Numbers Vs Emotion in Money Decisions
April 27th, 2008 by Ana
One thing I truly love about reading y’all’s comments is they often make me think about things either in a new light or at a much deeper level than I had. Here’s another great example, in Eric’s comment on my post Raiding Retirement - A Huge No-No:
… I would have to sit down and run the numbers - this isn’t an emotional decision, which I am afraid you have made it into …
I am all for running the numbers on most things, but there is one simple truth (for me, at least). My emotions are tied to my money situation, and heavily influence my personal finance decisions. For me, money equals security. When I lived paycheck to paycheck, I lived with a fear in the back of my mind and in the pit of my stomach at all times. What if the car broke down? What if the gas (heating) bill came in higher than expected? What if I got sick and had to miss work?
This feeling of fear and insecurity is why I am so anti-debt, and is the result of bad experience (and bad decisions). When I was driving home on Decemeber 26, 2006 - knowing the trip was on a credit card and worried how to pay it - and heard of a better plan on the radio, it was of fifteen years of financial fear and frustration that motivated me to make such major behavioral changes my son wondered if I had joined some kind of cult. These emotions also motivated me for fourteen long months to get out of debt.
These changes brought about another emotion that I had never associated with money: HOPE. It’s another strong motivator, and one that drives me today. HOPE that I will have a big enough emergency fund to cover whatever life throws at me. HOPE that I will be able to retire comfortably, and not need to rely on VA disability or Social Security. And best of all, HOPE that I can influence my son so he can truly have wealth and financial success in his adult life.
Money is a very emotional topic: for proof I point to the comments section of just about any personal finance blog where discussions often get heated (this one included). Money - or lack of it - colors almost all of our daily decisions and touches our emotions.
I am sure there are folks who are able to make money decisions on a purely numbers basis instead of an emotional basis. Obviously I am not one of them! One of my favorite quotes is Dave Ramsey on the topic of saving up money for an emergency fund: “You will only save up money when it becomes VERY VERY IMPORTANT TO YOU!“ Guess what? Eighteen months ago, getting out of debt and saving up money became VERY VERY IMPORTANT to me!
I can run the numbers for the most part … but for me money IS a very emotional thing, and the emotional component is what has kept me motivated to make major positive changes in my financial life. Since this blog is about my experience with money and debt … it will have a strong emotional aspect to it. Sometimes I will run numbers to back up a point I am trying to make, other times I will simply link to other people who are better at the numbers part of the money game. But for me personally, money decisions are all about emotions and how well I will be able to sleep at night.
I will admit I am now curious. Which is it for y’all, the readers? Emotions or numbers?
Posted in random stuff |
April 27th, 2008 at 10:30 am
You are right emotions are often a significant factor. I think it is valuable to gain a detached understanding of the facts but it is also critical to include emotions in financial decisions. I am biased toward safety. That is just a part of my financial makeup. I am less comfortable hoping things will work out. That doesn’t change the facts but it may well change my behavior. And that is fine. So maybe I save 10% of my income for retirement and someone else saves 7% thinking they will get better returns… Or maybe they buy a hose with 5% down while I don’t until I have 20% to put down.
April 27th, 2008 at 1:28 pm
For me, it’s about both emotions and numbers. My emotions determine what, the numbers determine how.
I like zeroing in on a target based on how I feel (Like my Ferrari dream/goal/whatever you want to call it) and then working with the numbers to make it realized. (The saving and investing part of it.) Without both, I’d be rather lost to be perfectly honest. There’s always going to be emotions in personal finance, that’s part of what makes it personal I think. (Even if the emotions are removed when it comes to things like picking funds and other places they don’t belong.)
April 28th, 2008 at 12:25 am
Excellent post, and I agree with you 100%. I make decisions based on emotions, always, but make sure my emotional decisions are all being made in alignment with my bigger plan (the big picture). So far, it’s worked brilliantly.
At a BBQ on Saturday, my two super-business-focused numbers-kind-of-guys friends and I were all talking about retirement, and even these guys told me they go by what fits using common sense and their intuition. And that’s a lot for them to admit! But both these guys, well-off and well-paid, still wouldn’t make a stupid decision like draw out of their IRA.
Colin put it best. When I asked how much of his savings he would need to take out to finally pay off his BMW, he said something like 20% and I responded, “I thought you had a lot more saved than that, what with retirement and everything.” And he said:
“What? Oh. Well, yeah, if you include my IRA into the mix. I just contribute to it and then forget it’s there.”
Way to be, Colin!
April 28th, 2008 at 7:54 pm
Interesting. I don’t know. I think it’s kind of both. My logical unemotional side is the bill paying / saving / organizing time. My emotional time is when I end up spending more than I should. I need to be more logical and crunch the numbers.
May 1st, 2008 at 12:20 pm
I’m an emotions person. I think that it is difficult to be a complete numbers person because there are always circumstances in life where we have to break our budget plans in order to help our friends or just live a little!
May 3rd, 2008 at 7:13 am
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