Key Takeaways
- Take a step back and use reasoning to avoid impulsive purchases and emotional spending. Our attitude should be to focus on long-term impacts over instant gratification.
- By associating positive feelings with our tough choices, we have a higher chance of not relapsing into our old ways.
- Attaching an emotional significance to a future goal is an effective tool to help us prioritize our future financial situation over current life’s luxuries.
- Living within budget and investing your surplus is not a one-time exercise, but a way of life. We must absolutely not wait for the ‘right age’ to start investing.
- If you continue to face challenges bringing transformation to your financial habits, seek professional help.
A major chunk of the problems we face around financial decisions are not so much about our intelligence but more to do with our emotions. We make a budget but fail to stick to it. We know we need a financial plan, but keep procrastinating making one. Some of us are even guilty of refusing to open our credit card statements in the fear of having to face our lack of control on spending. Spending too much, too little, being too reckless, or too careful – hardly has to do with our knowledge. It is not exactly rocket science to understand that we must spend within limits and plan for our future. Yet many of us fall short of applying this fundamental concept.
We first need to identify that there is, obviously, a relationship between our emotions and finances. And to our utmost displeasure, that relationship happens to be complicated. But the good news is, we are here to simplify it by taking an objective look at why we do what we do with our money. By analyzing the deep emotional roots of your financial decisions, we hope to help you stick to the financial plan you have created.
Stop reacting, start reasoning
Once we have fulfilled our basic needs, most of our purchases are a result of emotions. But when we let ourselves just react to these emotions – whether it be to make ourselves feel better on a bad day, or splurge during an outing due to peer pressure – that is when we are letting our emotions control our finances. It is nearly impossible to detach emotions completely from our financial life. After all, research has shown that money can buy happiness to a certain extent (or amount). However, we can always take a step back and use reasoning to avoid impulsive purchases and emotional spending. Our attitude should be to focus on long-term impacts over instant gratification. We should make it a habit to reason out our financial decisions and know whether it is going to make us feel better instantly, only to be followed by waves of guilt. If the answer to that question is yes, then the money is probably better off staying put in your wallet.
To build the right attitude, people use various strategies to control themselves from acting on an impulse purchase. One of the ways is to see it as getting paid for the effort you put in to stop yourself from doing something. For example, if you feel an urge to buy the expensive branded belt that you don’t really need, tell yourself: If I don’t buy this belt worth Rs 50,000, it’s almost like I just got paid to not buy the belt. Using your own version of visualizing savings as a reward for controlling your impulses, you can effectively rewire your brain to analyze every rupee you spend. And to really foolproof your strategy, keep a buffer for an occasional splurge in your budget.
Reimagine limitations as liberation
Now that we know how we can identify and control our impulses, it should be simple from here on, right? If only. A lot of us face major challenges putting restrictions on ourselves because guess what, it feels terrible. Nobody likes to stay within boundaries, caged up by our conscience, societal rules, law etc. Yet, we manage to live most of our lives staying within the confines of these well-meaning rules. Perhaps, it’s because we understand the benefits attached to them. We need to implement the same strategy to the financial boundaries we set for ourselves. Instead of thinking of it as a limitation on enjoying our lives (attention: YOLO crowd), we have to envision what liberties good financial decisions can bring to us. For example, we can splurge our entire salary and live life king size till a certain age. But what happens when we lose our income or have to retire, or if there is an emergency? It won’t be the best feeling going about asking friends and family for financial support, that is, assuming that they are able to help in the first place. On the other hand, regulating our expenses and investing for our future will ensure that we live self-sufficiently all our life. By associating positive feelings with our tough choices, we have a higher chance of not relapsing into our old ways.
Attach dreams to your goals
Goal-planning is a critical component of financial planning – making sure that we manage our finances in a way that enables us to achieve our future goals. The caveat is that while it is great to have goals, there will be times that we just want to fall back into living in the moment and goals are not good enough to hold us back in these moments. So it’s paramount that we attach our dreams to our goals. You must be wondering what this means. For instance, wanting to buy a house is a goal. We have to connect it to our vision of living and enjoying with our family in our dream house, spending weekends BBQing in the backyard (or whatever your version of living in your dream home might be). Similarly, those of us who have goals of taking trips must attach more meaningful emotions such as exploring new places, enjoying different cuisines, and creating memories of a lifetime to convert this goal into a dream. Simply put, emotions impact our financial decisions and so attaching an emotional significance to a future goal is an effective tool to help us prioritize our future financial situation over current life’s luxuries.
Way of life
Living within budget and investing your surplus is not a one-time exercise. It’s more of a way of life, just like having a healthy diet and leading a physically active life. Hence, we must absolutely not wait for the ‘right age’ to start investing – you know when we think, “I will start to be more responsible when I turn 30” – because the right time is now. It also applies to those who may be thinking it is a little too late for them to start.
If you continue to face challenges bringing transformation to your financial habits, seek help. The biggest and entirely self-imposed hindrance we face is that we think personal finance is too personal. And yes, while it is personal in nature, it is not very different from other personal aspects of our life such as physical and mental health, where we do seek help from professionals when we are unable to stay healthy. Similarly, there are financial advisors, financial counsellors and many other avenues that can help us get back on track with our financial health and goals. For those shy of human interaction, you can always turn to robo-advisors, which are unbiased, low cost, time-efficient and accessible solutions to your financial planning woes. Bonus, robo advisors won’t let emotions come in the way.
Bottom Line
Your financial plan is not just a set of numbers paving the way towards your goals. It’s as much about your fears and doubts as it is about your hopes and aspirations. Almost all your financial decisions are going to have an emotional root. Identify, understand and make the best choice that your future self will thank you for.