Everyone has made an impulsive financial decision that they end up regretting later. While these hasty decisions might feel right when you initially make them, they have the potential to harm your long-term finances.
Some impulsive decisions might have little effect on your overall financial wellbeing. For example, picking up a treat when you’re grocery shopping or spending a little more than you should when you’re browsing your favourite online shop.
However, there are times when making a quick decision has the potential to affect your long-term financial security. This might include when you’re deciding how to invest your money, withdraw a lump sum from your pension, or deplete your emergency fund.
So, using tricks to curb your impulsive decisions, including these four, could be useful.
1. Recognise when you’re more likely to make impulsive decisions
There are times or situations when you’re more likely to make impulsive decisions. For instance, common triggers for making rash financial decisions might include:
- When you’re experiencing emotional highs or lows
- Limited time offers that give a sense of urgency
- If you’re facing social pressure.
Usually, you might take the time to carefully evaluate an investment decision to understand how it could fit into your wider goals. However, if you’re approached by a group of friends who are excitedly chatting about an opportunity that you “must” buy before it’s too late, you could be tempted to throw caution to the wind.
Simply understanding which scenarios are more likely to lead to you making an impulsive decision is a good place to start. It means you’re in a better position to take note when you could benefit from taking a step back, expert advice, or more research.
2. Implement a cooling-off period
An impulse purchase can seem exciting at first. Yet, a day later, the high it gave you may have worn off and it might be replaced by feelings of regret. So, implementing a cooling-off period could help you reduce the effect emotions have on your financial decisions.
Using different time frames depending on the importance of the decision may be useful.
For a smaller purchase, you might benefit from simply sleeping on the decision. If you still want the item or experience the following day once the initial emotions have passed, it might be worth it.
For larger financial decisions, give yourself several weeks or even longer.
If you’re thinking about investing more money, taking out a loan, or adjusting your financial plan, this longer period could give you the time to fully research your options and weigh up the pros and cons.
Should you decide to go ahead with your initial impulse, you can feel more confident if you’ve explored the other options and fully understand the potential implications.
3. Consider your long-term plan when making decisions
When you’re managing your finances, it’s important to remember the decisions you make today could affect your options in the future.
Having a clear long-term plan that you’re working towards could help you balance short- and long-term goals. For instance, you might enjoy treating yourself to a fancy meal out each week and feel that it’s a worthy expense. But would you still feel the same if it could place your plans for an early retirement at risk?
It’s not just about how you spend money either. You might be tempted to increase the amount of investment risk you take in the hope of achieving higher returns. Yet, taking more risk than is appropriate for you might mean you have a greater chance of losing your money.
So, next time you’re about to make an impulsive financial decision, ask yourself: does this align with my long-term goals?
4. Work with a financial planner
Working with a professional who understands your circumstances and goals could help keep you on track. There are several important reasons why.
First, by setting out a financial plan with your aspirations at the centre, you’re more likely to be aware of how impulsive decisions could place your goals at risk. In some cases, that could be enough to curb your impulsiveness.
Second, being able to turn to someone you trust when you need a second opinion could be invaluable. Talking about your ideas and discussing alternatives may be useful when you’re assessing which options are right for you in the short and long term.
Finally, regular financial reviews might mean you’re less likely to make large impulsive decisions as you know you have a scheduled time to discuss and think about your finances. If you’d like to talk about how we could work with you or you’d like to review your financial plan, please get in touch.
Please note: This blog is for general information only and does not constitute financial advice, which should be based on your individual circumstances. The information is aimed at retail clients only.
The value of your investments (and any income from them) can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.
Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.
