Mixing money and emotions is rarely a good idea. It almost never ends well.
But there are certain key times in life when this is particularly true, such as when going through a divorce, buying a home, or after losing a loved one and inheriting a substantial amount of money.
It’s easy during these times to let emotions cloud judgment and make regrettable financial choices that will haunt you for years to come. With that in mind, here are five key times in life when it’s best to check your emotions at the door as you make money decisions.
Homebuying and Selling
Real estate transactions are typically among the most significant financial decisions people make in life, and along with that comes a rollercoaster of emotions.
“When the stakes are this big it’s even more important to remove emotions from the decision- making process,” said Leon Goldfeld, co-founder of the real estate brokerage site Yoreevo.
To help do that, Goldfeld recommends a buffer period of 48 hours. If you find a home you love, press the pause button. Spend a few days thinking about it before making a decision to buy. During that time, ask yourself a few key questions.
“Are you buying it because it’s your ‘dream home’ or because it’s at an attractive price?” said Goldfeld. “Ideally the answer is both. But the latter should be a requirement. Not separating your emotions can cause you to overpay for a home and a buffer period can mitigate that risk.”
When considering those two questions, be practical and consider the big picture, adds Tonya Lockamy, a Florida-based real estate agent.
“So many buyers make decisions about homes based on decorations and paint colors they connect with,” she explained. “A well-decorated home will sell faster than an empty home every time. Buyers need to be smarter. Two things that are very important when buying a home is the location and the structure of the home. The rest is easy to customize to your own liking.”
Not to be overlooked, the process of selling a home can also be filled with emotion. After all, countless memories are created in one’s home, holidays celebrated, kids raised, and more, all of which can tug on your heart when saying goodbye.
“This adds another dimension of stress when negotiations start,” said Lockamy. “I’ve seen sellers walk away from full-price offers on pure emotion due to the stress of the negotiations. It’s important that the seller focuses on the terms of the agreement when reviewing an offer. Is the price fair? What are the terms of the inspection period? Are there any contingencies? How long will they have to closing?”
Marriage and Divorce
Embarking on a new marriage is a happy time filled with planning, parties, and coloring in the details of your hopes and dreams for the future.
Without putting a damper on this time, it’s still important to make smart money decisions and, importantly, to get on the same page financially. Schedule a regular money date with your partner to talk openly, realistically, and fairly about your financial situation and goals.
Start by thinking rationally about whether you really need an elaborate, expensive wedding. As much as you might pine for a fairy tale ceremony, research has shown that couples who spend less on their weddings are less likely to divorce.
Speaking of that possibility, you might also consider putting a prenuptial agreement in place to provide a clear financial plan should the marriage end, says Lisa Zeiderman, founding partner of New York matrimonial and family law firm Miller Zeiderman and Wiederkehr. “No one wants to think about the idea of one day filing for divorce, but it’s an entirely possible outcome,” she says.
Even if you’re already married, a post-nuptial agreement can be drawn up to properly divide your assets. In addition, if you’ve had children since the wedding, you can create a post-nuptial agreement that includes your kids’ financial future.
Pre-nups aside, divorce is a tricky time for couples, when emotions make even the sanest among us act slightly unhinged. The key is to not let those emotions drive the process, says Steven Weil, president and tax manager for RMS Accounting in Fort Lauderdale, Fla.
“In an effort to punish each other, it’s easy to spend way too much on the fight than you can ever hope to recover,” says Weil. “Couples who come to an amicable decision not only can expect to keep more money on the table to divide between them, but they can also get the proceeding out of the way and move on with their lives.”
In the days and weeks after losing a loved one, it can be difficult to think straight. Dealing with financial issues during periods of significant change can be nearly impossible.
“Following any highly emotional occurrence, getting your head around the nuts and bolts of financial decision-making can be a menacing obstacle,” said Michael Kay, author and financial life planner at New Jersey’s Financial Life Focus. Kay suggests your first focus should be on liquidity: Do you have enough cash available to cover your needs?
As for determining how to handle any sort of windfall or inheritance resulting from the passing of a family member, the approach depends on your long-term hopes and goals.
However, Mark Painter, a CFA and founder of New Jersey-based EverGuide Financial Group says the first step should be determining how much income might be generated from an inheritance.
“When people are emotional they tend to do something that they think will make them feel better. In Hollywood it’s depicted as someone eating a gallon of ice cream in their sweats while watching a movie, but in real life this usually means making a big purchase that you have always wanted but maybe could not justify spending on,” said Painter. “With the windfall, the spending rationale goes out the window because you have newfound money and your emotions will tell you to splurge as well because you need to pick yourself up.”
Focusing on the income the inheritance may earn is important because it takes some of the emotion out of your decision. For example, if you inherit $500,000, the initial reaction may be to think that it’s a lot of money and will last a long time.
“When you realize that this money will produce about $20,000 a year in income, it does not feel like quite as much as initially thought. This simple step allows someone to reevaluate what to do with the money and figure out the best alternatives,” said Painter.
Yet another consideration, specifically when inheriting an investment portfolio, is how to handle that portfolio going forward, says David Edwards, president of New York-based Heron Wealth.
“A common pitfall is the reluctance of the beneficiary to change the investment strategy an inherited investment portfolio,” explained Edwards. “‘If those stocks were good enough for Dad, they’re good enough for me!’”
In fact, the moment of inheritance is a perfect moment to start over. Often the benefactor was not able to sell the stocks because of deep capital gains considerations, but with step-up in basis on the cost-basis of the stocks in the portfolio upon death, there’s no tax penalty to sell, said Edwards.
New Salary Negotiations
There’s a lot of pride wrapped up in one’s career and salary, which can impact how you handle the task of asking for what you’re worth.
Salary negotiations can be emotional because they involve the anxiety or fear tied to concerns about having enough income to take care of yourself. There can also be anxiety associated with the information asymmetry inherent in such negotiations, explained Melissa Donohue, author of “Financial Nutrition for Young Women: How (and WHY) to Teach Girls about Money.”
“Simply put, your employer typically has more knowledge than you do about what can or will be paid for your position, which is an imbalance,” she explained.
Money negotiations also require that you speak to your value and your worth, which can be emotionally challenging.
“Your income will likely be a huge part of your financial security through retirement. Effective salary negotiations will help you maximize this crucial wealth builder,” said Donohue.
Last but not least, it’s not unusual for emotions to drive investment decisions. Nearly all financial advisors agree that emotions and investing should be kept in opposite corners.
“People often get ‘married’ to a stock or hold onto an investment because it has some personal connection to a family member or an investment hunch,” said Meredith Briggs, a certified financial planner with New York-based Taconic Advisors. “Investing isn’t a popularity contest or a test of loyalty. When it comes to your personal finance you have to carefully manage risk and that often means ignoring what your heart says and listening to your head.”
Aaron Klein, CEO and founder of Riskalyze, a risk-alignment platform for investors, also warns against emotion driven and fear bound investing, which includes getting upset when you’re not making enough money on a portfolio and rejecting a stock purchase simply because it may be under-performing.
“Emotion will drive us to reject what’s a good bargain for our investment accounts,” said Klein. “A few years ago, when Apple was dropping, a bunch of people bought Apple at its low and they’ve done incredibly well since then. The vast majority of us reacted with emotion and said, ‘That’s bad,’ and the people who made the money, said, ‘That’s a bargain.'”
“As humans we have this remarkable ability to sabotage our investing by letting emotion be the driver,” added Klein.
That’s not to say that all bargain-priced or declining stocks are a wise purchase. But the price of a stock has little to do with whether purchasing it is a good or bad decision.
The moral of the story? Like many other times in life, keep your emotions at bay when investing and you’ll likely fare far better.
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