How Your Emotions Affect Your Finances

by The Smarter Wallet on March 29, 2011

Do you seek financial or business success? If so, it’s good to know just how much our attitude and emotional makeup can affect our personal financial status.

I’ve always been keen on saving money. I have no qualms about spending it either but until the bills are paid and some cash has been put away, I can’t even think about spending it elsewhere.

But you and I could think very differently about money -– and this is where the idea of behavioral finance comes in. The idea is that different people react in different ways to financial decisions. Finance might seem to be a very cut and dried area of interest and in a sense it is. But behavioral finance comes into play when we add emotions into the mix. At the end of the day we cannot assume that two or more people will react in completely the same way when faced with the same financial decision.

Are we talking about a widespread decision or something on a more personal level?

Both things can be true. In many cases, when you read about behavioral finance you will read about the stock market and other areas of interest where people can make emotional decisions that could have an effect on a wider area of financial interests.

In many situations, it may be a good idea to make financial decisions without being emotional.

For instance one trader could believe passionately in a particular area of the stock market, whereas another one will feel totally indifferent towards it. No matter whether each person is right or wrong, their feelings and emotions will lead them both to make very different decisions when faced with the same situation.

But this works on a personal level too?

Yes it certainly does. We all have our own ways of dealing with money and making decisions about it. For example we all react differently when faced with a credit card bill. Some will just pay the minimum balance and worry about the rest later. Some will pay off as much as they can, while others will clear the whole balance. And some will undoubtedly try to forget they ever saw the bill in the first place.

We all acquire different habits and views about money and these are what make us react to different financial situations. Thus we are all affected by behavioral finance in some way or another, virtually on a daily basis as well.

The thing to remember is that it pays to find out more about this approach to finance if you can. Understanding why you make certain decisions about your finances can help you move towards a better financial future. Sometimes the reasons why we do certain things are blatantly obvious, but at other times this is not so much the case.

By learning more about behavioral finance we can discover the reasons why we do certain things and react to certain financial situations. This can better prepare us for the future and lead us to be more responsible about money if we aren’t in the best financial shape at the moment. For instance, we’ve all heard about how millionaires have a certain mindset, right? Read more about this in our article on how to be a millionaire.

While personal finance is often talked about with respect to the stock markets and other professional areas of finance, there’s a lot about it that goes beyond technical matters. A lot about finance has to do with human psychology and how our behaviors and emotions influence how we manage our money, earn it or invest it. Many times, our psychological makeup can lead us to do the wrong things or make erroneous choices with our money. It’s best to know how we react to money and finances and to understand the reasons we think the way we do about this aspect of our lives. The better we know ourselves, the greater the chances that we’ll know how to make the right financial decisions that will lead us to monetary success down the road.

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{ 1 comment… read it below or add one }

1 Justin Reckers March 30, 2011 at 8:21 am

I completely agree with your assessment. It is important for people to first understand the internal barriers, biases and conflicts that affect their financial decision-making. This includes understanding common things like mental accounting and how the marketing geniuses of the world have preyed upon individual self control for as long as you can imagine. Understanding will lead to better (More economically rational.) decisions. Check out my site for some basic and advanced reading on the topic.

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