Quick quiz: what do the following statements have in common?
- Used car?? I don’t want to buy somebody else’s problem.
- If the rent covers the mortgage, I’m set. Right?
- He’s rich. He can afford it.
- Maybe when I’m in my 60s, I’ll be able to afford that.
- The government / my parents / my spouse should take care of me.
- I’ve worked hard for this money. What if the market tanks?
These statements show how emotions drive our decisions.
- Used car?? I don’t want to buy somebody else’s problem. – Fear.
- If the rent covers the mortgage, I’m set. Right? – Hope.
- He’s rich. He can afford it. – Contempt, Self-Doubt.
- Maybe when I’m in my 60s, I’ll be able to afford that. – Envy, Hope.
- The government / my parents / my spouse should take care of me. – Fear, Hopelessness.
- I’ve worked hard for this money. What if the market tanks? – Fear.
We’re Driven By Greed, Fear and Hope …
There’s a cliché that two most powerful money-related emotions are greed and fear.
But no one thinks of themselves as greedy. No one wakes up in the morning and says, “Time to screw the poor!” Greed is a subtle force.
Likewise, many people don’t describe themselves as fearful or scared. Fear is like a tooth cavity: you don’t notice it unless the situation is out of hand. It’s either hidden or it’s unbearable.
Fear expresses itself in small ways:
- You want a new car in case your eight-year-old car breaks down. The engine is making funny sounds, anyway. Or is it the timing belt? Whatever.
- You avoiding the market because you can’t stomach the possibility of loss.
- You linger in your 9-to-5 not because you love your job, but because you hate the idea of unstable income. Besides, you get (so-called) “paid vacation!”
- You disparage people with wealth. They must have trampled others to achieve their success.
“I’d rather be happy than rich.” That’s fear talking. You’re not sure if you have what it takes. You’d rather avoid trying.
You rationalize this fear though an illogical idea — that happiness and wealth are contradictory.
Why Hope is Not a Financial Plan
But fear and greed aren’t the only two financial emotions. We’re also driven by hope.
Hope talks when we say:
- I’d like to live in this house, and rent it out when I “trade up” or move away.
- If I put money in mutual funds, it will go up over the long run. Right?
- I think my product/service is good enough to sell.
These are great sentiments. Hope is wonderful. But hope is not a financial plan.
What’s a better option? Math. Analysis. And rationally aligning your choices with your life goals.
You might be thinking: “No! Not math! That’s my worst subject!” — Don’t worry. This ain’t fancy-pants calculus. It’s elementary.
Instead of worrying “what if?” or speculating “I hope // I think,” create a spreadsheet to walk you through the consequences of every major financial decision.
You’d like to move out of your home and start renting it out? Fine. Make a spreadsheet. Analyze assumptions for vacancy, maintenance, management, insurance, taxes, and income. Run scenarios A, B, C, and D. What’s the best case? What’s the worst case? Can you live with it?
You want to invest, but you’re afraid of expensive mistakes? Look at historic averages. Examine how long you’ll stay in the market. Quantify your fear.
You don’t know whether to repay debt or invest? Run the numbers. What rates of return do you project? How does that compare to added interest costs on your debt?
Financial conversations are filled with emotional language. “What if … ?”
I’ve found that a spreadsheet is a source of comfort, particularly when I’m making a high-dollar decision.
That doesn’t mean I’ll choose the option that earns or saves the most money. For example, I might choose cash over leverage to increase peace-of-mind, reduce stress and strengthen cash flow. But I won’t make this decision without analyzing the numbers first. Peace of mind holds value, and with a spreadsheet, I can quantify that value.
We can’t remove emotion from our financial choices. But we can manage our emotions through math.