Figuring out emotions
Don’t forget to factor in feelings to any financial plan As the end of the tax year looms, I know that putting my Christmas bonus into my pension will lower my tax bill. I know it makes sense but I…
Blog13th Jan 2014
As the end of the tax year looms, I know that putting my Christmas bonus into my pension will lower my tax bill.
I know it makes sense but I am seriously considering not doing it.
What’s stopping me? Well, I want that money available for another important goal next year.
I realise that if I follow through with this course of action, I will have decided it is worth paying the tax but keeping the money available.
In this case, the numbers do not do a very good job of accounting for my important goal.
Having a financial plan and sticking to it is important, and one of the biggest reasons we fail to is that we react solely to emotion instead of considering the facts.
But the opposite is also true. When we consider only the facts and do not take the time to understand our emotions, it can lead to regret and make it difficult to stick to the plan.
In my case, my decision takes into account both the facts – I will not save as much on taxes – and the emotion lying behind me having the money available for my goal.
This is just one example of personal finance being more personal than it is finance. Here are some more:
Hold the latte – of course, we can save money by making our own coffee, but what if that perfect cup just makes us feel better?
- Buy economy – we may have been saving hard to buy that dream car but buying a cheaper model makes more sense. Can we handle the emotion of passing on our dream?
- Don’t stay at home – there’s a financial cost for deciding not to wok, or to work less, but what is the emotional cost if we decide there is huge value in spending more time with our children?
I am not recommending you ignore facts in such decisions, but too often we skip over the question of whether we can handle a financial decision emotionally. No wonder it is hard to stick to the plan if we pretend emotion has nothing to do with our decisions through the filters of both numbers and emotions.
I think a financial plan is only the starting point for most of us. It gives us a baseline and a way to get closer to our goals, but when it does not feel right don’t panic.
Take time to walk through why other option feels like a better choice and understand the trade-offs of that.
Sometimes, facts will trump our emotions, and we will go with the optimal numbers answer.
But sometimes emotion will win in our financial decisions. If we understand why, it becomes a decision we can handle without regret.