Let’s face it. Managing money is as much about emotion as it is about being an excellent financial planner. So to manage your budget, save money and get your finances in order it is important to be able to control your emotions when making spending decisions.
The best way to avoid making emotional money mistakes is to defer any purchases until the next day. For example, if you are at the electronics store and have an urge to buy something – don’t. Go home and think about the purchase. The following day, ask yourself if you still want the item and if it is worth spending your money on it. Simple actions like this can help take the emotion out of spending and can collectively save you thousands of dollars a year.
Perhaps one of the best examples of emotions taking over when making a financial decision is something referred to as “the new car bug”. Many people decide to start looking for a car. They think they’ll be in for a long process and maybe even plan on buying a low end used car. Next thing you know, they are buying a brand new high end car at the first dealer they visit.
We visited another blog that talked about how to control emotions when it comes to money decisions. Here is an excerpt of what they had to say:
Before you reach for your wallet or click on “Buy,” ask yourself:
Is this going to make me feel fantastic in a way that it actually improves my well-being? If spending is about improving your well-being, that helps rule out impulse and stupid big-ego purchases that are mostly about looking cool.
Is this going to help me get the results that I’m aiming for? When you’re focused on creating an amazing future, you tend to value the present more.
Is this going to help other people (including the people you’re purchasing from)? Is this going to make things easier for me, and free me up so that I can pursue more . . . pleasure? If the pleasure potential matches your budget, then you’ve got full clearance to proceed….
Full article available at Getting Emotional About Money
Another emotional mistake that people make when managing their money is to put too much stress on the small things and ignore the big things. For example, most people spend more time deciding what smartphone to buy than they spend managing their retirement portfolio. By focusing on the small things and forgetting the big picture, a lot of money can be wasted. As the following author wrote:
Americans love to try to do it all. They use phrases like “it couldn’t hurt, right?” when in reality, it very much could hurt to focus on the wrong things.
That’s because we’re cognitive misers with limited attention and willpower. If you’re wasting these limited resources worrying about a $3 latte, you will almost certainly be ignoring the Big Wins — like negotiating a higher salary, finding your Dream Job, earning more, and cutting costs on the biggest areas of spending.
Making these big changes is hard, so we try to distract ourselves with peripheral decisions like APR, interest rates, credit-card companies, and other irrelevant data.
Choose your battles wisely. We can only focus on so many things (something that flies in the face of our “do it all” culture), so it’s important to (1) pick the right areas to focus on, and (2) ruthlessly hone and optimize our approach within each area….
Read more about these 4 dumb money mistakes
As the article says, you should “choose your battles” and try to make spending decisions that have the biggest impact with the smallest amount of time. By having better focus on your spending you can vastly improve your budget. And a good budget can lead to great rewards such as early retirement, financial freedom, and a more relaxed lifestyle.