Our financial decisions are influenced by a lot of things. This is why you need to recognize just how powerful the mind is. There are things that influence us unknowingly. It is like our brain makes its own filters and we subconsciously follow them without question.
We call it cognitive biases. This is defined as a type of error in thinking as we process information around us. Our brain set up filters and limitations that makes us lean towards a particular decision. It is meant to simplify the time it takes to process information. This is great if you need to make a quick decision about something. But then again, while this seems like an awesome trait, it is not always helpful – especially when we are making major life decisions. This also includes your money. If you are not careful, you might make a lot of financial mistakes that can compromise your future.
It is not always advisable to make important decisions on a whim. You have to think carefully and clearly. If you have made a decision, scrutinize that choice and make sure it is the right one. That initial decision may have been influenced by prejudices that we have in our brain.
But then again, what are these prejudices that can influence how we make decisions?
Biases that can affect your financial choices
Here are the most common cognitive biases that can influence your financial decisions.
While we are always trying not to be judgmental, we cannot help but be prejudiced based on our first impression. Whether it is good or bad, the initial impression that you have on a person, task, or experience can strongly influence the choices you will make. For instance, if you got the easy way out of debt, you will not be hesitating to borrow more money. Even if your current financial situation is reaching the critical level, you will still rely on debt to get yourself out of it – simply because your first impression is that you can solve it easily. But when you have a hard time getting out of debt, you will be hesitant to put yourself in the same position.
The bandwagon effect is actually prominent in the financial industry – specifically when investing. People usually try to follow what the others are doing – especially when the majority are acting on the same impulse. The thing is, what the majority is doing is not always the right thing to do. You need to consider your own financial goals before you follow what the others are doing. They may have different goals than you. If they are willing to take on more risks, they may have a higher risk tolerance than you. Do not be quick to jump the bandwagon because you may not have what it takes to survive it.
When making financial decisions, most of us are hesitant to ask for advice. However, the rare moments that we do are only meant to listen to a confirmation of what we have already decided. Obviously, this is not always healthy. Getting advice is only okay if you are willing to listen to those who are not afraid to go against your decisions. Otherwise, getting the advice is needed. You need to be open to new ideas and perspectives to make sure your decisions are well-rounded and thought-out.
You know how ostriches bury their heads when something threatens them? This is also a cognitive bias that we all have. When we are faced with a difficult financial situation, we usually try to hide from it and ignore that it is there. This is a common reaction to debt. However, it is also quite destructive. You should not put off dealing with your debt. It will only get worse the longer you do nothing about it. If you have debt, the best financial move you can make is to come up with a debt solution that you can commit to.
The truth is, there are other cognitive biases that have the power to influence your financial decisions. Since these are biases, it is harder to determine if you are doing it or not. In fact, you may not know that you just acted on a bias of yours. This is why you need to know what these biases are. That way, you can make your decisions around them. Admittedly, this can be very tricky because it is like outwitting your brain. But if you have a clear mind, you should be able to recognize when your decisions are being clouded by common prejudices.
Steps to follow when making decisions about your money
Making financial decisions should never be taken lightly – but you should never feel intimidated by it either. We will always be put in a position where we have to think about how we will use our money and it should always be done in a smart way.
To be smart with your financial choices, it is important for you to make a habit of pausing. According to scientists, the brain uses a different method when making snap decisions. Even if the details are practically the same, the brain will process it differently if it is based on speed stress or accuracy stress. When it comes to your finances, you should always focus on accuracy rather than speed to ensure that you are making the right decision at all times.
The truth is, you do not have to wait for long. A day at the most is more than enough time for you to consider if a financial decision is the right one or not. But what should you do while you are waiting? Here are some of the things that you need to work on to ensure that you are giving this financial issue enough thought.
Write it down
It always helps to write down what you are about to pay for. Do not just write the expense. You should also write your current financial situation to determine if you can afford that expense or not. If you have a written budget plan, this should be easier for you to reconcile. You should also try to write all the outcome that will result if you go ahead with the decision and if you postpone it.
Do your research
Another thing that you should do is to conduct your research about it. Maybe there is a cheaper way to get what you need? Or it might be possible for you to get more out of the financial transaction. By going through all your options, it is easier for you to make smart financial moves. If there is something that you do not understand, make sure you clarify it before you make the final decision.
Talk about it
This is actually very helpful when you are about to make huge financial decisions. Talk to your spouse or your partner. Get advice from your parents. If you know someone who went through the same thing as you, go ahead and talk to them. For instance, your sister just bought a house with her spouse. If you have plans of buying your own, talk to her about the experience. She might be able to give you sound advice and tips on what mistakes to avoid. This can enlighten you and help you anticipate the process to ensure that it will be a smooth one.