In managing money, the biggest pitfall is often how we make decisions about our money. Our decision-making capabilities for practically everything are emotionally driven, meaning how we are feeling at the moment often results in what decision we make -- and that can be dangerous.
When we are feeling excited, exhilarated or in a state of euphoria, we are in a danger zone for decisions. This is why retailers try to make us feel good about buying something. A car dealer makes cars look appealing, a coffee shop makes its stores look refreshing and relaxing, a multilevel marketing firm makes its product look like the perfect solution for making money, a tech company makes its gadgets look cool. These situations give us a thrill and appeal to our emotions to think it's OK to buy now. It makes us forget what's really important about deciding on a purchase -- whether we need it and whether we can afford it.
Placed in these situations, the best thought is to wait until you have time to think about it and compare the purchase with others like it. When we are feeling calm and have time to think, we then make the best decisions, and this includes not only buying but investing.
When you reach this peaceful mindset, your decision process should begin with asking yourself if you can afford the purchase and anything else the purchase requires you to do, such as buy insurance or spend a lot of time on it. If not, the decision is clear. If it is something you need or want, you then think about other options and whether they are more affordable and have the same quality. If another option is, the decision is clear.
The same goes for investing. If two mutual funds had the same objective, would you invest in the one with the lower expense ratio or the higher expense ratio? And with investing, if one investment is overvalued, would you purchase another one similar to it that is undervalued? The decision is clear. Overvalued investments are dangerous as we saw with inflated Internet stocks 10 years ago. The concept of value investing and contrarian investing believes that buying undervalued and out-of-favor investments can result in bigger gains. But it's not always the case as other factors must be considered before investing this way.
So the next time you are faced with a financial decision, ask yourself: Am I excited? If so, that should signal to you not to make a decision until you calm down and think about it, or consult with someone who isn't emotionally involved.