Unfortunately, our emotions and cognitive bias can have a huge impact on our financial behaviours. Traditional economics assumes that rational decisions are made by individuals. This is compared to the acknowledgments made by behavioural finance which suggests humans are not always logical, especially where money is concerned. Emotions can and often do lead people to a point where they make decisions that can impact their future finances.

Whilst it would be nice to believe that all financial decisions are ruled by logic this is not the case. When emotions get the better of us, we can make rash, bad, decisions that can damage our financial wellbeing.

Common emotional traps

There are a number of emotional traps that it is easy to fall into. Some of these can make you a little reckless with your spending:

• Fear – A powerful emotion that can paralyse your ability to make decisions. It makes you panic and buy because you fear if you wait too long to make a decision the item in question will be gone and you will have lost your chance. Understanding how fear drives your spending is essential to finding the pattern and breaking it.
• Greed – This is the desire for more and it can lead to impulsive financial decisions. Just because something is a “bargain” price does not mean that you need to buy a huge quantity of that item. You may find that you really don’t need it and won’t be able to use it.
• Overconfidence – This can be just as dangerous as greed or fear. If you believe that you are immune to the risks of the market or think you have a superior understanding of the market, you may not do the appropriate research before you invest your money. This overconfidence can have devastating financial implications.
• Social comparison – Just a touch of “keeping up with the Joneses” or comparing how you fare financially compared to others. This is the thing that drives you to spend more than you really can afford. You may want simply to be perceived as being better than others around you. This is a very destructive cycle.

Your money personality

Everyone has a unique financial types something that influences their spending habits, their saving and investing. Identifying your type can help you to make financial decisions that are more informed.

• The spender – enjoying immediate gratification, struggles to save
• The saver – prefers to save and is reluctant to spend, often over frugal
• The investor – grows wealth through investment, prepared to take calculated risks
• The avoider – often ignores financial matters, leading to disorganisation and missed opportunities

When you understand your type, you can look for financial strategies that align with your tendencies.

Conclusion

Understanding how and why you spend and how you feel about investing and saving can help you to make the most appropriate financial plans for the future. Whatever financial type you are it is important to create a comprehensive financial plan for the future. This will help you to take control of your finances and ensure that when it comes to the future you have created a financial cushion to help you live your best life.