Do You Spend Rationally or Emotionally?

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fear and money, psychology of money, personal debt, irrational spending, spending management

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The following post is by MPFJ staff writer, Greg Johnson. Greg is a proud husband, father, and debt crusader who is in the process of becoming debt free. Along with his wife, Greg co-founded the personal finance blog Club Thrifty, where they encourage readers to “Stop Spending. Start Living.”

When it comes to doing simple math, most of us are more than capable of handling the basics. We know that 3-1=2 or that 1-4=-3. For the most part, we do these formulas without even thinking about it. It is almost second nature.

Furthermore, many of us deal with simple math problems every day at our jobs. Some of us even deal with complex mathematical problems that the average person would find difficult, if not impossible, to solve. We are obviously intelligent people.

So, why is it that so many of us have difficulty making the math work when it comes to budgeting and our personal finances? Isn’t budgeting simply a basic math problem?

While it is true that budgeting one’s finances doesn’t take a math genius, the fact is that our personal finances are more complicated than just looking at the numbers in a vacuum. If we look at it from a purely objective viewpoint, it is easy to see that spending $1,000 more per month than we are earning is going to put is deep in the hole. Rationally, we know that this is not a good thing. However, when it comes to money, there are other things/elements in play.

Rational vs. Emotional Spending

Ideally, we would all love to be rational spenders. However, emotions play a huge part in how we deal with our personal finances. The way in which we handle our emotional reactions to money can have a lasting effect on the security of our financial future. Some of us may decide to go shopping in order to lift our mood. Others may be experiencing a midlife crisis and decide to splurge on a new convertible. There are a range of different emotions that can effect the way that we save and spend money. However, the biggest emotional driver of our spending and saving is fear.

How Fear Affects our Financial Health

Fear is something that is the driving force behind many of the financial decisions we make in life. It is also an extremely effective marketing tactic used to get people to do or buy things. All you have to do is turn on the television to find out what sort of havoc fear is wreaking today. Oil prices may rise or fall based on fears of conflict in the Middle East. Markets may drop drastically, citing fears over government defaults. Lately, there has been a lot of talk mentioning a fear of the U.S. government falling off the fiscal cliff. Yes, those who would profit from fear can use that emotion to manipulate the financial markets…and there seems to be a lot of fear mongering going around lately.

On a smaller scale, fear affects many of the purchases and financial decisions that we make as well. Many of us fear aging, which is why botox procedures have become so popular. The fear of intruders propels the growth of the firearms and home security industries. Some folks will spend all of their money buying goods to prepare for whatever the next version of the apocalypse is. Still others decide to hoard their money out of a fear that they will never be able to make any more – or worse yet, fear that they will somehow lose it all. While it doesn’t relate directly to spending, many of us fear not being able to pay our bills – which is why we stay in jobs we don’t like rather than trying to find work that we do like. The emotion of fear pervades most of our financial decisions whether we like it or not.

While fear may seem like a bad thing, the fact is that fear can also motivate us to make good purchases. Fear of dying and leaving your dependents with nothing may motivate us to buy life insurance. Exercise and diet programs are the products of fearing an unhealthy lifestyle. The fear of not being able to keep the lights on or having a place to live also keeps us making mature decisions.

The next time that you make a financial decision, remember that there are a lot of people and companies out there who are looking to take advantage of your tendency toward emotional spending. In fact, many of them may even help to create fear in you so that you may decide to buy their products. Try and remove emotion from your financial decisions. Be rational. The better you become at removing the emotion, the better handle you will have on your financial health.

How about you all? Do you find yourself spending rationally or emotionally? Why?

Share your experiences by commenting below!

    ***Photo courtesy of http://www.flickr.com/photos/21313845@N04/2397388906

    Comments

    1. John S @ Frugal Rules says:

      Good post Greg. I agree that a lot of budgeting is simple math, but for many it can be difficult to prioritize or look at the future as opposed to just that week/month. Working in advertising myself I know better than anyone that there are companies out there trying to take advantage of the emotional urge to buy something. The key is to seeing that and not being led by your emotions. That separation is a vital one, but can be difficult for many to make.

    2. It is difficult for a lot of people. If you can step back and look at things rationally, rather than emotionally, it will help you out on most any difficult decision.
      My recent post Things I’d Rather Hire Somebody Else to Do

    3. Canadianbudgetbinder says:

      I could never understand it myself but since having the opportunity to talk to so many of my fans on Facebook I realize that people do things for myriad of reasons. Some people don't budget in relationships because one partner is not participating, others feel like they have lost control and it won't help, others don't get basic math, some could care less and think it wont' work etc etc. Emotional spending with the amount of credit that is available to people is the reason so many people actually spend. Take away credit then they would struggle to buy stuff unless they had cash. We know that won't happen so we have to be informed. Can you believe I was in Staples the other day. Mrs.CBB says wow I smell coffee. We get to the cash and they have a starbuckss display that they now sell coffee. Mrs.CBB laughs and says.. oh haha I thought I could smell coffee I thought I was hallucinating. The cashier says, well no, that post over there dispenses the coffee smell every so often so customers will want to buy it. OMG if you could have seen Mrs.CBB's face… what is this world coming to. Emotional spending and marketing ploys are just another way that the hole keeps on getting bigger. We have to stop it on our own, because companies are out to get our money any way they can. Mr.CBB
      My recent post Budgeting With Mr.CBB Got Us Back On Track!

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