Why logic and good judgement are key to making the right financial decisions

Every day we make financial decisions that affect a variety of aspects of our lives. This could be buying groceries at the store or taking out a large loan to build a house. In any case, you need to spend money based on logic and good judgement. Emotions can seriously distort our perception of the situation and lead to bad decisions.

Fear

Fear forces a person to make financial decisions in a state of panic. This often happens during economic crises, when many people start buying up essential goods en masse, fearing a shortage.

On the other hand, fear of unexpected expenses can cause a desire to save excessively on health, education or recreation, which negatively affects a person’s quality of life.

In the business sphere, fear of failure or financial losses limits opportunities for growth and development. Being afraid to take risks, a person either does not dare to start a business at all, or, having established one, acts too cautiously, fearing to make a mistake.

Anxiety

Under the influence of anxiety, people tend to endlessly reflect and constantly revise previously made decisions. A person incessantly hesitates and doubts, never daring to take specific steps. As a result, plans remain unrealized, and time and opportunities are lost.

An anxious person, trying to protect himself/herself from losses, prefers to keep his/her savings in cash or in a bank account, avoiding investments in more profitable assets. As a result, under the influence of inflation, money loses its purchasing power, and the person misses opportunities to increase capital.

Envy

A person who is envious of the success of colleagues or partners can, riding the wave of emotions, begin to act unscrupulously. This undermines trust and reputation, which ultimately negatively affects the financial situation and reduces the chances of achieving success in business or career.

In addition, in an attempt to outdo others, a person can start thoughtlessly buying expensive things that he/she does not really need. This leads to the accumulation of debt and deterioration of the financial situation.

How to manage emotions in the process of making financial decisions?

Financial decisions require cold-eyed analysis, but emotions can significantly distort our perception and negatively affect the result. The following self-help techniques will help you avoid this:

1. Introspection. Ask yourself: “What am I feeling right now?” and “How does this feeling affect my decision?” This helps you better understand when emotions begin to control your actions and allows you to take steps to control them.

2. Journal of decisions. Write down all financial decisions, with a description of your current emotional state. Review your notes regularly.

3. Pause. Before making an important decision, give yourself a certain amount of time to think. This will help to reduce the influence of emotions, return to rational thinking and carefully consider all aspects of the situation.

4. Scenario analysis. Consider all possible scenarios of events development. Having created several such scenarios, you can assess the possible risks and benefits of each of them. This gives a sense of control over the situation and reduces fear of the unknown.

The influence of emotions on the effectiveness of financial decisions must be underestimated. They can significantly reduce the ability to rationally analyze, which leads to hasty or unfounded decisions. Or, on the contrary, they can reduce your determination and, thus, move you away from your goal. That is why it is so important to develop skills for managing your emotional state and making decisions based on objective data.

You can read about other skills that are necessary for growth and development in the modern world in this article: 7 metaskills that will change your life