How To Make Better Financial Decisions
Life often presents us with two choices: left or right, up or down, stop or go, right or wrong. These dichotomies are a part of nearly every decision that we make. But sometimes we become too focused on choosing one way or another that we don’t take into account the roads in the middle.
This happens a lot when we make financial decisions. The two factors that seem to be at odds with each other are logic and emotions. Logic and emotion, especially where the money is concerned, have always been thought of as conflicting ideas. But what if their relationship with each other was more nuanced than that?
Financial decisions are never easy and require a blend of logic and emotion to get right. Today, we wanted to talk about how to blend these two ideas together as you work through your financial plan.
Factor emotions back into your financial picture
For so long the idea of emotions and logic were always thought to be mutually exclusive: you could either act emotionally or you act logically, without room for an in-between. When it comes to finances, people often think that they need to only use the logical side of their brain whenever they make decisions.
In fact, we are conditioned to think that logic carries more weight, importance, seriousness, and gravitas over emotions. We are taught that emotions are unpredictable, unrealistic, and lack substance. So if we make a choice based on logic it is a good choice, whereas if we make a choice based on an emotion society labels that as reckless and impetuous.
But if we think about that dichotomy for a little bit, we realize that it doesn’t tell the full story or embrace the true role emotions play in our lives, even our financial lives.
Emotions will be a part of any financial decision, even if we try to avoid it. The most important thing shouldn’t be to repress your emotions about your finances, rather harness and understand those emotions and use them to help guide your saving, spending, investing, goal setting and so much more.
Let’s look at an example. Logic may tell you that you need to pursue a specific amount of risk in your portfolio given your retirement timeline. However, if you’re not comfortable taking on that amount of risk, your portfolio’s strategy won’t hold up! If you know you’re risk averse, and you won’t be able to stick with your strategy (even in a bear market), your “logical” portfolio structure may not actually be the best fit for you.
If you only take logic into account, you miss a full side of life and what it can do for you. Sometimes your emotions can benefit you in financial decisions. They can help you establish, build, and live your legacy. Emotions can lead you to the values and priorities that underpin your financial goals which act as the foundation for your entire financial plan. Without emotion, your plan wouldn’t have heart, it wouldn’t be specific or unique, it wouldn’t be yours.
When making financial decisions, big or small, it is important that you really understand the choice you make and the consequences of that decision. Making informed, educated decisions will help keep your financial plan on track whether that is in retirement saving, tax planning, spending habits, a home purchase, or any other number of financial choices you will make throughout your life.
Our firm is passionate about providing educational resources for our clients so that they are empowered and confident when making financial choices. It is important to us, for example, that you understand how your taxes will be impacted by a financial choice or why you need a particular type of insurance, or how a home mortgage will impact your financial plan and so on.
Lean on your financial goals
If you find yourself having trouble with a financial decision, a great place to start is honing in on your financial goals. Realigning your goals with your financial habits will help you make an informed choice that is aligned with the goals you set.
Your financial goals can act as a benchmark for your financial habits. By understanding what you are working toward, you will be able to make choices that support those goals. When you do that you are instilling positive financial behavior, prioritizing your relationship with your finances, and working to advance your dreams.
How to balance emotion and logic in financial decisions
As with any aspect of your financial plan, balance is key. If you allow logic to be the only marker for financial decisions, you may find yourself uncomfortable, anxious, or stressed about the trajectory of your financial plan. The same goes for putting too much emphasis on emotions. Take, for example, this market correction. It may leave you feeling uncertain or stressed about your finances, but acting on that emotion can cause more harm than good.
Creating a strong balance between emotion and logic in financial decisions can be the best way to both customize your plan and design a plan that will really work for you and your family.
Here at TFS, it is important to us that our clients be able to make smart, informed decisions about their finances in a way that supports the life they want to live. Give us a call today to learn more about what that could mean for you.