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Keeping the emotion out of your finances

The most powerful tool we have for minimizing our spending is to remove emotion and raw impulse from the equation. So how do we do it?

Brendan McDermid/Reuters/File
Holiday shoppers walk along 5th Avenue in New York. According to Hamm, removing emotion from your spending decisions will improve your personal finance.

We are emotional people. We react to situations with a wide range of emotions: joy, fear, anger, mirth.

On the other hand, money is about as non-emotional as you can get. Money is simply a method of exchange between goods and services.

The problem that most of us run into when it comes to personal finance is that we inject emotion into their financial choices.

People spend money on things that make them feel good. When we want something, we’re feeling an emotional pull toward an item.

When we feel that emotional pull, we give the seller the upper hand. They have the power to set the price. We might shop around in some situations, but if it’s something like a house where there are limited options, we’re often carried along for the ride.

The most powerful tool we have for minimizing our spending is to remove emotion and raw impulse from the equation.

How can you do that? There are several techniques you can use, but they all boil down to a few things.

First, have some strict constraints on yourself when you put yourself in a spending situation. Have a list that you must strictly follow, for example.

When you’re shopping at the grocery store, do your shopping strictly from a list. If you see something else you really want, just remember it for later and think about adding it to your next list. I’m going to bet that waiting a week takes the edge off of that “want” and produces a grocery list without that unnecessary item.

When you’re shopping for a house, do the same thing. Make a list of features that you want, then check houses to see if they have those features. If it does, put in a reasonable offer and don’t negotiate. If they won’t play ball, look for another house.

Second, if you see your emotions flaring, focus exclusively on the task at hand. Don’t get distracted by those emotional elements.

When you’re paying your bills, for example, don’t get upset about the content of the bills. Pay them (assuming they’re correct), then remove yourself from the emotion and analyze the bills at a later time without the emotion involved. This might lead to a rational discussion with your spouse or a well-considered decision to drop a cell phone provider, but making decisions in the heat of the emotional moment is never a good idea.

Finally, when you want to spend spontaneously, put a cap on it before you ever step into such a situation.

If you want to go shopping with your friends, take along a certain amount of cash – an amount that you decide on before you ever walk out the door. Only take that amount. Don’t give yourself the chance to spend more. With that money in hand, however, you can spend freely because you’ve already decided rationally that it’s okay to spend that money.

Whenever you’re in a situation where you’re directly spending money (or about to do so), stick to some basic rules for that situation. If your emotions are telling you otherwise in that moment, tell your emotions to take a hike. If they won’t, step away from that decision and don’t spend any money.

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