Making financial decisions – don’t let emotions get in the way

May 25th, 2012 Cindi Schrock
Dangers of emotional decisions RS

At its core, personal finance concepts are usually straightforward and simple. However, some people struggle with managing their money by letting their emotions get involved.

For example, you purchase a more expensive version of a rug because it features the pattern all the home décor magazines have been raving about. Or you upgrade your car to include GPS navigation because all your friends are doing it.

Allowing your emotions to factor into financial decisions can be a dangerous habit with serious consequences. We’ve put together a list of the five most common ways people let their emotions get the best of them when managing their finances.

Mistake #1: Turning your back on a problem and ignoring it.

Often times it’s easier to simply ignore a problem rather than facing the possibly uncomfortable truth and addressing it.

It can be tempting, for example, to disregard credit card debt as it continues to grow and accrue interest. This is probably the worst way of handling the problem. It’s also easier to simply ignore an error on your credit report, as opposed to working with the credit bureau to have it fixed.

When it comes to money management issues like debt, or other similar problems, it’s important to take action immediately so it doesn’t spiral out of control and cause further harm.

Mistake #2: Doing something the same way just because that’s how you’ve always done it.

If you’re not careful, being stuck in your ways can cost you dearly.

Imagine, for example, that you’ve always invested your money in Certificates of Deposit and stubbornly continue to do so. While this may have been a good approach 10-15 years ago, the recent decline in CD interest rates has dramatically reduced the return you will receive.

Instead of doing something the same way over and over again, open yourself up to new strategies and options. Do research and talk to your banker or financial advisor to stay abreast of new financial tools. This will allow you to stay flexible and select the strategies that will provide you with the most return and best fit your unique situation.

Mistake #3: Being paralyzed by fear or indecision.

Making financial decisions can be an overwhelming and confusing experience. For example, many people know they have to make a change, but they are so overwhelmed by the choices and potential consequences that they become paralyzed and don’t make any decision at all.

If this happens to you, a good approach is to start with what you know for certain, and then work your way towards a decision.

For example, if you’re unsure about how to invest your money for your retirement, start by thinking about your retirement goals – what age do you want to retire? Where do you want to live? What do you want to do? And then use that information to select an investment strategy that’s right for you.

Mistake #4: Trying to do everything yourself.

Financial professionals, like bankers or financial advisors, can be a powerful ally to have on your side. These professionals have a great understanding of the advantages and disadvantages of financial tools and can be a great help in selecting the right choices for you. Don’t be afraid to seek out their help.

Remember – you don’t have to implement their recommendations. Ultimately it’s up to you to make the decision. So why not hear some ideas and suggestions?

Mistake #5: Keeping up with the Joneses

When a few of your neighbors buy new cars, your car always seems a bit older. When your friends go on a fancy vacation, it’s only natural that you want to too. There are many more examples. Don’t be tempted to play catch up with your friends or family. This will lead to unnecessary expenses that will deplete your savings.

List your expenses to remind yourself how you end up spending emotionally, so you won’t repeat the same mistakes again.

When it comes to personal finance, there is no room for emotional decisions. Instead of making spur-of-the-moment choices, make it a habit to objectively evaluate your options.

Cindi Schrock

About the author

Cindi Schrock is Second Vice President, Managing Officer at MidWestOne Bank. She works with MidWestOne customers to help them manage their personal finances and identify effective money management solutions.

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