Welcome to the second and final part our article series on how our emotions affect our financial decisions. In Part One of the series, we discussed the various ways that Anger, Anxiety, Excitement and Jealousy affect our financial decisions and provided steps we can take to prevent them from leading us astray. In this article, we will be continuing that trend by expanding on how three key emotions affect the financial decisions we make.
1. Feeling Overwhelmed
Do you ever find yourself feeling like there’s too much to do and too little time to do it? Most people would agree that sometimes, pressure from work, stress from relationships or just ‘adulting’ in general, can get quite tiring and overwhelming. This overwhelming feeling affects our financial decisions by making it a lot harder to find the required time/mental energy to effectively manage our finances.
For instance, during my Masters I had a close friend who, by his own admission, wasn't the most frugal person in the world but was still able to manage his money fairly well. He had a regular monthly budget of £500 (₦233,600) for upkeep which he maintained for most of the year; but during our final exams, proper money management “had to took a back seat” because of the overwhelming amount of work we had to do.
When our exams were over, we decided to review our accounts to see what damage had been done. We both had rough estimates of what to expect, and while I was within the range of my expectations, he had surpassed his estimates and gone over his usual monthly budget by £300 (₦140,200) without really noticing that it was happening.
Feeling overwhelmed can lead to a negligent approach towards money management and without proactive steps to manage our finances, life will unfailingly impose one form of result or the other on us, usually a result that we’ll be unhappy with.
How to reframe it
At its core, feeling overwhelmed is a result of us feeling like we lack control, over our jobs, our finances or our lives as a whole. In order to regain control, you’ll need to take a step back to calmly assess the seemingly overwhelming situation and then break down what needs to be done into bite-sized, manageable pieces.
For instance, if you grappling with how to start saving more money but feel like you have too many things claiming your time and money like your job and bills, you could start by taking the small step of downloading a helpful budgeting app like Fudget (click here for the iOS link and here for the android link) to help you track your spending. After tracking your spending for some time, you can take another step to see what part of your spending you can cut down.
You could then assign a percentage of your earnings that you would like to set aside as savings, before deciding to open a savings account that you can use to build wealth for the future. The secret is breaking your goal down to manageable steps, then taking action. Taking action, no matter how small, will give you the nudge you need to dissipate that overwhelming feeling and start working toward your goals.
Financial overconfidence occurs when we place too much confidence in our ability to land on our feet, regardless of how we manage our finances. Financial overconfidence is usually a result of prioritizing our present needs to the detriment of our future concerns under the assumption that “things will turn out fine in the end”. This line of thinking can be very problematic because it creates a false sense of financial security.
Susan Bruno, a certified financial planner and principal at Beacon Wealth Consulting LLC, said “people who feel that ‘the sun will always come out tomorrow’, typically ignore long-term financial planning because they believe they will always be able to fend for themselves in a pinch”.
However, speaking as someone who once suffered from this brand of overconfidence, I can honestly tell you that this system of dealing with one’s finances works…until it doesn't. By underrating the importance of long-term planning (saving and investing), I was failing to shape the future that I wanted for myself, leaving that future open to chance and circumstance. My reluctance to face the cold hard facts of my financial standing & money habits made me vulnerable to sudden turns of events, like a phone bill that was so high, it left me seriously thinking about my life.
How to reframe it
Think of confidence as a continuum: Lack of confidence is paralyzing, self-confidence is good and ideal while overconfidence is deadly, because it could lead to serious financial problems. Having a positive financial outlook is generally a good thing, but optimism needs to be sprinkled with a little bit of reality in order to get the best financial results in life. You can curtail your overconfidence by asking yourself hard but necessary questions like:
“Do I earn enough money to maintain my current lifestyle?”
“Is my spending pattern sustainable in the long run?”
“What areas of my spending do I really need to cut down?”
“Do I have enough money saved up to deal with an emergency?”
“A year from now, how likely am I to regret how I’m living right now?”
Once you can honestly answer these questions, the next step is to confront the numbers, one at a time, to identify where you’re going wrong and any areas you can improve. When you know where you really stand financially, you can then take a well-informed steps to design a budget and develop a savings plan.
Related: How to get a grip on your savings
Sometime last year, I missed out on a job that I was so sure I was going to land and to be honest, I was bummed out. I went on a bit of a spending spree afterwards without even realizing the full extent of my spending until I reviewed my bank statement at the end of the month.
Shopping is referred to as retail therapy because buying things we like or enjoy makes us feel better, at least temporarily. However, the short-lived nature of this solution could lead to continuous spending and financial problems if systems are not put in place to control one’s spending. The food, clothes and shoes we buy to chase away the blues, have negative effects on our ability to save and build wealth for the future.
How to reframe it
The first step I took to curtail sadness’ influence on my finances was designing a budget to limit how much I was using to make myself feel better. This allowed me set boundaries on a natural reaction to sadness, and minimize its harmful effect on my finances.
Related: How to design a personal budget
The next step I took was identifying alternative means to remedy sadness that have less telling repercussions on my financial status. Activities such as exercise, long walks or speaking to a trusted friend will help alleviate sadness in a more productive/less expensive manner.
Well this brings us to the end of our article series on how emotions affect our financial decisions. We really hope you’ve found this series useful and gotten enough information to guide your financial decisions regardless of how you feel from time to time. If you have suggestions for emotions we haven’t covered, please let us know and if you enjoyed or learned anything from this post, please like it, share it and leave a comment! For more DailyKobo advice, click here to subscribe to our newsletter and don't be afraid to get in touch.