Money mistakes; yes we all make them, but do you ever wonder why? It’s all about what is going on in our head. But you knew I was going to say that didn’t you.
This is what happens. The more we attach emotion and meaning to money, the more we lose sight of what it really means. The maths bit goes out the window. It is when 1+1 equals more than 2 that mistakes kick in.
Here are five tips to help you avoid money mistakes
1. If you are feeling emotional, don’t make important financial decisions. Sounds really obvious doesn’t it; but when you are emotional your perspective narrows and you can lose sight of the big picture. A warning here, have you tried to help someone see logic when they are in a highly emotional state? It can backfire and they dig their toes in even more, empathy and understanding is needed more than reasons and logic until they have calmed down.
2. Being stressed or tired are also not good times to make financial decisions. We just don’t think straight. Wait until the tension has eased. I remember my Mum saying, never go to bed angry as you may say things you regret later, the same applies to money decisions when you are tired you may regret what you buy.
3. Sleep on it. Walk away from whatever the situation is. a good decision will still be a good decision in the morning, whilst a bad decision may be prevented.
4. Have a plan and stick to it. What is the big picture, what do you want to achieve. Knowing where you want to go will help keep the emotions in check, or get you back on track should you need to.
5. Worry about what you can control. Work out what you can control (your own budget, decisions) and what you can’t control (the government deficit, interest rates), and focus on your own backyard
So now you know how to avoid making money mistakes, what can happen if we do lose sight of what money really means?
We start doing dumb things, like spending more than we earn. Why, because we want to keep up with the Jones’s. The ads on TV say we really need the latest gizmo and we can buy now pay later and we believe we can.
Or we get scammed. I have lost count of the number of emails I have had telling me I have a large amount of money in some foreign bank account just send my bank details and some money and it can all be mine. One of my clients got hooked into one of the Nigerian scams and was sending $000’s of dollars overseas. His poor wife was powerless to do anything about it not matter what she tried. In the end, he lost everything, his business, his wife and his home, a real tragedy.
We work our butts off to make lots of money but don’t have time to spend it, or we lose those along the way that we wanted to spend it with.
The list goes on and on. If you look at your own life, I am sure you will have had a few slip ups along the way. I know I certainly have.
So why do we do it? It’s only money and we should be able to make rational decisions with it. Well most of the time we probably do. But unfortunately we aren’t always rational, and we don’t always make rational and logical decisions. We are often driven by our emotions; I am not just talking about money here.
Our brain is a wonderful piece of engineering, and I am sure you know the concept of the left and right brain. The left brain is more logical and rational and the right emotional (in very simple terms). Our emotional side can override logic in times of strong emotions.
A good example of this; you are driving along, minding your own business, and someone pulls out unexpectedly in front of you. You immediately react and without thinking hit the brakes, swerve to avoid them and then you pull over. Your heart is thumping and your pulse is racing and it takes a couple of minutes to calm down.
Every feeling and thought has a chemical reaction and during that reaction we temporarily lose access to the rational brain as the fight or flight and survival instinct kicks in.
Now this example has nothing to do with money, but a very similar reaction can occur around a financial situation that triggers the same alarm response. A family tragedy; an unexpected bonus, the divine handbag that you just have to have for example can push logic to one side and let emotions take over. It’s all about now and what is going to make me feel better. A new TV appears instead of paying off debt; the consequences are forgotten and so are our best laid plans.
The key to avoiding money mistakes is to get both sides of your brain working together to make sound financial decision.