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In
managing money, the biggest pitfall is often how we make
decisions about our money. Our decision-making
capabilities for practically everything are emotionally
driven, meaning how we are feeling at the moment often
results in what decision we make — and that can be
dangerous.
When we
are feeling excited, exhilarated or in a state of
euphoria, we are in a danger zone for decisions. This is
why retailers try to make us feel good about buying
something. A car dealer makes cars look appealing, a
coffee shop makes its stores look refreshing and
relaxing, a multi-level marketing firm makes its product
look like the perfect solution for making money, a tech
company makes its gadgets look cool. These situations
give us a thrill and appeal to our emotions to think
it's OK to buy now. It makes us forget what's really
important about deciding on a purchase — whether we
need it and whether we can afford it.
Placed in
these situations, the best thought is to wait until you
have time to think about it and compare the purchase
with others like it. When we are feeling calm and have
time to think, we then make the best decisions, and this
includes not only buying but investing.
When you
reach this peaceful mindset, you decision process should
begin with asking yourself if you can afford the
purchase and anything else the purchase requires you to
do, such as buy insurance or spend a lot of time on it.
If not, the decision is clear. If it is something you
need or want you then think about other options and
whether they are more affordable and have the same
quality. If another option is, the decision is clear.
The same
goes for investing. If two mutual funds had the same
objective, would you invest in the one with the lower
expense ratio or the higher expense ratio? And with
investing, if one investment is overvalued, would you
purchase another one similar to it that is undervalued?
The decision is clear. Overvalued investments are
dangerous as we saw with inflated Internet stocks 10
years ago. The concept of value investing and contrarian
investing believes that buying undervalued and
out-of-favor investments can result in bigger gains. But
it's not always the case as other factors must be
considered before investing this way.
So the
next time you are faced with a financial decision, ask
yourself: Am I excited? If so, that should signal to you
not to make a decision until you calm down and think
about it, or consult with someone who isn't emotionally
involved.
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