letting your emotions control your finances

The following post originally appeared as a guest post on Mrs. Micah: Finance for a Freelance Life. In addition to a great blog of her own, she’s been a frequent and appreciated commentator here for a long time! She won a contest that I ran, and one of the prizes I offered was a guest post – and this was the post I gave her. Enjoy, and check out Mrs. Micah’s blog, too!

How can emotions help (or hurt) your finances?

photo credit: pardeshi

Take a simple example: let’s assume there are two kinds of moods, good and bad, and two kinds of financial situations, good and bad. Remember: simplistic.

If you are in a good mood but a bad financial situation, you are probably doing OK. You can see the problems with your finances and a way out of them.

If you are in a bad mood but your finances are good, you can afford to just back off and wait for a while.

But if your mood is bad and your finances are bad, you will likely have trouble improving things; and if your mood is good and your finances are good you are set, although you do have to watch for overconfidence.

Do not discount emotional health and stability when considering finances.

Making decisions out of despair or ridiculous enthusiasm can be just as bad as making ill-informed decisions.

If you don’t think that’s true, you haven’t followed the real estate market recently; many otherwise intelligent people were caught up in a euphoric belief that the real estate bubble would expand forever, despite signs that it was simply a repeat of the real estate boom of the 80s.

For years, I allowed emotions to control my finances.

I let good moods and good money relax me. When I had money, and felt good, I would spend it. I might invest in a crazy dot com, or buy a new TV.

When times were bad I would sulk and sit on cash instead of promptly paying off bills or moving my money to high-yield savings accounts. I let my mood determine how I spent my money.

In my case, I let my mood make my money decisions, and engaged in a terrible form of emotional market timing; I tried to be frugal when frugality wasn’t called for and I spent when I should have saved.

If you find yourself allowing yourself pity purchases or hoarding money in fear, there are a few steps you need to take to get out of that rut.

1. If you need help, get help. I have always been at the mild end of mood swings. I never took medication or counseling, but if I needed it, I would. If you don’t feel in control of your moods, or you can’t recognize them as temporary moods, seek help.
2. Take some of the ‘free will’ out of your money. I am sure you’ve heard ‘pay yourself first,’ but it’s critically important if you have moody financial tendencies. Make your savings automatic, or your debt repayment plan automatic.Don’t count on yourself to show the same peppy enthusiasm for paying off your debt next month that you do this month. Make sure that money is gone to repay debt or straight into your retirement account, before you even touch it.
3. Don’t spend on highs or lows. If you are feeling down, stay away from the store or the online shopping or whatever tempts you.If you are feeling too high, do the same.Make sure that you don’t put yourself in positions where you feel that buying that CD is going to lift your spirits, or that you need to buy those shoes because everything’s going so well.Impulse spending will almost always cause regret.
4. Talk about it. I have made the mistake repeatedly in my life of assuming that my moods were some inner battle that I had to suppress.They aren’t.They are a normal part of life, and it’s easier if you tell people that you aren’t in a good mood when you aren’t.Friends, family and coworkers understand; none of them are Vulcans, and they can all understand that some days you don’t need to be pestered to go out to dinner, for example.
5. Learn ways to reward yourself without spending money. If you need to spend to reward yourself – to lift yourself out of a trough or ride a great mood – you will always be in trouble.Learn to lift lows with exercise, or enjoy highs by cooking or spending time with loved ones.
6. Change your mood. There is only one thing in this universe that you control.You don’t control your own body (it can get ill without your permission) or other people or time or your future.You can only control one thing:your own mind.The next time you feel down, tell yourself you are going to acknowledge the mood but you’re not going to let it make you irrational about money.Your mood and your actions are two separate things.

   So take it from someone who goes by the nickname brip blap ; you can keep your moods from controlling your personal finance situation!

Odds and ends:

Don’t forget to check out the first Finance Fiesta – sorry I didn’t do so earlier but I should’ve since it was tagged as the “life of the party”. I’m always glad to see new carnivals, so keep up with this one!