3 Times When Emotions Can Get in the Way of Your Finances
Personal finance usually involves a lot of logic, math, and other academics — making it more “finance” than “personal.” Because of this it can be easy to overlook some of the other factors in our lives that might be at odds with the finance principles we’ve come to trust. While the heart will continue to want what it wants there are instances when you’ll need to let your brain take over to help avoid making a major monetary mistake.
Here are three examples of times when your emotions can get in the way of your personal finance decisions:
1) The “Dream Home” Scenario
Many retailers and brands thrive off of what are called impulse buys. Usually this applies to a piece of memorabilia you may be tempted to purchase at a concert or a pack of gum you pick up at the checkout counter just because it’s there. However some of the largest purchases we make in our lives are also impulse buys and ones that are often driven by emotion.
If you’ve ever watched HGTV you know that the term “dream home” gets thrown around a lot. Some people on their various programs will even explicitly say that they’d be willing to go over their maximum budget for “the right house.” While finding a home that you’re happy with and that suits your needs is important so is sticking to your budget and ensuring that you can afford whatever house you choose. The same goes for cars or whatever else you want to buy — your budget is your budget and “need” still trumps “want.”
2) The Giving Heart
You’ve probably heard it said that you should never lend money to friends. There’s good reason for that as outstanding debts between people can be one of the fastest ways to kill even the longest and deepest of relationships. That said it can also be hard to deny money to a friend or a family member who has fallen on hard times.
Even more than the resentment that can grow when money is owed, some people might be inclined to give cash to a friend even if it means sacrificing their own financial stability. In these situation neither party is helped and it’s best to decline. While you should always think twice before lending money to a friend you shouldn’t even consider it if it will cause you a financial hardship as a result.
3) The “Experience” or “Idea” Investor
Imagine this: you walk into a new chain restaurant that you’ve been hearing about and has just reached your city. You go in, order up half of the menu, and are quickly impressed with the service and overall experience. Afterwards you go home and nab some stock for company because, based on what you’ve seen, they’re surely going to do well, right? Not always.
Having positive experiences with different businesses and recognising early trends can be a great way to pick stocks but only when coupled with actual due diligence. The same goes for investing in an idea that’s presented to you. Remember that it’s not the idea itself that will turn a profit but the execution of that idea. For stocks be sure to look at the data, news, and other indicators available to know whether it’s a good buy. As for other investment opportunities like startups you’ll want to carefully look over the business plan and financials to make an informed decision about whether or not to jump in.
Separating your heart from your brain can sometimes be a difficult task. However, in order to make sound financial decisions, it is necessary. Try not to fall for these three emotional tricks that can do damage to your finances.