Are Emotions Controlling Your Finances?

Liberty Wealth Advisors |

If anything good has come from the last few years of uncertainty and volatility, it’s that many of us are seeking to become more financially literate. We’re more aware of our finances and are better at prioritizing our expenditures. We’re also more aware of how important it is to save for the future, while still enjoying the present moment.

However, when it actually comes to our actions, we aren’t always completely rational. Part of our decision-making process is emotional, and it’s this emotional aspect that can be the impetus for an irrational action or reaction. Because our emotions won’t fit into a quantifiable formula or a spreadsheet, we can’t account for their influence in a concrete way. This is important to keep in mind – it’s crucial to maintain a perspective on how your emotions influence your decision-making process.

Here are a few financial scenarios where emotions may run high, and suggestions on how to manage emotions in those contexts:

Paying Down Debt

People with credit card debt often have at least one account with double-digit interest charges. Oftentimes, when they develop a plan to systematically pay down their debt, they choose to start with the high-interest debt first. However, paying down a high-interest account can be a slog; people may feel like they aren’t making any progress. The natural human inclination towards instant gratification and positive reinforcement guides many to pay off lower-interest debts first, where it’s easier to gauge progress.

While there isn’t necessarily a bad way to pay off debt, paying lower-interest debts first may cost more in interest over time. It’s undoubtedly motivating to check things off the to-do list, so we tend to tackle smaller jobs first. However, it is often more financially prudent to pay off the higher-interest debt first, and then move on to smaller or lower-interest debts. This might not feel as gratifying, but with the help of an experienced Liberty Wealth Advisors® Financial Advisor, you can generate a plan to tackle debt that is systematic, rational, and that you feel good about. Moreover, your advisor can help you stay on track through moments when emotions are running high. Longer-term, working with our Financial Advisors can help you stay out of debt once it’s paid off, and focus on meeting long-term wealth building goals that are in your best interests.

Purchase Decisions

It’s easy to create a budget on paper in a calm environment, but it’s more challenging to stick to that budget in practice. When we’re at the mall or grocery store, we can become more vulnerable to our emotions. How we’re feeling in the moment, a case of “FOMO” (fear of missing out), or the urge to keep up with trends can all come into play. Whether it’s buying a house with more space than needed, or a car with superfluous features, people can be tempted to lean into their emotions when making purchases and rationalize those decisions later.

We can help you analyze your cash flow, savings goals, and budgeting to ensure that they are on track and aligned with your long-term financial goals. If you have questions about your budget, your Liberty Wealth Advisors® Financial Advisor is a great resource to keep you on the right financial path.

Investment Decisions

Investing can be an emotional roller coaster. When markets are volatile (like now), fear and uncertainty can especially influence investors’ decision making. Volatile market conditions can also make investors feel as though they are not making progress towards their long-term financial goals. The fear of loss can drive people to sell their holdings at the worst time (sell low), and the fear of missing out on future gains can drive people back to the market at a different worst time (buy high). These attempts at market timing often come at a high price.

Markets are going to fluctuate, and focusing on the long-term is better than chasing daily, quarterly or other short-term trends in our opinion. We recommend working with a trusted financial advisor like those on our team at Liberty Wealth Advisors® to create a plan you’re comfortable with, and helps you maintain discipline through all market conditions.

Overcoming Your Emotions

There is no easy way to take emotions out of investing. Emotions are powerful and deeply personal. But you can learn to recognize and control how you respond to your emotions. The first step is to become aware of your emotions when you’re making financial decisions, and to understand what they may be influencing you to do. This discipline can help you break an emotional decision-making cycle.

The next time you have a financial decision to make, try taking a moment to ask “why am I doing this?” If you find yourself working hard to justify an action, it may be because you’re being influenced by your emotions. This can be especially true if your actions would go against a thoughtful plan developed in advance with your financial advisor. In that instance, stopping and comparing to your original plan might save you from making a financial mistake based on emotions.

It may take time and practice to ensure that emotions don’t lead to bad choices with  your finances, but with discipline and the help of a trusted financial advisor we believe your chances of long-term financial success improve greatly.

We would be honored to help you toward achieving your long-term financial plans. Please contact us any time to learn more.
 

 

 

No strategy assures success or protects against loss.

This content is developed from sources believed to be providing accurate information. The information provided is not written or intended as tax or legal advice and may not be relied on for purposes of avoiding any Federal tax penalties. Individuals are encouraged to seek advice from their own tax or legal counsel. Individuals involved in the estate planning process should work with an estate planning team, including their own personal legal or tax counsel. Neither the information presented, nor any opinion expressed constitutes a representation by us of a specific investment or the purchase or sale of any securities. Asset allocation and diversification do not ensure a profit or protect against loss in declining markets.