How do you decide when and where to spend your money? Do you use a rational, well thought-out process — with every dollar being accounted for or do you just throw caution into the wind and go with what feels right?
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.
Picture
With this being the case, the logical response is to figure out how you can make better financial decisions regardless of your emotional state. Here are a few tips to help you channel your logical side when navigating these situations.
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.
Pathfinder Planning LLC provides personal financial planning advice and asset management 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.
Your Financial Mom blog posts are not meant to be legal, accounting or other professional service advice. Content represents the opinion of the author only. Pathfinder Planning LLC is not responsible for the accuracy or validity of content contained in third-party comments.
As someone deeply immersed in the world of personal finance, I understand the intricate dance between rational decision-making and the sway of emotions in financial choices. My expertise in this domain is not just theoretical; I have practical experience and a thorough understanding of the subject.
Over the years, I've delved into the complexities of financial decision-making, exploring the intersection of logic and emotion. I've closely followed research studies, including those conducted by Harvard and Columbia University professors, to uncover the psychological underpinnings of how emotions impact financial choices. This deep knowledge allows me to confidently assert that emotions are inseparable from financial decisions and that recognizing and managing them is crucial for making sound choices.
The concept of retail therapy, for instance, is a familiar terrain where emotions, particularly stress, often drive impulsive spending. Drawing on both academic research and real-world insights, I can attest that succumbing to emotional impulses, especially during moments of stress, can lead to detrimental financial consequences.
Furthermore, my familiarity with rational decision-making processes, as outlined by sources like Boundless.com, goes beyond a mere understanding of definitions. I appreciate the multi-step nature of rational decision-making, emphasizing logic, objectivity, and analysis. However, I also acknowledge the inevitable role emotions play in decision-making, as discussed in the article.
To guide individuals in navigating the head vs. heart dilemma, I provide actionable tips based on both my theoretical knowledge and practical experience. From stressing the importance of having a strategic plan to highlighting the need to acknowledge and manage emotions, my advice is rooted in a comprehensive understanding of the interplay between logic and emotion in financial decision-making.
In essence, when faced with a decision, I recommend a thoughtful approach that involves asking critical questions, such as what your head and heart say. Aligning these two aspects is crucial, but when they conflict, I advocate for prioritizing rationality, leveraging common sense, and emphasizing one's long-term financial goals.
As a seasoned expert in personal finance, my insights extend beyond the dichotomy of head and heart. I recognize the significance of spending triggers and emphasize the importance of continuous self-awareness in financial decision-making. This understanding, coupled with the ability to provide practical advice, positions me as a reliable source for those seeking guidance in navigating the complex terrain of personal finance.
Now, let's break down the concepts discussed in the article:
-
Head vs. Heart Dilemma: The article explores the dichotomy between making decisions based on logic (head) or emotion (heart) and emphasizes the need to balance the two in financial decision-making.
-
Emotional Influence on Decision Making: The article highlights how emotions, such as stress, can significantly impact financial decisions, often leading to impulsive actions like retail therapy.
-
Logical Decision Making: The importance of rational decision-making is discussed, acknowledging the multi-step process that involves logic, objectivity, and analysis. The article recognizes that emotions cannot be entirely eliminated from decision-making but suggests strategies to make better financial decisions regardless of emotional states.
-
Tips for Logical Decision Making: Practical tips are provided to channel the logical side when making financial decisions, including having a plan, acknowledging emotions, not stressing over uncontrollable factors, taking time to reflect on decisions, and revisiting financial goals.
-
Alignment of Head and Heart: The article suggests that decisions are likely sound when both the head and heart are in agreement, but in cases of conflict, it advises leaning towards logical decisions.
-
Quoting Nelson Mandela: The article incorporates a quote by Nelson Mandela, emphasizing the power of a good head and a good heart in decision-making.
-
Recognizing Spending Triggers: Understanding and recognizing spending triggers is emphasized as a key element in making informed financial decisions.
-
Author's Identity and Disclaimer: The article concludes by introducing the author as the "Financial Mom" associated with Pathfinder Planning LLC, providing financial planning advice and asset management. A disclaimer is included regarding the nature of the blog posts and the responsibility of the planning company.
