Have you ever considered how you make money decisions? I suspect you are like most people that are not aware that there are things you can do to improve your success when it comes to how you make money decisions.
Being in the right state of mind when you make money decisions will dramatically improve your outcomes.
There are some simple steps you can take to get into the right state of mind.
It is important to understand some of the theory about how our brain works and responds to the modern world of fast money…
Our brains have evolved over the years to cope with the hunt-or-be-hunted conditions of the wild.
This evolution has resulted in our brains responding to the civilized world of money in ways that are often at cross-purposes to our actual well-being.
It is therefore important to develop some conscious control over your state of mind when it comes to how you make money decisions.
How Do You Make Money Decisions?
Every day you will exist in a continuum of different states of mind…
It could be calm relaxation, reflective thinking, focussed alertness, worried anticipation or emotional stimulation.
I am sure you have either heard or said some or all of the following expressions at some time to describe your state of mind: ‘off with the fairies’, ‘freaked out’, ‘foggy’, ‘in a panic’, or ‘stressed out’.
Each of these expressions describe a distinct state of mind that are likely to compromise your decision making capacity.
Athletes often talk about being ‘in the zone’ and how their decision making was super sharp. Everything came naturally and easily. Well the opposite is true for when you are zoned out.
Your ability to move from one state of mind to another is quite fluid, and will be dependent on the task that you are undertaking at the time…
The alertness required to perform at work or in business, is completely different to the relaxation required to fall asleep.
Intuitively you will find the state of mind required to complete the task at hand.
The good news for you, and your money making decisions, is that it is possible to learn and manage the desired state of mind for the outcome you want.
Developing the skill of regulating your state of mind for specific decisions or tasks can determine how effective you become at that task, particularly money making decisions…
How to Make Money Decisions
To perfect this skill you will need to have principles or guidelines, be consistent and you need a plan.
A majority of financial decisions that result in loss have been made emotionally and contrary to otherwise good information, advice, strategy or written plans.
So how can you manage your state of mind to improve the outcomes of your money making decisions?
Here are 7 suggestions that if practiced each time you enter a money making decision scenario will dramatically improve your outcomes:
1. First Breathe
In the past year I have been learning the benefits of meditation to all aspects of life. Unfortunately for some people the notion of meditation conjures up negative emotions.
To keep it simple and give you a rapid introduction to basic meditation, the first thing you can do before any of the following steps is to breathe.
Be aware of your breath… which can be as simple as counting to three on the out breath and then again on the in breath.
By focussing on your breath, even if for just a few seconds, you can eliminate the noisy chatter that goes on in your mind. I have heard this described as the ‘monkey mind’, the constant yadda, yadda, yadda.
By taking a few seconds to concentrate on your breathe the ‘yadda, yadda’ will disappear and you enter a far more grounded state of mind.
2. Avoid Making Money Decisions when you are emotional
I’m sure you are familiar with the notion that decisions made when you are in a heightened emotional state are not necessarily the best decisions you make… and that means both good and bad emotions.
When you are in a heightened emotional state of mind your perspective narrows and you lose site of the big picture.
Your ability to think logically about the longer term outcomes of your choices is reduced significantly.
Think about times you have been in a discussion or negotiation with someone who is clearly in a heightened emotional state… what are the chances of talking to this person logically?
Normally these scenarios result in the person that is emotional digging their heels in and making less than optimal decisions, or less considered impulse decisions.
When it comes to making money decisions it is rarely the case that an emotional decision will lead to positive outcomes.
3. Avoid making important money decisions under tension or fatigue
The online definition of tension includes the notion of mental or emotional strain. And provides an example use of the word in a sentence that reads “a mind which is affected by stress or tension cannot think clearly”.
The logical result of tension is a stress response reaction which can lead to an emotional pattern characteristic of someone of a much younger age, that is, childlike responses.
It is why you may have heard someone in a heated discussion say ‘don’t act like a child’. The person has regressed due to the stress caused by tension.
The same can be true for fatigue…
Again, in any sport at any level more mistakes are made when the participant is fatigued.
It is also far easier to fly off the handle and say something you may regret later when fatigued…
And by extension, buy things you will regret later.
To avoid poor outcomes for your money making decisions, you may come up with a rule that says you will not make any financial decisions after dinner, or after a certain time at night. This is just a simple way to manage the potential for fatigue impacting your decision making.
4. Be Willing to Sleep On It
When it comes to investing and making money, there are no emergencies.
As an investor, you are endeavouring to make money over time, and as a result there is rarely going to be a circumstance where you need to make a decision in a hurry.
The same mindset applies to buying consumables, like the latest television or computer gadget. There is no emergency in making these decisions…
If it is a good decision to make today, it will be a good decision tomorrow, after you have had the chance to sleep on it.
It is important to recognise the distinction between procrastinating and making an informed decision not to act right now when your state of mind may not be optimal for the outcome you are seeking to achieve.
Making the choice to ‘sleep on it’ is a decision…
If you are exposed to traumatic or crisis situations, sleeping on a decision can convert a highly emotive state to one of reason.
By recognising your susceptibility to emotional news or crisis situations you can devise a strategy to manage and not react, especially in your investing activities…
5. Have a well-informed and fully structured plan
I’ve written previously about the need for a written plan when it comes to your goals for investing.
In terms of money making decisions you need a big picture view and to understand your long term goals. And I even have a money planner for your money!
To achieve this you need a plan, a strategy that is based on facts and your objectives, and not based on emotions or instinct.
You can and should seek assistance in forming your plan, become fully informed of the issues involved in your strategy…
And one of the steps that you may overlook, that is crucial to the planning process, is to ensure that you periodically review your plan to check that it is in alignment with your objectives and consistent with any advice or research you are using.
6. Stick to your plan
If experience is any indication, not writing a plan is the first mistake most investors make…
The second biggest mistake is not sticking to your plan.
Surprisingly, it is when things are going really well that more investors fail to follow their plan.
It is the excitement of doing well that causes investors to take on more risk or deviate from what has worked to get the good results, which unfortunately tends to end in tears…
If you want excitement, find a hobby away from your investing activities.
7. Worry about the right things
As an investor you will become comfortable with the notion that returns take time…
And in time there will be circumstances that cause you to question your decision making.
The key to this suggestion is that you should identify what you WILL worry about, which should only be what you can control.
You can only control your plan, your actions and your decisions…
You can’t control the markets or external events such as government policy changes that impact investments, for example interest rates.
If you put all your energy into those things you can affect and stick to your plan, the matters that are beyond your control will be of less significance.
Your emotional reaction to matters that are beyond your control will be far more balanced when you develop the skill of focussing on what you can control.
Remember what I have been saying about money management, it is the little things that will bring you undone.
So start this week with suggestion number one.
Each time you are about to make a money decision, however small it may be, remember to breathe and give yourself time to change your state of mind to one that supports your money making decisions.
Leave me a comment and let me know which of these tips you are going to start, or continue to use, from today onwards.