true when it comes to making a financial decision, as anger is fuel to the fire of burning away your money.
But this is easier said than done. Even the great Warren Buffett has a history of letting anger get the best of him. Buffett recalls that his purchase of Berkshire Hathaway was his “dumbest” mistake because it was done out of anger. In the 1960s Buffet had a tentative deal to sell his Berkshire stock back to the company at a set price. When the company attempted to squeeze Buffett on the price, he got angry. “So I went out and started buying the stock, and I bought control of the company, and fired [former Berkshire CEO] Mr. Stanton.” While Berkshire went on to be a billion-dollar business and make Warren Buffett the man he is today, he doesn’t dispute that his actions taken out of anger were a mistake.
How can you ensure not to make a decision out of anger? If you feel the emotion of anger coming on, stop what you are doing and don’t let yourself make any decision at all. Go for a run, talk to a friend, or do anything else, but whatever you do, wait until your anger calms down before you make your next financial decision. After your anger has subsided it is ok to move forward with the decision you were pondering now that you are in a more calm, clear headspace.
Think about the confusion that can overcome you when it comes to purchasing a new laptop or home appliance. You can look over tens or hundreds of models and get decision-paralysis because of how many options you have. This is just one example of a financial decision that can lead to confusion.
Unlike decades past, these days, there are hundreds, if not thousands of different financial products to choose from. All of these choices are enough to make your head spin. At last count, there are over 7,500 stocks and 5,000 exchange-traded funds to choose from when it comes time to make an investment. Imagine trying to do research on each one of them!
You can combat confusion by taking a careful, well-thought-out approach to investing. List factors that are important to any financial decision you are making. These can include the liquidity of an investment to the price and longevity of a home appliance. Then, do research on your options to determine which options will be better for you based on the factors you previously listed. Don’t know how to do your own financial research? Get a solid financial education so that you can learn what is right for you.
Financial decision making on its own can produce major anxiety for anyone. These decisions may determine what college your child can attend, how quickly you can pay off debt, and even what age you will be able to retire. The majority of people feel stressed about their financial situation, making anxiety a difficult emotion to quell. Professor Megan McCoy, a marriage and family counselor noted the many ways that the average person is overcome by anxiety when it comes to dealing with their finances:
“You may be worried: What am I forgetting? What if I mess up? What if the market crashes? You can’t just fix the spreadsheet. You have to fix your mental outlook, your beliefs, your cognition around money, as well. Otherwise, you’re only fixing half the problem.”
When it comes to investing, there is often a risk of losing money. The idea that you could lose your hard-earned money can cause significant anxiety in some people, so much so that they may not invest at all. Unfortunately, anxiety in this way causes people to make poor financial decisions. Anxiety causes you to only think about the downside without contemplating the upside. Someone with anxiety would probably not even trust a bank, and instead opt to keep their money in cash tucked under their mattress.
Much like other emotions, you should never make a financial decision if you are feeling anxious. Imagine you are talking to a financial advisor who is pushing you to invest in something you don’t understand. If you start to feel anxious, simply tell the advisor you would like some time to think it over. Always remember: it’s your money, so don’t ever let anyone else make you feel anxious about making a decision when you aren’t comfortable.
There are risks in any financial decision, no matter what it is. But don’t let these risks stir up the anxiety that could cause you to make a decision you regret.
Excitement and Love
Do you find yourself so excited about a new investment opportunity that you want to invest your entire savings? Not too fast: this excitement should be a red flag that your judgment is impaired. As it turns out, a headspace of overexcitement or extreme joy might not be the best state to make a decision. Unfortunately, it is easy for even the best financial professionals to fall in love with, and be emotionally attached to a financial decision. It is a sense of pride that often blinds one to the cold hard facts of a financial decision.
If you ever find you have fallen in love with an investment, stop immediately! The feeling of love is an overwhelming one that is clouding your judgment. Take a stock for example. You may find that you have fallen in love with a particular stock, and therefore want to invest all your money in that stock. So you start to buy the stock without any regard for its price, and only realize later, you completely overvalued the underlying company because you fell in love with the stock.
If this has happened to you, the best thing you can do is to admit when a financial decision made out of excitement has gone wrong. Don’t ever be afraid to part ways with an investment just because at one time you were in love with it. Always examine the information today instead of how you previously felt.
In other situations, you may find yourself making an unwise purchase because of your love for a sporting event or artist. This is exactly what happened to one couple, who sold their motorbike and jewelry just to watch their favorite football team, only to realize they couldn’t actually afford the tickets. Don’t be like this couple and let your love something cause you to make a purchase you will regret. Instead, create a budget and follow restrictions on your spending. This way you will be able to still enjoy the things you love, while spending a reasonable amount of money that you can actually afford.
It is often said that fear is the biggest motivator in life. Fear of starvation for you and your family will cause you to work harder, while fear of ill health might cause you to workout and take care of your body. Unfortunately, the motivator of fear doesn’t do well in the financial arena. Financial decision making out of fear will almost always result in a bad result.
One of the biggest fears is the dreaded FOMO, or, fear-of-missing-out. FOMO when it comes to investing is especially toxic, as it causes people to make rash decisions without the adequate knowledge or information.
Take the 2000 dot-com bubble as an example. Technology stocks were booming through the roof, and all of the talks was that they would only go higher. This causes many people to purchase stocks at all-time high prices without thinking. These stocks were extremely overvalued, and it wasn’t before long that the entire market crashed, generating losses across the board.
Don’t let fear get in the way of your decision-making process. Always do your homework, make an informed decision, and don’t let the decisions of others dictate what is best for yourself.
No one is a robot
Of course, it is nearly impossible to completely remove emotions from any decision. Therefore, we aren’t advocating that you try and squash any emotion that arises in the financial decision making process. Instead, work to understand your emotions and take your time when making a decision. If you are going to rely on emotions, ensure they are relevant to the decision at hand. Don’t try and eliminate every emotion from a decision, just disregard the ones that don’t have anything to do with the decision itself. This is the hallmark of having high emotional intelligence.
All of this is to say, don’t worry if you find your emotions stirring up as you make financial decisions. What’s most important is to try and keep these emotions in check, and not let them wreck havoc on your financial decision making in the process.
*As with any investment, your capital is at risk. Investments made through Bondora are not guaranteed; therefore any assets allocated to the Go & Grow account are not guaranteed by any state fund or otherwise secured and it may not be possible to liquidate assets or withdraw money immediately. The yield is up to 6.75% p.a., but please note that the yield achieved in past periods does not guarantee the rate of return in the future. Before deciding to invest, please review our risk statement or consult with a financial advisor if necessary.