Emotion in planning
Many of my retired clients ask me "have I saved enough money for retirement?". Of course, it is a rhetorical question which can only be truly understood by them. The question they need to ask themselves is "do I feel comfortable with my lifestyle now I am in retirement?".
Our relationship with money and goals is emotional. The very basis upon which we design our goals is emotional, using the right brain which evokes creative thought, intuition, and looking at the big picture. Memory is a large part of how the brain makes decisions. The hippocampus and amygdala are activated during decision making recalling memory and looking at the value we each associate with those memories - respectively.
However, the process to reach our goals needs to be rational and methodical (see the internal conflict?). This is where the left-brain is helpful in providing logical sequencing and analytical considerations i.e. is my bonus best used to pay down our home loan or do I take that unplanned holiday because flights to Bali are heavily discounted? There will always be distractions which appeal to the right brain and therein lies the internal conflict and why it is critical we all have a plan to keep us from deviating from our key goals.
Princeton University psychologists, Adam Alter et al, asked participants to make decisions after being confronted with annoyances such as conflicting information and poor directions. Participants were found to often use their gut-reaction rather than rely on rational analysis to make a decision.
Working with an Authorised Financial Adviser can provide external input to keep you from making decisions that distant your goals and keep you on the right track. It is never too late to recognise and understand destructive behaviors and emotions, nor is it too late to take control of them to avoid poor decision making.
Here are some common ways people distract themselves from achieving their goals.
Succumbing to short-term market volatility. We can be certain that markets will be uncertain. It is critical to take a long-term view and ride out times of poor performance. It is human nature to feel an urge to react to a bad market but remember business markets are cyclical.
Procrastinating. Procrastination is a sure way to keep you from planning effectively for your long-term goals. The fear of mistakes can mean we defer important financial decisions. Break the task into little steps so it feels and appears manageable then act on it. Enroll in a workshop or engage an Authorized Financial Planner to help guide you.
Optimist bias. The optimism bias (unrealistic or comparative optimism) is a belief idealism that blinds a person into believing they have a lower risk of suffering a negative event compared to others which can lead to improper decisions on risk management. Consider what could happen and assess the impact on your life - then put in place a plan to help alleviate the loss.
Behavior repetition. Life can throw us curve balls which means it is necessary to review you plan periodically to ensure it is compatible with your long term goals. We are creatures of habit and we will do things the same way because change can be uncomfortable and uncertain. Increase awareness and build your knowledge bank by talking to a professional or reading investment magazines and books written by professionals.
Marching on alone. We all have strengths and weaknesses. Recognizing our weaknesses is important so we can take control and find others to help balance us. Making decisions in a bubble can be time consuming and lead to poor decision making. We often seek out information to support our theory instead of careful analysis and critical thought on the bigger picture - open yourself up to opportunities and engage a professional to help work with you to evaluate the best pathway forward.
Ignoring behavioral issues. Ignoring financial issues can have a negative impact on your financial position the longer you avoid addressing them. There are some of us that are easily seduced by short term gratification at the consequence of our long term goals. If the behavior is triggering increased debt levels then address the issue immediately.
Next time you are faced with a decision that conflicts with your financial objectives, ask yourself “am I making this decision based on rational thought or am I allowing my emotions to take me away from my financial objectives?”.
