Principle 1 of the 10 Money Mastery Principles states: SPENDING IS EMOTIONAL. We all know this to be true, because we are emotional animals. Life is far more fun when we are having grand emotional experiences like seeing a newborn baby, watching a sunset, eating a delicious new desert, or skydiving. Our emotions are exciting but they can also prove to be challenging, especially when it comes to money. How hard was it for you the last time you had to explain to your spouse why you spent more than you had for something silly? Or how emotional did you get the last time you had to make an investing decision?
Consider what financial guru, Keith Fitz-Gerald, discovered from three university studies on the emotionality of money (taken from Total Wealth, May 14, 2015):
“Researchers at three major universities — Stanford, Carnegie Mellon and the University of Iowa — published findings showing that brain-damaged individuals made better investment decisions than the rest of us.
“To be precise, what they studied was the impact of injuries that prevented the brains of the injured from processing emotional stimuli and, by implication, responses to those specific inputs.
“Researchers found that when they compared the findings to folks with no brain damage, the ‘injured’ individuals made significantly better investment decisions.
“That’s because the human brain is wired to evaluate economic and investing information using connections and pathways that are closely linked to emotional inputs. You’d think this kind of decision-making would involve logical brain pathways but that’s not true.
“This is why making decisions with your money can be very challenging, especially when the markets are complicated and the investing landscape emotionally charged like it is right now. Because you are taking what should be a logical decision and using emotional receptors to make it.”
As co-author of the Money Mastery principles who has coached thousands of people on how to manage their own money with confidence and efficiency, I can tell you from experience that you should do everything you can NOT to use these “emotional receptors” when making financial decisions.
How can you avoid using these receptors?
- Build a spending plan. Go back 12 months and examine the way you spent money over the last year. See what “categories of spending” show up and then total the amount you spent in each category. See if anything surprises you. Did you spend more money that you took in? Did you spend far more money on eating out and fast food than you actually thought you did? Did you buy more clothes and spend more money on entertainment than you imagined? Yes… well let’s blame it on those pesky receptors. If you will build a 12-month historical spending plan, then from that historical picture determine your values and priorities for spending going forward, you will be able to make spending decisions while you are in a fairly unemotional state. This will give you a better chance at eliminating those receptors at the point of purchase. A plan helps you use more of your logical brain when making financial decisions.
- Place your spending categories in a tracking system such as a phone APP, electronic device or on paper. This will allow you to easily record, at the point of purchase, every expenditure you make in each spending category and most importantly, see what you have left to spend in that category for the month, thus avoiding over-spending. By looking at what you have to spend in monthly segments you can cut off emotions and see the effect your spending will have on other areas of spending and on your financial picture overall.
What about debt? How did you get into the debt in the first place? Well, the answer is those pesky receptors. The solution is to create a spending plan and track the plan. As you do, you will create a surplus that can be used to accelerate debt payoff. As long as you have surplus each month, you are not going deeper into debt and you can use the surplus to pay down debts much quicker.
What about retirement planning? Most people take more time and effort planning their yearly vacation than they do their entire retirement future. How can you hope to be successful if you never plan? I know why many people don’t like to plan for retirement, they don’t know where to start, how to prepare the numbers, and haven’t saved anywhere near enough, so they avoid this subject all together. However, when I help them take the emotion out of this by teaching them how to build their own retirement plan (which is based on things they absolutely control right now such as spending and debt) they get excited about all the possibility their future holds.
All of us can eliminate the emotions that undermine financial decisions by doing everything the Money Mastery way, or we can get in an accident and have head injury. Both will help take the emotional drama out of money — you decide which route you’d like to take.