Emotions And Money
Humans are more emotional than rational, especially around money. About 98% of the time, humans act on emotion, not rationality. But to succeed, you need to hone your emotional competency. Doing so is especially important since emotional competency affects your money management skills. Envy can lead to overspending, while fear can limit your opportunities to build wealth.
So how do you build emotional competency on finance-related decisions? Here are a few steps to get started.
Stick to a Budget to Control Your Emotions and Money
When you purchase items based on your emotions, you fall prey to emotional spending. This bad habit stems from negative emotions, like stress or anxiety. But it can also come from positive emotions, like pride or happiness. Retail therapy is another word for this phenomenon, and 49% of Americans are guilty of it. While retail therapy can be therapeutic to some degree, the bills that come later could cause even more stress.
The best way to avoid emotional spending—and overspending—is to plan a monthly budget. Determine the income you’re making and compare that to your expenses. Include estimated costs for essentials like rent, utilities, and groceries in your budget. Don’t forget to cover leisure spending.
Finalizing a budget plan is only half the battle. The other half is summoning the willpower to stick to it. Do set restrictions to help you control your spending habits.
Emotions and Money: Make Smarter Investments
Emotional investing is another potential pitfall. Financial markets are volatile, and watching wide swings can induce fear and panic among investors. Plenty of investors experienced this at the beginning of the pandemic. To minimize their losses, they sold their holding. But stocks eventually rebounded, and those who held out made huge profits.
Diversify your investments. Since it spreads your capital out across different markets, your securities are less likely to suffer from the same market swings. Diversification puts you in a better position to control your emotions. If you use some of your funds to purchase stocks, it can generate huge returns. But stocks are relatively risky as major events can instantly trigger a crash. You can offset that risk by opting for safer investment options. The real estate market is more stable than the stocks and cryptocurrencies markets.
A good savings option is safer than any of those markets combined. An excellent choice for savings is a certificate of deposit (CD). A CD is a bank deposit that earns interest in a predetermined amount of time. Most CDs have fixed rates, so once you’ve applied for one, you’ll know exactly how much interest you can acquire by the end of the arrangement. Though you can’t double your investment, you’ll be able to calm your emotions by knowing that market volatility does not affect CDs. A savings account can go alongside your securities. They continually earn money and remain stable despite stock market fluctuations.
Emotions and Money: Remain in Control
You cannot get rid of your emotions. But emotions should always stand behind rationality, not the other way around. One way to practice this is to refrain from making snap decisions.
Practice money mindfulness. Pause to reflect on external and internal factors before you make an expense: are you buying that gadget because you need it or because you feel left behind? It might even be helpful to keep a journal with detailed accounts of your expenses. Write down what you felt when you made a purchase and compare your notes. You might see revealing trends. If you noted that you were stressed before you made an unnecessary purchase, you should find ways around this. Manage your negative emotions through practices like meditating or going for a run.
You need to develop your emotional competency. Emotional competency ensures that you stick to your financial plans, even when your emotions scream for you to do otherwise. Mastery over your feelings helps you gain confidence. With that confidence, you can achieve your financial goals and even your life goals.