There are several circumstances in which our emotions negatively influence our financial health. If we make decisions based solely on our feelings, we can lose money, put our savings at risk and even fall into debt. For this reason, in this note, we will review several scenarios in which emotions negatively impact our finances so that you can identify them and avoid them.
In day-to-day decisions, where our consumption patterns and daily expenses are found, we may say phrases like:
“I’m going to buy today if it goes up tomorrow.”
Thinking that something may be more expensive tomorrow, we buy it today. This is known as inflation psychology. It can have two adverse effects: buying more (above our needs, messing up our budget, or reducing our ability to save); or generating debt for significant value purchases (causing a higher fixed expense later).
Our consumption must be responsible and realistic, always in line with our income and never above it, even in inflation scenarios. Remember that spending less is the most essential thing in an economic context of crisis.
“I buy it because it makes me happy.”
In reality, when we often say this, it is because we do not find situations that are rewarding for us in which we do not have to spend money. Has it happened to you?
This often happens because we live in a society and culture that revolves around consumption, with a strong tendency to associate money with personal satisfaction.
If you’re in a situation where you can’t help but see products on sale and buy them, chances are you’re getting carried away by this emotion before asking yourself: “Do I really need this? Is it going to make me happy?”
“Everyone buys, I’m going to run out.”
Compulsive buying is a maladaptive pattern of consumption in which some people lose control over their buying behaviour.
What emotions influence this behaviour? Fear, anguish, exaltation, or uncertainty. And when else happens? Generally, that affects many people in historical, economic, or social contexts.
One of those contexts was the pandemic, which triggered online purchases and even generated excessive purchases of products such as gel alcohol and toilet paper. Do you remember the news that showed people fighting over a package? This demonstrates that emotions, not reason drove those purchasing decisions.
So how do I know if my emotions are losing me money?
If you are seeing a pattern like the following:
- “The products I buy we don’t need or I buy them in an excessive quantity.”
- “I lose track of what I buy. I don’t remember where the money went.”
- “My purchases exceed my economic possibilities, they generate debts and do not allow me to control my expenses.”
- “My consumption patterns are having negative consequences with my family or with my partner.”
How do emotions influence investment decisions?
In investments, emotions also directly impact the possibility of making or losing money. Remember that what moves the market is the emotions of the people who operate in them. Even this phenomenon is known as “market sentiment.”
This reflects investors’ affective state, which can be: optimism, excitement, enthusiasm, euphoria, anxiety, fear, despair, panic, discouragement… These are all emotions that we can consider extreme that take us away from what is most important. : make financial decisions calmly.
The goal of investing is to make more money in the long run. To do this, your mind must be in tune with the markets and focus on what you are doing and why. Being a good investor means knowing your mettle, detecting the points where you tend to lose control, and resuming your strategy.
To succeed in the stock market, we must know the emotions that affect us when investing. We are likely to experience the following:
- Panic or anxiety about entering or exiting the investment instrument.
- Anger or humiliation for losing money or not having entered the correct asset.
- Overconfidence or greed of wanting to win a lot and lose what has been earned by not taking the profits already generated.
- Fear of being left out of a reasonable investment (FOMO).
None of these scenarios is ideal since we will likely lose money if they affect us.
The last one is FOMO (“Fear Of Missing Out ”) or fear of “missing the train.” It can cause us to make bad decisions. In the case of investments, it can be entering the markets at the wrong time because we see a price go up and up, and we want to chase it. It is something we should never do. Most of the time, the trend of assets that go up tends to decrease because all investment instruments are cyclical.
So, instead of “getting on the train,” what could happen to us is running after it until we exhaust ourselves and, along the way, lose our money. We don’t want that to happen to us.
We must learn daily, get professional advice, and know ourselves to develop an investment plan rationally and relate to money healthily.
When you go to invest, check how you feel, if you are angry, if you feel upset, if you are distracted, or if you cannot concentrate. It may not be the best time to think about investing.
