Human beings make most decisions at an emotional level, which often contradicts logic. This is especially true for those with Latin roots, like me.
A global study by Gallup found that Latin Americans ranked high in terms of putting emotions and relationships above individual assets. Because of this, we must pay close attention when spending money on family or close friends, something I struggle with every holiday season.
Each year, I tell myself I will buy gifts throughout the year, taking advantage of 12 months of discounts. However, I don't. I spend my free time with family and friends—not shopping. So, I desperately buy things at the last minute, paying a premium in exchange for knowing that my family members will have a gift from me. This behavior is explainable and predictable, because all human beings struggle with emotion vs. logic, regardless of their background.
The Link Between Emotions And Your Wallet
In my case, it would make sense for me to budget for gifts throughout the year. I could divide the cost into 12 months, place it in my variable spending category, and save money and time. It would be a no-brainer. Of course, such "logical" thinking doesn't always win out.
Consider this example from New York University: Two groups of students were asked to buy a digital camera on a set budget. One group received cash to do this; the other, a credit card. The group with cash spent substantially less than the group with the credit card. Having to part with that much tangible money created an emotional connection for the group with cash. Because the other group could just swipe a credit card for a large-ticket item, it detached the emotion of spending real money—thus, they spent more.
We can observe another example of the dangers of emotional purchasing with the time it took for winners of the Michigan lottery to lose their new wealth. This included individuals who received lump-sum distributions of $700,000 and $800,000; however they were not able to keep their wealth—and some even ended in worse shape than when they started. As of 2013, more than 3,500 winners were receiving some form of public assistance, such as food stamps.
Finally, here's something we can all see in our everyday lives. Pay close attention to traffic, restaurants, and stores at the end of the each month. There will be more movement these days than any others. Why? Because most people get paychecks then. Companies know this, and they increase their marketing campaigns at those times to trigger the short-term, emotional gratification that our brains crave when shopping.
How To Overcome Your Emotions
Even though logic is the language of the mind, emotion is the language of the subconscious—therefore, it often defeats logic when it comes to making decisions. Being aware of this is a step forward. However, to help you build your long-term financial well-being without your emotions taking over, consider the following:
1. Make a list of things before you go shopping. Studies by the ING Group have shown that 57% of people save money when they create a list before shopping. Set a budget for annual gifts 12 months before the holidays, and be creative by considering experiences over material things.
2. When investing, try to avoid following the herd. Studies from the University of Leeds have shown that the general public has a lagging effect on market direction. Even if it may seem "un-cool" to go your own way, do your research first before investing.
3. Cool off before buying large items. When making major purchases (for example, over $500), take some time between the decision and the purchase date. Prioritize your expenditures by categorizing them in term of cost and effect. For example, you should pay your health insurance and car insurance before a short-term vacation.
A Final Word
Common emotional purchases include "buying things in anticipation of money that is not guaranteed to arrive" or "buying things that are just too good to be true." These may provide short-term happiness; however, they're just as likely to result in long-term regret or debt.
When it comes to mind vs. heart, you now know your odds. Take a deep breath when it comes to money. Your priorities should almost always be focused on your long-term financial independence and not immediate satisfaction.