There are certain financial decisions that can change your life. This is the reason why you need to be careful everytime you make choices about your money. Even if you think it is a simple matter of choosing to spend or not to spend, you never know the effect of that to your future.
The perfect example here is debt. Some people buy a lot of unnecessary stuff through their credit cards. They buy items below $10 thinking that it is a small expense anyway. But if you do this $10 credit card charge every day for the whole week, that is already $70 on your card. If you do that an average of 20 days a month, that is $200 on your card. You may think that this is an expense that you can afford – ask yourself this: can you pay it back in full at the end of the month? One economic problem or an unexpected layoff can make that debt grow if you cannot pay it back. Do not be so casual about your use of debt just because it makes you feel good about spending.
To make the right decision, most of us concentrate on being rational and logical. While this is true, you need to know that our emotions also play an important role in influencing our choices. In fact, an article published on PsychologyToday.com revealed our emotions do not only influence our decisions, it may even determine them. The article mentioned the book of Antonio Damasio, Descartes Error, and how he argued that emotions are a necessity when it comes to making decisions.
Some people say we should make choices using both our head and heart. While both should work together to make a well-balanced decision, is it right for us to rely on our emotions even as we make financial decisions?
Emotional situations that require us to make financial choices
Unfortunately, there are financial choices that we need to make even when we are in a high emotional state. This is something that cannot be avoided. Our emotions and finances are too entwined to keep them apart. They will always influence each other. Our choices are influenced by our emotional state and at the same time, our financial situation can also affect our disposition.
Take for instance the idea of retail therapy. According to an article published on BaltimoreSun.com, buying as a form of therapy is real especially for those who are feeling very sad. The article discussed the results done by researchers from prestigious universities that include Harvard and Columbia universities. To be specific, the study revealed that sad people will most likely look for financial gratification even if it means they will lose more money as compared to waiting before they make a purchase. That is because these people do not have as much patience and would like to seek rewards to help themselves feel better.
It is human nature to want to remove ourselves from a bad emotional state. Sometimes, desperation leads us to go for the easy way out – even if this is not necessarily the best option for our finances.
Unfortunately, there is nothing that we can do to guarantee that everything will always be good. It is a fact of life that things happen – both good and bad. But what you need to be on the look-out for are the emotional situations that will require you to make financial decisions. That way you can prepare for them so you will know what to do when they happen.
Here are some of them.
- When someone is sick. Probably the most popular situation wherein you are in a high emotional state and you need to make financial decisions is when you or someone you are financially responsible for is sick. The combination of worry, anxiety, sadness and apprehension can really put your emotions in a heightened state. How can you make the important decisions that you need to make in order to pay for healthcare costs? Take for instance this example. Your child contracted a serious illness that requires hospitalization. Because you are so worried about your child’s health, you will not stop to consider the health care options that are more friendly towards your finances. You are willing to spend a lot – even to the extent of getting into debt, just to make sure that your child gets better. While there is nothing wrong with that, you have to consider what will happen in the future. What if this sickness is just the beginning? If you exhaust your financial resources now, what will you spend for future treatments? Although you are feeling worried, you should not make rash decisions. Know the sickness first so you are sure that your finances can sustain the expenses for the full treatment.
- After losing someone. The loss of a loved one is devastating. The grief and sadness can literally paralyze you. It is understandable that you cannot make important decisions at this point. However, there are times when you need to make money choices. For instance, you need to choose the funeral services that you will use. How much should you spend? Not only that, what will you do about the hospital bills associated with their passing? How will you pay it back? There are several things to arrange after a loved one passes on. You need to think about all of that and your emotional state will make it difficult for you to do that.
- After a failed relationship. This can refer to divorce or separation from your partner. This can be a painful experience. Depending on the cause of your separation, you can feel despair, betrayal, sadness, anger, frustration and a lot of other negative emotions. It is difficult to make your move to fix your finances – especially if you had been making joint financial decisions with your spouse or partner while you were together. How will you split your assets? How will you take care of joint debts? These are important considerations and you may not be in the best emotional state to handle them. Money matters during divorce or separation can turn ugly. You need to try and be rational about it so your anger will not rule over your choices.
- Economic improvement. This is a deviation from the other three because this results in a positive emotion. When you experience an improvement in your financial situation (e.g. job promotion or a salary increase), you tend to make irrational financial choices too. For instance, we tend to celebrate after a salary increase. That is because we feel like we deserve to reward ourselves – even if the financial increase has yet to happen. This is your right but sometimes, it is not the best for your financial situation. When we are happy, our feelings can also lead us to make irresponsible decisions.
Tips to make good decisions about your money even when emotionally distressed
Most of the time, people are advised to not make financial decisions when they are feeling a strong negative emotion because they are more likely to make rash choices. Since it is a negative feeling, we usually want the feeling to end as soon as possible. That leads us to speed through the decision making process. It results to a poorly thought out choice that could compromise your financial position.
According to Wikipedia, decision-making should be a rational process. However, it leaves a lot of room for emotions to influence it. When considering emotions while making choices, it is sometimes believed to distort reasoning. This is why it is not encouraged especially when the decision requires logical thinking – something that financial decisions usually do. The page from Wikipedia also discussed that although this is true, there are cases wherein emotions should be considered when making choices.
The bottom line is, although we are discouraged from making financial decisions while we are feeling an emotional high, it is something that we cannot really control. As discussed earlier, there are situations that force us to make decisions about your finances even if we are going through a very emotional experience.
Since there is no avoiding these situations, you need to at least figure out how you can make better personal finance decisions despite your emotional state. Here are some tips that can help you through these situations.
- Acknowledge your emotions. First of all, you need to accept that you are in an emotional state. Do not ignore it. Instead, acknowledge what you are feeling because that is the only way that you can think your way right past it.
- Have a plan and be prepared. It is always important that you have a plan for any event in your life. For instance, having a health insurance can really help when someone is sick. That way, you do not have to worry about the full cost of getting the medical help that you or a family member will need.
- Let go of what you cannot control. Sometimes, the negative emotions that we feel are caused by events that we have no control over. In order to let go of these feelings, you need to learn how to accept that there are some things that you cannot change. For instance, if you lose someone, that is over and done with. It may seem callous to say so but death is a part of our existence. Life goes on even after we lose our loved ones. Acceptance of the situation will allow you to think clearly even as you feel different emotional highs.
Follow these tips so your financial decisions will still be rational even if you are currently feeling heightened states of emotions.