Why emotion will cost you money

Money is an emotional subject. But letting our emotions influence our financial decisions can be a costly mistake.

Do you find yourself getting emotional about money? If you do, it’s hardly surprising. Money can make even the best of us emotional. Just imagine your emotions if you won the Lottery, or were declared bankrupt.

But did you know your emotions can determine how wealthy you are? Well they can, according to new research from Barclays Wealth. And the bad news is that too much emotion can cost you money.

Which possibly explains why a cold-hearted banker who spends his day rejecting loan requests and repossessing people’s homes is wealthier than you will ever be.

And why you, you big-hearted dollop, are always skint.

That money emotion

The new research is focused on investing, but applies equally to every part of your finances. The survey analysed share trading habits of more than 2,000 investors in 20 countries, and found emotion got in the way of making money.

Related how-to guide

Destroy your debt

If your credit card bills and debts are getting you down it's time to make a stand - here are five easy ways to start.

See the guide

Too many investors lose money by trading too often. Buying and selling stocks and shares on a whim, demanding instant returns and losing patience when they don’t get them, getting bored, getting greedy, getting distracted by hot new prospects, hopping from one strategy to another. In other words, throwing self-control out of the window, and letting their emotions rule.

That’s no way to make money. Barclays Wealth concluded that poorly-controlled, over-emotional trading cost investors nearly 20% of their potential returns over a 10-year period.

Whereas those who controlled their decisions, say, by waiting before making a financial decision, or setting themselves deadlines, typically did a lot better.

Out of control

I didn’t need to analyse 2,000 investors in 20 countries to come to a similar conclusion. Instead, I went shopping with my friend Lizzie. Ever since I’ve known her, she has worried about being broke, and I quickly remembered why.

She started off with £100 in her pocket, fresh from the ATM, and over the next few hours frittered it in a haphazard, uncontrolled and at times emotional shopping spree. Despite my protests, she lavished £15 on a glossy book on making cupcakes (a gift for my girlfriend, the fifth cupcake book she has bought us).

She over-ordered at lunch, then remembered she was on a diet, and barely touched her food. She bought a pair of cut-price sandals she knew didn’t fit, and never took them back to the shop. And on it went, until the £100 had gone, at which point she remembered she was broke. Then she burst into tears. Self-control didn’t come into it.

The financial feelgood factor

You need self-control to do all sorts of sensible things. Like buying insurance - nobody does that for the thrill of it. Or saving money, when it is so much more exciting to spend it. Or knuckling down to the dreary task of clearing your credit card, rather than giving into the sensory pleasures of maxing it out.

You can also argue that they are acts of love. If you love your family, then you need to protect them with life insurance, save money for their future, and spare them the agony of going broke. This will prove much more emotionally rewarding than giving into instant gratification.

Few things feel better than being financially solvent. Clearing your debts can give you a real emotional high.

If you’re broke, fix it

If you don’t have self-control, if your emotions are making you poor, don’t despair. There is something you can do about it.

Say you find it impossible to save. Choose one of your less emotional moments, log on to your online bank account, and set up a direct debit to transfer, say, £50 a month into a savings account. Make sure the money comes out soon after payday, when you have cash in the bank.

That way, even if you spend the rest of the month on the retail therapy rollercoaster, you will still have saved £50. At the end of the year, you will have salvaged £600 from the emotional wreckage of your life.

Donna Werbner looks at how much you can save by quitting smoking.

Next, you could do what I urged Lizzie to do. Write down every penny you spend, say, over a two-week or four-week period. Then sit down, and take a cold and unemotional look at where your money is going.

You may be shocked at where your emotions have led you, and how little you have to show for it.

Rule your heart

You could also set yourself some financial rules. Before buying non-essentials, insist that you sleep on the decision, and come back next day if you still absolutely have to buy it. Or take a short walk, say, 15 minutes, to give yourself time to cool off. It is amazing how quickly you can forget why you desperately wanted something only minutes before.

You could also control yourself by only carrying a limited amount of cash, and leaving your cards at home. And resisting bargain offers and big discounts, which are designed to play on your emotions and tempt you into buying things you don’t need.

Emotional wreck

If that doesn’t work, and your finances remain an emotional mess, there is some consolation. At least you’re not a cold-eyed, bean-counting robot. You’re a living, breathing, vital, emotional human being, pulsing with love and life. Shame you’re also broke, but that’s just part of who you are.

And we love you for it. No matter what your bank manager says.

More: 2,385 savings accounts and they're nearly all rubbish! | Fight back against rising food prices