Emotions drive bad financial decision

If you were to be asked what makes you human, what would your answer be? Emotions. Out of all living beings, only humans can experience such a wide range of feelings. Emotions also play a great role in how we make our day to day decisions- such as when to wake up, what to eat and who to talk to, etc. You might think that when you make a decision about your finances, you are being logical about it. However, for all you know you might be using your emotions to decide your finances.

Research has revealed that you are born with certain intrinsic behaviors that are hardwired into your brain and these influence 95 percent of the decision you take when it comes to your finances. The remaining 5 percent is what we learn from our life experiences and education system. (1) When you have to take a financial decision under pressure or at an important juncture in life, emotions such as fear, anxiety and excitement can act as triggers and lead to imperfect decision making. So, can you afford emotional financial decision making? The answer is no.

Using your emotions to guide your finances can be counterintuitive - whether you are someone who is a calm or an adrenaline junkie. It helps to be aware of what you are feeling, and how is it guiding your decision making, especially when it comes to finances. Here are a few things to keep in mind:

1. Don’t give in to the fear of missing out: Everyone in Mitesh’s office had taken term insurance. Without doing any recce or comparing different plans in the market, he bought a policy. Only to find that the premium was much higher than others. This is when a friend told him he should have bought one online, since most of them are cheaper. Do not be swayed by what everyone else is doing and above all don’t let fear lead you into emotional financial decision making. Avoid herd mentality. You are unique and so are your circumstances and hence your financial decision will be different from the next person.

2. Avoid haste when in stress: Stress can lead to a financial apocalypse if not kept in check. Take a few deep breaths and relax, when your finances make you feel stressed. Whether it is not having saved enough, or not being insured enough, do not take a decision under stress. Once you are in a calm state of mind, rethink the situation and your response to it. Ask yourself: do I need to react to this immediately or can i take some time to make a decision that is in my best interest? Be proactive, not reactive.

3. Be emotionally aware: Allowing yourself to feel the various emotions that you are going through can help you avoid emotional financial decision making. Sounds unbelievable right? Denial will only take your farther from your emotions. You will not be able to identify what triggers negative emotions such as anger and anxiety and control them before they become overpowering. It is important not to let your feelings get so strong that they hinder your judgement and you end up making a wrong financial decision

4. Set goals for yourself: If you don’t have a destination in mind, what use is a map? Similarly, if you have mastered the art of handling your feelings, but do not have financial goals, both long term and short term, you could end up using your emotions to guide your finances. So sit down and write clear, concise, time bound goals for financial milestones that you want to achieve in your life. Use a disciplined approach to follow through these goals and see them through. This gives direction to the whole process of financial planning.

Finally, it is important to dig deep and ask yourself what values do you hold close and how do they align with your financial goals. This together with a greater emotional awareness is the key to making better financial decisions. Ones that are less emotionally driven and more realistic and goal oriented. It is true that the future is uncertain. Accept this truth and take your finances in your hands by being in control of your emotions.

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