How emotions influence your financial decisions and ways to deal with it

How emotions influence your financial decisions and ways to deal with it

Emotions play a very active role in your financial decision-making process. Read more to learn how and the ways that can help you to avert major financial setback due to them.

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When we say emotions and finances, we feel that these two terms are poles apart. We think that all the money matters are generally taken with utmost thought, consideration and with logical reasoning. However, we work hard for our family, their future and our goals. So how do we expect that any decision including finances, related to our family and dreams; which have high emotional value, would lack the emotional aspect?

Traditional Economics focused that people are rational, which does not hold true in real world. When it comes to money, people aren’t entirely rational. The concept of Behavioral Economics then came in to being. Behavioral economics is about understanding common decision mistakes that people make and why they make them. Emotions are just a part of the whole behavioral aspect. Let us take a simple example to see how people make mistakes even though they know what’s right and what’s wrong. We all understand that to earn profit we need to buy at low price and sell at a higher price. But you must have heard so many stories that people have bought stock when the markets are almost at the peak and then sold them after suffering a loss.

4 major emotions and their impact on your finances:

  • When you have fear: Fear is an emotion which blocks you from moving ahead. Taking an initiative or moving forward gets difficult as you don’t know what’s in store for you. So, starting an investment for few might be a hard decision as for them it’s an unknown territory. However, overcoming this fear is very important, as you know, ‘Darr ke aage jeet hai’.
  • When you are sad: Going on a shopping spree whenever you feel sad? Think how hefty it can get on your pocket. Some feel relaxing after spending a couple of bucks on themselves. After all it’s called retail therapy. However, it might do worse than good in long term.
  • When you are angry: Anger is a very powerful emotion. It is difficult to take a sound decision when angry. One might take an investment decision and when it doesn’t work out, just to prove himself correct in jest of anger, retaining that particular investment, may not be a smart call.
  • When you are overexcited: A winning streak can give you just the high you needed to reaffirm your investment decisions. But, just don’t get carried away with it. Taking a calculated move on every investment decision is mandatory.

Ways which can let these emotions impact your finances the least

  1. Diversify your investments: Diversification in simple terms means not putting all the eggs in one basket. In this practice you spread your investments across different assets types or investment options. This is done mainly to reduce volatility on your investment portfolio. So, for example if you have invested 30% of your investment in equity stocks and equity mutual funds and rest in government bonds and other debt instruments; and the stock market under performs, you know that you haven’t exposed your entire fund on a high-risk asset (equity).
  2. Determining long- term and short-term goals: Goal based investments are very helpful. If you have a long- term goal like your child’s education, investments can be done keeping in mind long term product like equities whereas, if it’s for short term like personal goods or even emergency funds, focus should be on more stable form of investment.
  3. Don’t dwell in your past: If in the past some investment decisions haven’t worked well, it doesn’t necessarily mean that in the future you won’t reap any benefits. The fear to start afresh or the disliking of the whole idea of investments can be a wrong decision.
  4. Avoid herd behavior: A common financial mistake people do is, just follow others without taking their own situation into consideration. If someone is buying a particular insurance plan, you buy it too, not realizing if you really need it or no. Following a herd behavior in taking financial decisions have most of the times proved incorrect.
  5. Overconfidence can lead to disappointment: Just because you had a winning streak earlier, doesn’t mean you can be casual about your future investments. Weighing pros and cons of all the financial decision is a crucial aspect.
  6. Upgrade yourself: Its very important to keep yourself updated about latest financial products. Continuous learning helps you take wise decisions.
  7. Take advisors help: it always a good choice to fall back on someone who has good knowledge and expertise on financial matters. Call up your financial advisor whenever in need.

We humans are filled with emotions in every moment and they aren’t bad at all. In fact, emotions determine who we really are. These emotions make up our personality. The key here is to be aware and not get carried away by certain bout of emotions.