Have you ever purchased anything on the spur of the moment (such as a dress or pair of shoes) and when you got the item home, you realized you didn’t really like or need it? Everyone wants to make smart financial decisions, but unfortunately sometimes people allow their emotions to take the lead, just like in the above example. This behavior can have a negative impact on any given financial situation.
Here are some common mistakes people make by allowing emotions to get in the way of finances. (For related reading, see: 3 Smart Ways to Update Your Investment Plan.)
- Ignoring financial issues. It is important to address financial issues as they occur. Ignoring things like increasing debt or something else can have a negative impact on your financial picture the longer you avoid them. Some other not-so-good practices that people do include: not keeping track of spending and not creating an emergency fund. Creating a budget is key to helping you understand where your money is going. It can also help you identify areas where you could potentially cut back to redirect money to fund your goals. As for the emergency fund, you should typically keep three to six months of living expenses in a separate account. By not having this ready, you run the risk of pulling money out of long-term savings at the wrong time or charging extra expenses to your credit cards.
- Procrastinating on financial decisions. One of the main obstacles to planning effectively for your long-term financial goals is procrastination. We sometimes have a tendency to put off making important financial decisions due to lack of confidence. Typically, the lack of confidence is due to the fear of making a mistake. You can easily overcome this obstacle by educating yourself. Enroll in financial classes or workshops. If you need more guidance, consider hiring a financial planning professional.
- Doing things the same way you always have. People have a tendency to do things the same way they always have because they are uniformed or afraid to make a change. By reading financial magazines and visiting financial websites, you can deepen your awareness and knowledge of how to financially plan more effectively. (For related reading, see: 5 Financial Planning Decisions You Won't Regret.)
- Letting short-term market volatility interfere with your investment plan. When creating your investment strategy, it is important to have a long-term perspective based on your goals and risk tolerance. You will be more likely to stick to a long-term strategy and not tempted to sell investments at the wrong time.
- Not asking for help. Trying to do it all yourself could be a big mistake. If you feel overwhelmed or need additional expertise, you may consider hiring a professional. A financial planner or investment professional can create a long-term strategy to help you achieve your long-term financial goals.
Do any of the above points sound familiar to you? If so, the good news is by recognizing and understanding these behaviors and emotions you can control them and avoid making poor financial decisions that could negatively affect your financial future. So the next time you make a financial decision (or not) stop and think, Am I making this decision based on sound information or am I allowing my emotions to get in the way? (For related reading, see: How Women Can Get Their Finances in Order.)