If anything good has come from the last few years of uncertainty and volatility, it’s that many of us are becoming more financially literate. We’re more aware of our finances and are better at prioritizing our expenditures. We’re also more aware of how important it is to save for the future, while still enjoying the present moment. We make lists and spreadsheets, and use planning and budgeting apps, all with the aim of better managing our financial lives.

But when it comes to our actions, we humans aren’t completely rational. Part of our decision-making is emotional, and it’s the emotional aspect that usually triggers an action. Actions are skewed by fear, guilt, exuberance, loneliness, or whatever else is influencing us. Because our emotions won’t fit in a spreadsheet, we can’t account for them. And depending on how you manage your emotions, they may be negatively influencing your financial picture.

Here are a few financial scenarios where emotions may run high:

Paying Down Debt

Many people with credit card debt typically have at least one account with double-digit interest charges. So when they develop a plan to systematically pay down their debt, they may choose to start with the high-interest debt first. But paying down a high-interest account can be a slog; they may feel like they aren’t making any progress. The innate need for instant gratification and positive reinforcement guides many to smaller debts first, where it’s easier to gauge progress.

While there isn’t necessarily a bad way to pay off debt— as long as it gets paid— paying lower-interest debts first may cost more interest over time. It’s motivating to check things off the to-do list, so we tend to tackle small jobs first. That may be what it takes to get through the whole list, but the costs may be higher. It may not sound like a logical approach, but we can easily rationalize our emotions to make them more palatable.

Purchase Decisions

A lot of people are becoming more serious about saving and are creating budgets. Unfortunately, budgets only happen on paper. When we’re at the mall or grocery store, we become vulnerable to our emotions. How we’re feeling in the moment, FOMO, or the urge to keep up with trends can all come into play.

Whether it’s buying a house with more space than needed, or a car with extra features that will never be used, people tend to lean into their emotions when making purchase decisions and rationalize them later.

Investment Decisions

Investing can be an emotional roller coaster. Over the last few years, fear and uncertainty have driven many decisions and this may be why some people feel like they aren’t making progress towards their retirement goals. The fear of loss can drive people to sell their holdings at the wrong time, and the fear of missing out can drive people back to the markets just when it would be smarter to get out.

The market will always change. It will drop, and it will rebound - and that's just the nature of the game. That’s why it’s generally believed that focusing on the long-term and staying the course is better for your long-term financial health than chasing short-term performance.

Overcoming Your Emotions

There is no easy way to take the emotion out of financial matters. Emotions are powerful and deeply personal. But you can learn to recognize and control how you respond to your emotions. The first step is to become aware of your emotions when you’re making financial decisions. This can help you break the rational-emotional decision-making cycle.

Next time you have a financial decision to make, try taking a moment to ask yourself “why am I doing this?” If you find yourself rationalizing an action, even if it goes against your plans, it may be because you’re being influenced by your emotions. Stop and try to take yourself back to your original plan to see if the action still makes sense. It may take time and practice, but it will get easier. Consulting a professional who can help you stay focused on your long-term plan can help logic prevail when emotions try to get the best of you.

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^{No particular strategy assures success or protects against all losses.}

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