Ideally, you’d like to be logical, rational and calm as you make important financial decisions. But often, emotions run high when it comes to money and how having it — or lacking it — impacts your current situation. It can be difficult to go through the financial decision-making process without feeling stressed, frustrated, angry or helpless. These emotions are dangerous, leading to poor spending decisions.
People might often be governed by emotion, but they are also capable of controlling them. Here are four strategies you can employ to keep emotions out of financial decisions.
1. Take a Step Back
Sometimes, you’re just too close to a situation to see it for what it is. Take a step back from what’s going on and look at it from an a new perspective.
“I suggest clients use what I call the 4-1 method and ask themselves four questions,” said Aaron Hatch, certified financial planner and co-founder of Woven Capital: “How will I feel about this decision in one hour? How will I feel about this decision in one day? How will I feel about this decision in one month? How will I feel about this decision in one year?”
What would you tell a close friend if he was faced with a similar financial decision? You might find that the answer is different than what you were considering doing. When people take themselves out of the problem, a more rational and logical solution can emerge. It might be difficult at first, but with a bit of practice, your financial decision-making process can lead to smarter money management over time.
Say, for example, you hate your job. One day, you have a fight with your boss and decide to quit. You’ve just made an emotional decision that can have a detrimental impact on your finances. Alternatively, it’s best to think the situation through first. Why not first spruce up your resume, line up some interviews and find a new job before throwing in the towel? It’s still the same decision, but now it makes much more financial sense.
2. Decide to Wait
Avoiding important financial decisions when your emotions are running high is a smart move. Stress, jealousy, anger, fear and sadness are just a few of the strong emotions that can lead you astray when faced with an important financial decision.
“In fact, sometimes just the act of taking action makes us feel better, even if our actions are misguided,” said Hatch. “What we often forget is that choosing to keep the status quo is a choice. It is an action, often the best one in the heat of the moment.”
It’s similar to going shopping when you’re hungry or stressed. It’s just not smart. It often leads to overspending at the supermarket or buying stuff you don’t want, don’t need or isn’t very healthy. Rather, you need to first deal with your emotions and get them under control before embarking on a decision-making path.
For example, you just found out that a colleague got the big promotion instead of you. You’re angry and jealous. Retail therapy might sound like a good idea, but it will only give you a fleeting moment of satisfaction. As soon as reality sets in, that $200 pair of jeans might not look as good when compared to your checking account balance.
If you once again busted your bank account “blowing off steam,” you’ll feel even worse. Try congratulating your colleague and pick his brain to find out what he did to get the promotion. Next time, it could be your turn.
3. Take a Break
Do something that clears your head. Go for a run or walk, do some yoga or crafts, or just clean the house. Find an activity that works best for you. This way, you’ll burn energy and get your emotions under control at the same time. You’ll find that you are much better at making financial decisions after you’ve taken a time-out to replenish your energy levels and clear your head.
“If I were a doctor, I would write prescriptions for my clients to listen to their favorite song on repeat for one hour or to go walk around the block a couple times or even take a power nap before making a big decision,” said Hatch.
Say you’ve just received three massive bills at once from an unexpected medical procedure, for example. There’s no way that you can afford to pay them out of pocket. You’re feeling stressed, overwhelmed and frustrated. But instead of immediately freaking out or spiraling into a depression, take a break and go for a brisk walk or run. Even just 30 minutes should do the trick.
Once you return, draw up a budget, then call the hospital’s finance department to arrange a payment plan that will work for both parties. You will find that most companies will be understanding if you contact them long before the due date and make alternative arrangements.
4. Ask for Advice
Sometimes you need outside assistance to gain perspective on a situation. That might mean confiding in a person you trust or working with a professional. But always make sure you’re asking the right person. For instance, there’s no point in asking someone who is knee deep in debt how to manage your own financial crisis.
“A valuable contribution that a professional can bring to the situation is asking good questions, which can help you see your decisions in a new light,” said Hatch.
Consider this hypothetical scenario: The market takes a dive and drops a couple hundred points three days in a row. Upon market close, you log in online to see your investments have taken a hit in the thousands of dollars. You find yourself feeling panicky, and your mind immediately questions whether you should sell out completely. You go into preservation mode and start feeling hopeless.
Take the better path here: Close your laptop and call your financial advisor to talk investment strategy. Revisit your investment policy statement together or create one if you haven’t yet. If you’re not working with a financial professional, call up a trusted, financially savvy friend and get his take on the situation. He might offer advice or a perspective that you might not have thought of yet.
Related: 5 Signs You Need a Financial Advisor
Financial Tips to Remember
Financial decisions can be stressful and highly emotional, especially when times are tough or unexpected financial events occur. Although any decision can ultimately be influenced by emotion, the trick is to be aware of the emotion and control it rather than letting it control you.
Make your financial decision-making process more rational by taking a step back, deciding to wait, taking a break or asking for advice. It’s OK, and probably best, to not react immediately. Remind yourself to gain some perspective through time, space, exercise or consulting someone else before acting on your emotions. This advice could save you a lot of money, and trouble, in the future.