If you’re like most people, you probably do a little of both. Consider this: just about any decision that you’ve ever made likely falls under one of two categories: a logical decision backed up with emotion, or an emotional decision backed up with logic.
This means that you either make decisions primarily with your head or your heart.
It’s important to recognize that emotions are going to influence your decision making process no matter what. That’s just a part of life. The key is knowing how to identify those emotions, and determine how to effectively use them when evaluating financial decisions.
Let’s take a look at the head vs. heart dilemma in more detail and see if we can’t find a way to balance the two.
How Emotions Affect Your Decision Making
Our emotions are so closely intertwined with our finances that there is really no way to keep them separate. The choices that we make are largely influenced by our emotional state, and alternatively, our financial situation can have a huge impact on our disposition.
A perfect example of this is what happens when you have a bad day at work and, instead of coming to grips with the fact that bad days are par for the course of life, you head to the mall in search of retail therapy.
According to a study published in the journal of Psychological Science by Harvard and Columbia University professors: people who are sad are willing to forgo greater future monetary gains in exchange for instant financial gratification. While I am just your Financial Mom -- and not a noted Ivy League scholar -- I can tell you with 100% certainty that these people are allowing an emotion to drive their decisions and, if the behavior is continued, it will ultimately end in financial despair.
The main premise behind retail therapy is to alleviate whatever stress is affecting you. But spending to numb the stress away is never a good idea. A better financial move is to recognize the triggers that cause the stress that makes you want to shop. When you take the time to properly identify the cause of the stress, you are more likely to find a solution that doesn’t involve the swiping of your credit card.
How Logic Affects Your Decision Making
According to online educational resource, Boundless.com: Rational decision making is a multi-step process for making choices between alternatives. The process of rational decision making favors logic, objectivity, and analysis over subjectivity and insight.
While this may be an adequate definition, it doesn’t account for the role that emotions play in decision making. As we discussed earlier, making financial decisions independent of emotion is something that cannot really be controlled.
Have a plan: From grocery shopping to retirement planning; it is important that you have a strategic plan for the uncertainties of life. By committing to a plan, before stress or any other type of emotion becomes a factor, you increase your chances of successful execution.
Acknowledge your emotions: No matter how logical of a thinker you believe yourself to be, you need to acknowledge your emotions. By acknowledging what you are feeling at a given moment, you allow yourself the opportunity to think your way through it.
Don’t stress about things you cannot control: Many times, the things that we stress over the most are caused by events that we have no control over. In order to overcome these feelings, you must learn to accept that there are some things that you cannot change and move on! Spending time obsessing over things out of your control won’t change the outcome.
Sleep on it: When you’ve settled on a decision, don’t act immediately -- instead, allow yourself a predetermined amount of time to reflect on it. This ‘grace period’ usually results in greater clarity and will either reinforce your decision or cause you to re-evaluate.
Revisit your goals: Going back to the first point about having a plan. Always remain cognizant of the goal you are trying to reach. This is the reason you’re investing, saving, or paying down debt in the first place. Compare your final decision to your goals. How will the choice you are about to make affect the probability of achieving that goal? The answer will help you determine whether or not it is a logical option.
When I’m faced with a decision, I try to ask myself: What does your head say? And then I ask: What does your heart say? If they are in agreement, then it’s probably a good decision. If they are at odds, I try to go with my head. Common sense and rationality always seem to help me make good money decisions.
“A good head and a good heart are always a formidable combination” - Nelson Mandela
Recognizing your spending triggers is the key to understanding why we make the financial decisions we do. So the next time your head and heart are in conflict, go with the logical decision and trust that your heart will eventually fall into place. It might not be easy, but over time you will find it easier to make rational decisions -- independent of your state of emotions.
Pamela J. Horack, CFP® of Pathfinder Planning LLC provides personal financial planning advice for a simple fee to young adults and working families in North and South Carolina through group classes, one-on-one planning, and ongoing advice.