How Emotions Can Influence Your Financial Decisions

How Emotions Can Influence Your Financial Decisions

PNB MetLife 01-02-2016 01:49:40 PM
How Emotions Can Influence Your Financial Decisions

If you think that emotions don’t affect financial planning, you’ll be surprised. As negative emotions will affect your mental state, they can result in bad investment options. This concludes a study by a group of psychological scientists from Columbia University and the Harvard Kennedy School of Government.

Research has found that fear and sadness are experienced at a more intense level than positive emotions. In fact, both feelings can be felt 2.5 times stronger. This means you are more likely to splurge when feeling low as compared with having a good day. When you are feeling a negative emotion, a biological response creates an urgent need to deal with it. Since making financial decisions are often difficult, it’s only natural that the process involves unsettling emotions.

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Balance your emotions and financial decisions

The good news is once you have identified these negative feelings, it can motivate you to come up with creative solutions to correct any financial problem. Some of these negative emotions are listed below, along with suggestions on how they can be eliminated.

SADNESS

According to the study, sadness induces impatience and narrow-mindedness. When making decisions on financial planning, this emotion can cause a person to have ‘present bias’, where they end up favouring immediate gratification over future rewards. The skewed decision rests on short-term gains instead of long-term benefits.

Tackle it:
Talking to a friend or a counsellor can do wonders to put your sadness aside and view the world from a different perspective. Another way is to write down your goals and your financial risk tolerance. That way you can better differentiate between what is an impulse purchase and what is something that you actually need. This also applies to how you treat investment options, helping you make a rational decision when deciding between holding on to an investment to generate better returns or selling it off for a quick buck because you’re having a bad day.

ANXIETY

People often hesitate when it comes to making investment decisions. One reason for this is fear. They are afraid that their decisions will result in a loss of capital and that they will have to rely on family and friends for money. Another reason is their lack of awareness. Their limited knowledge on personal financial planning lowers their confidence when it comes to making such decisions.

Tackle it:
Set reminders and automatic deductions so that regular bills don’t increase your anxiety level. Another solution is to create a list of bite-sized tasks to help you organise your finances. If you find the nitty-gritty of planning finances overwhelming, consider consulting a trusted financial planner who can weigh the potential risks for you. This will take some pressure off you. Do also make some time to browse financial magazines and blogs regularly to be more informed and financially savvy. They will help you with financial jargon and keep you updated on trends.

ENVY

It’s natural to be envious of other people’s possessions. But sometimes this emotion can lead to jealousy, embarrassment, and the need to measure up, causing you to spend beyond your means, while affecting your personal financial planning disastrously.

Tackle it:
Begin by creating a list that separates your needs from your wants. This will help you accurately picture your situation. It will prevent you from comparing your lifestyle with that of a neighbour or a friend, since every lifestyle is unique. Do also take note of your material goals and start saving for them. This helps to keep your spending habits in check and ensures that you don’t overspend.

OVER-CONFIDENCE

Some people tend to be too optimistic when it comes to their investment decisions. They have no concept of investment planning, often because they don’t believe in the system or think that their investment will somehow work out.

Tackle it:
Get your credit report out in front of you. Do you have sufficient savings for your retirement? How about medical emergencies? Are you insured? Are you really ready to make this financial decision?

Confidence is good but it shouldn’t cloud your view of reality. "So don't deflate your hopefulness – just pepper it with a little bit of reality. Confront the numbers, one at a time,” advises Amy Jo Lauber, president of Lauber Financial Planning and author of Living Inspired and Financially Empowered. Consulting a financial planner can always help you to regain perspective over your investments.

Finance may be the stuff of numbers but emotions can create chaos in this realm. Once your negative emotions have been identified, you can take the appropriate steps to ensure the practicality of your financial decision.