How Emotions Affect Your Finances

What is it about money and the heart? We try to make rational decisions about buying houses, investing for retirement, even something as simple as deciding on a household product. We think we can take emotion out of the equation.

The truth is, we can’t. There’s no such thing as a completely logical decision. Every choice we make is a mix of rational thinking and emotional desire. And that can be a dangerous cocktail when your personal finances are at stake.

What’s more, most people are largely unaware of their subconscious desires and motivations and fail to take them into consideration when making decisions. You can help to make sound financial decisions every day if you follow some simple guidelines. Even better, you can improve your decision making by taking the steps to uncover the emotion behind the money.

Here are six ways to help prevent your emotions from negatively affecting your personal financial choices.

1. Take a Minute to Think about Financial Decisions

When you make financial decisions quickly, it adds stress and anxiety to the process. So slow down. If you feel the pressure to buy, take the time to carefully review the sale and understand your options. The car deal advertised for a limited time only? It really isn’t as restrictive as it seems. You may even find another model at a lower price—if you take the time to deliberate and do some research.

When it comes to investments, making quick decisions based on the excitement of the latest market trends or TV news recommendations can lead to less than sound decisions. Buying and selling stocks frequently can lead to unexpected losses, while selecting a competitive fund with diversified assets and allowing your money to grow over time could be a more reliable approach.

There is inherent risk when it comes to the stock market so reacting to every little rise and fall in the stock market is usually a recipe for disaster. On just about every survey about relationships, money comes out at, or near, the top of the biggest stressors in a couple’s life. Yet it’s not really money that’s at the root of the problem.

Experts say it’s often a failure to join together while pursuing mutual goals. Not every discussion about finances needs to end in a fight. When you slow down, you have time to discuss purchases or financial goals, and you’ll feel better knowing you’re both in it together.

2. Set Goals and Line Up Your Financial Decisions with Them

Goals, we all have them. Or, we should. Without them, we’d make no progress. When we set goals we can then establish a plan to help us reach them. How are you going to afford your first home? Is it wise to buy the hot stock tearing up the charts? How do you know if you’re best suited for a term life insurance plan or a whole-life plan?

The decisions become considerably less complex when you have a set of financial goals guiding your life and your wallet. Think about what you want out of the future and come up with a set of goals based on that.

Do you want to retire someday? When would you like that to be? Do you want to own a home in the future? What kind and where? List out all the things that are important to you: Children’s education, protection from loss, travel dreams, anything you deem important.

Once you have a list, you’ll want to separate them into short-, medium-, and long-term goals. Then work backward and determine how to get there, based on your means and future income potential. Finally, check yourself to make sure you’re setting SMART goals , not ones that are unattainable or that will trip you up years down the road. Once your goals are in place, you will have the guidelines you need to keep you on track to a bright future, without all the added anxiety.

3. Decide Ahead of Time What You’re Willing to Lose

This tip primarily helps when investing, but it can be a useful reminder when purchasing all kinds of assets. When investing it’s important to determine your risk tolerance, since risk is an inherent part of investing. While there is no guarantee on your investment, there is a lot of potential for growth.

Determining how much risk you’re willing to weather will help you develop a diversified portfolio—tailored to your desired level of risk. By deciding how much you’re willing to lose, you won’t shoulder more risk than you should.

The same can be said for other purchases as well. When you’re shopping for a home or a car, if your heart is 100% set on a particular property or vehicle, you could end up spending more than you’d originally wanted to if you’re not willing to walk away.

If you’re on a strict budget, spend time doing your research and take the time to look at a number of different properties (or cars), so that you have a good idea of what is available and at what price. You could end up finding a gem of a property that’s right within reach.

4. Avoid the Stampeding Herd

Hear that noise? It’s the herd. Faceless investors moving rapidly in one direction, usually to a sector or stock, sometimes inflating prices in their path. It may be prudent not to follow them.

There’s actually a financial term for following investor behavior in lieu of personal decision making. It’s called herd instinct . It results in unfounded market rallies and market bubbles destined to burst one day.

Remember the rise of real estate mortgage investments that led to the Great Recession in 2008. So many brokers were approving loan applications without due diligence as investors chased after assets based on mortgages that it inflated the whole market.

5. Follow Your Instincts

When it comes to financial decisions, removing the emotion behind the money often leads to sound financial decisions, but don’t eliminate it completely. Let your intuition inform your decisions, without letting it control them.

Here’s an example of where it makes sense: If you do extensive company research before you buy a stock, you may stumble into a product, trend or marketing effort that you have particular insight into. For example, a new product being developed may not appeal to Millennials, but you can see Gen Z really salivating for it.

Maybe you work with Gen Z students through volunteering, or you’re a marketing guru in that sector. If that’s the case, your hunch could be worth exploring to making an investment.

Sometimes intuition can be a practical sense of simply confirming a decision. Say you’re looking to buy a new house in a certain neighborhood. You’ve toured the home and made a decision to go back and walk the streets around it, talking to neighbors, getting a sense of the place.

Often in settings like these, shoppers get a feeling about the surroundings. Good or bad, your intuition and instincts can provide valuable information to help you make your decision.

6. Find Your Financial Mentors

Another way to remove emotion from financial decisions is to surround yourself with good counselors, kind of like your own personal board of directors who can act as your financial mentors. You can turn to trusted relatives or your money-wise friends. Rely on them as your sounding board so you can make prudent financial decisions.

Take the time to expand your financial knowledge. There are a wealth of books and resources, from websites to podcasts. As you build your understanding of personal finance, you’ll be able to make smart financial decisions and be confident in your investing and savings plans.

And when that’s not enough, consider turning to the professionals. There are even some organizations that offer complimentary advice with an advisor, including SoFi. When you open an investment account with SoFi you’ll gain access to a team of financial professionals who can offer advice and help you determine your investing goals.

The information and analysis provided through hyperlinks to third party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.
The information provided is not meant to provide investment or financial advice. Investment decisions should be based on an individual’s specific financial needs, goals and risk profile. Advisory services offered through SoFi Wealth, LLC. SoFi Securities, LLC, member FINRA /SIPC .
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