Personal Finance and Your Emotions

by Emily on December 5, 2011

When making financial decisions, you need to think with your head and not with your heart.  We use our emotions to make decisions on a daily basis, but when it comes to your finances keep emotions out of the decision making process. We all love money and we hate to part with it, and even though your finances are personal, be sure to check your emotions at the door.

We here at onesmartdollar.com hope that you take our suggestions and advice when it comes to personal finances, and all of these tips we give involve using your brain to make all personal finance decisions no matter how much or how small. When it comes to the stock market and trends, people have a tendency to ride on the wave of the emotion of the entire market. When conditions are bullish and the market is up, investors are likely to try to jump in on that upswing and make buying and selling decisions based on the excitement of the market. Your gains or losses in the market may only be on paper and in order to realize the potential and growth of your investments you may need to stay the course and invest for the long term. When conditions in the stock market are bearish and the stock market is losing points and not returning any gain, investors have a tendency to panic and become skeptical about their investments. By doing your research on the stocks and on market conditions or by discussing your investments with your financial adviser you can make decisions based on information as opposed to emotions. Maybe you can even make money when the market is bearish by shorting stocks, but you will not be able to do so if you make decisions based on your emotions.

Think about your spending habits: are you more likely to make purchases when you are experiencing a specific emotion? Did you have a terrible day at the office and left work and purchased a new pair of expensive shoes? Did you have a fight with your significant other and splurged on an expensive meal or bottle of wine? Or did you get a promotion, lose weight or achieve a personal goal and rewarded yourself by making purchases. Are you an impulsive purchaser or do you carefully research and shop around for the best prices for something you have been wanting to buy. Do you save up for items you want or do you purchase them the second your paycheck clears, despite other bills or debts you need to pay off? Knowing your personal spending habits will help you save money. You can recognize what emotions within yourself trigger purchases and the amount of those purchases. Of course it is nice to treat yourself to something when you have accomplished a goal or personal milestone, but you cannot be rewarding yourself on a daily basis. If buying something when your sad makes you feel happier, you need to think can I afford this. Is this purchase that I think going to make me happier going to set me back financially this month, next month, or even this year. Try to access and tap into how you are feeling when you make purchases and think about why you are making each purchase.  Once you get a grip on how your emotions are related to your spending habits, you will be able to make purchasing decisions with your head instead of your heart.

It may be hard to not make financial decisions using your head primarily instead of your emotions, but if you can learn to do so because it will help you save money. You may love that car, that house, that flat screen TV, that dress, that jet ski, but can you really afford it?  Are you getting the best price for that item, have you shopped around, done research and really thought about the short and long term financial effects of your purchase?  This may seem over analytical at first, but it can become second nature to you. Thinking with your head and saying, do I really need this, or is this a smart time to buy this now can help curb your impulse spending. Naturally there are times when we all splurge, but if you are saving money by thinking with your head before you buy, you may have already saved up the funds for times when you do splurge. Last, saving up money and working towards a goal of purchasing an item can be even more emotionally rewarding and fulfilling than buying at whim whenever the mood strikes.

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Emily

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