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Life is made of choices, especially when it comes to money. That way, if we make bad financial decisions, we will live by the consequences of those decisions. If we want better results, we need to make smarter decisions. But what are the factors that affect our financial decision making?
1- Emotions and Feelings
When it comes to money, greed and fear are the most common emotions that can trigger bad decisions. As we know, when stock markets fall, investors panic and tend to sell stocks in order not to lose more money in the short term.
On the other hand, greed can drive investors to turn to get-rich-quick schemes, fueled by a desire to make the most money in the shortest possible time.
While fear and greed can lead us in the wrong direction, they are not the only emotions our brains are susceptible to.
Anger, such as is experienced in difficult divorces, can lead embittered spouses to make disastrous financial decisions. Feelings of sadness and emptiness can lead people to engage in unplanned purchases in an attempt to fill an emotional void. In times of exposure of life on social networks, jealousy and envy make many people have a more expensive lifestyle than they can afford.
The link between depression and debt is real, as debt can make a person feel helpless, hopeless and low in self-esteem. In addition, depression compromises a person's ability to make clear, rational decisions. Consequently, it can lead to lethargy and total inaction, which in itself can be a bad decision.
Emotions and feelings play a much bigger role than we insist on recognizing. So it is one of the factors that affect our financial decision making.
While many financial problems are mathematically simple to solve, emotions and feelings can make them more complicated.
2 - Financial exhaustion
According to a recent World Bank study, people with lower incomes are more likely to make poor financial decisions. They are committed to what is known as "financial burnout."
Your constant struggles trying to balance the day-to-day bills impact your psychological resources and can result in bad decisions.
As such, being heavily in debt or in serious financial difficulties can lead people to believe that they will never get out of their financial difficulties. Consequently, they are more likely to continue making wrong decisions.
For example, financial fatigue can lead a heavily indebted person to spend money playing the lottery instead of paying down debt.
So, exhausted from constantly worrying about money, working hard for a living and living precariously, those who suffer from burnout are less resilient and more susceptible to bad financial decisions.
3 – Lack of self-control
When it comes to creating long-term wealth, self-control can be more important than intelligence. Being able to defer the reward involves deferring immediate desire fulfillment and focusing on some greater payoff in the future.
Exercising self-control involves planning and thinking about what might be, and then comparing it to the opportunity that presents itself at the moment.
Being able to plan, think ahead, assess opportunity costs and defer reward is a key indicator of future success. Compulsive shoppers and spenders are unable to make the connection between how their current spending affects future financial security.
Our consumer culture has increased impulse spending as more consumers relate pleasure to shopping. And they know that the purchase was probably a bad financial decision. It is definitely one of the factors that affect our financial decision making
4 - Insufficient financial education
Failure to grasp and understand key financial concepts is another factor that can lead to poor decision making. Essential financial skills, such as budgeting and controlling expenses, are important life skills. And most of the time, they are not taught at home or at school.
Not understanding how compound interest can work for or against you can lead people to buy on credit without a full assessment of what they are paying in the long run.
A lack of understanding when it comes to the risks and rewards of investments can cause people to keep their money in low-return investments that don't keep up with inflation over time.
Ignorance of consumer protection rights is also harmful. It can cause individuals not to ask for refunds or replacements or to be misled by large companies.
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