Sometimes simple things can have a major bearing on your financial outcomes in life.
One major stumbling block to millions of people is emotions.
If you were to draw a line on a piece of paper and write the word emotional at one end, at the other end you should write the word ‘logical'.
Making Financial Decisions
Here I am referring to how you make financial decisions. Every choice you make can be measured somewhere on that line.
If all your decisions are driven by emotions then you are open to making many foolish choices because emotions are not logical at all. I'm sure you know that you can love someone for no logical reason. You just love them!
They say love is blind because there is no logical reason why you would put up with being treated a certain way over and over again but you do it anyway. We forgive when forgiveness is not deserved; we just forgive anyway.
Now, this may work in relationships with people, but when it comes to our relationship with money planning it can have disastrous outcomes.
Make financial decisions based on emotions that are not backed up with logic and you are in serious trouble. Saying things like ‘I feel like this is a great investment opportunity' doesn't really work unless you have done the calculations and research to justify the emotions behind the feelings.
If you always make financial decisions based on emotions, you'll eventually run into trouble. You'll fail to hit your goals, you'll find yourself in constant financial difficulty, and your overall quality of life will be worse as a result.
Know Your Emotions
I'm sure you know someone who shows absolutely no emotions and everything they do is clinical and based on logic. They can be dull to hang around but usually make good decisions (if they stop analysing and make one). You need to allow emotions into your life, but you also need to be aware of what impact they have on your financial choices and learn to control the situation.
Interestingly, if you go back to your line on your piece of paper and try to mark on the line where you sit (between emotional and logical) regarding making financial choices, you would find the mark would be at different places depending on what decision you are making.
A good example of that is how you might make really good logical choices when it comes to buying food, but the moment buying clothes is on the agenda you may lose all common sense and self-control goes out the window (and so does your money)!
The key is to know what your emotional weaknesses are and then protect yourself from yourself. If you know you have an emotional issue in a certain area, before you get into trouble, put a rule in place. A rule allows you to make a decision without having to engage emotions or logic.
Rules That Can Protect You
A rule like I will never spend more than $50 on a single non-essential item without walking away for 24hrs would be an example.
I can hear a lot of people gasping right now! “You have to be joking!” or “What if this item is on sale and it's the last one left and it's a bargain!” These people are getting all emotional on me. If you are one of them, you will need to work your way through this. You need to determine what is emotional and what is logical and how to make logical choices rather than emotional choices.
In six months' time when you are struggling to pay your car registration, will the need to fill the emotional void six months ago stack up to the emotional pain you are in because you cannot pay your registration? I doubt it.
After settling on the rule that sits well for you, try writing it down and placing it where you need the reminder. On your fridge so you write your grocery list to stick to, on a post-it note on the computer screen you do online shopping from, in your wallet credit card holder to give a timely reminder as you pull it out.
Once you're achieving the rule that sits well with you, you can move the parameters if you find it easy to achieve and challenge yourself with a new rule.
Here are a few examples:
Always deposit a certain amount of money into an “emergency fund” as soon as you get paid
Limit yourself/your family to just one takeaway or restaurant meal per two weeks
Never deviate from your grocery shopping list (or limit yourself to just two “impulse items”
When going shopping or out for drinks, consider bringing a limited amount of cash
It is normal for anyone in financial difficulty to think they have a money problem, but often, financial difficulty is a manifestation of something else including many different types of emotional problems.
You can be more clear about this to determine your own level of emotions when making purchases.
The best way to do this is to record all your purchases (yes ALL) you make in the next two weeks. Take a few minutes to sit down and classify them as emotional or logical and essential or discretionary purchases.
Analyse what you have recorded and classified and see what you can learn about yourself. You definitely need emotions, but they don't belong in making your financial decisions.
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