Organizing Your Finances
2020 was a hot mess. Given that, you may be thinking about getting better organized in the new year. Your money is no different. Organizing your finances now will set you on the right track for the rest of the year.
How do you decide when and where to spend your money? Do you use a rational, well thought-out process? Is every dollar accounted for? Or do you just throw caution into the wind and go with what feels right?
Organize with Your Head or Heart
If you’re like most people, you probably do a little of both. Consider this: just about any decision that you’ve ever made likely falls under one of two categories. It is a logical decision backed up with emotion, or an emotional decision backed up with logic.
This means that you either make decisions primarily with your head or your heart. When organizing your finances, you need a lot of logic as well as some emotion.
Emotions are going to influence your decision making process no matter what. That’s just a part of life. The key is knowing how to identify those emotions. Then you determine how to effectively use them when evaluating financial decisions.
Let’s take a look at the head vs. heart dilemma in more detail and find a way to balance the two. This will help as you begin to organize your budget, savings and investments.
How Emotions Affect Your Organization
Our emotions are closely intertwined with our finances. There is really no way to keep them separate. Our choices are largely influenced by our emotional state. And our financial situation can have a huge impact on how we feel.
A perfect example of this is what happens when you have a bad day at work. Instead of coming to grips with the fact that bad days are normal, you head to Amazon in search of retail therapy.
According to a study published in the journal of Psychological Science by Harvard and Columbia University professors: people who are sad are willing to forgo greater future monetary gains in exchange for instant financial gratification. While I am just your Financial Mom — and not a noted Ivy League scholar — I can tell you with 100% certainty that by allowing an emotion to drive your financial decisions, you will end in debt and despair.
Buying something “new and shiny” gives us a temporary endorphin boost. But spending to numb stress away is never a good idea and does not help to organize your finances. A better financial move is to recognize the triggers that cause the stress that makes you want to shop. When you take the time to properly identify the cause of the stress, you are more likely to find a solution that doesn’t involve the swiping of your credit card.
How Logic Affects Your Organization
According to online educational resource, Boundless.com: Rational decision making is a multi-step process for making choices between alternatives. The process of rational decision making favors logic, objectivity, and analysis over subjectivity and insight.
However, as we discussed earlier, making financial decisions independent of emotion is something that cannot really be controlled.
With this being the case, the logical response is to figure out how you can make better financial decisions regardless of your emotional state. Here are a few tips to help you channel your logical side when navigating these situations.
- Have a plan: From grocery shopping to retirement planning, it is important that you have a strategic plan for the uncertainties of life. Organizing your finances before emotions become a factor improves your chances of successful execution.
- Acknowledge your emotions: No matter how logical of a thinker you believe yourself to be, you need to acknowledge your emotions. This allows you the opportunity to think your way through decisions.
- Don’t stress about things you cannot control: We often stress about things that we cannot control. In order to overcome these feelings, you must learn to accept that there are some things that you cannot change and move on! Spending time obsessing over things out of your control won’t change the outcome.
- Sleep on it: When you’ve settled on a decision, don’t act immediately — instead, allow yourself a predetermined amount of time to reflect on it. This ‘grace period’ usually results in greater clarity and will either reinforce your decision or cause you to re-evaluate.
- Revisit your goals: Going back to the first point about having a plan. Always remain cognizant of the goal you are trying to reach. This is the reason you’re investing, saving, or paying down debt in the first place. Compare your final decision to your goals. How will the choice you are about to make affect the probability of achieving that goal? The answer will help you determine whether or not it is a logical option.
When I’m faced with a decision, I try to ask myself: What does your head say? And then I ask: What does your heart say? If they are in agreement, then it’s probably a good decision. If they are at odds, I try to go with my head. Common sense and rationality always seem to help me make good money decisions.
A good head and a good heart are always a formidable combination – Nelson Mandela
Now You Can Organize
Once you understand the “head vs. heart” debate, you can begin to organize your finances. Start by listing all of your checking, savings and retirement accounts. Then list other items you own, such as a car or home. Now, list all of your debts. This includes a mortgage, credit cards and student loans.
Now think about how each of these accounts make you feel. For example, look at your savings account. Are you concerned that the balance is too low? That is an emotional response. Let’s turn this into a logical response. Change your thinking to: “Wow – I only have six weeks of emergency funds.” Instead of worrying about a low balance, you can now create an action plan to increase your savings.
Marie Kondo is an organization master! She wants you to find joy in the things you have. Organizing your accounts will help you budget better, set goals and then feel good about the work you have done.
How to Organize Your Finances
Pathfinder Planning offers a great way to arrange your accounts all in one place. You can Get Organized when you log in to Advizr, our planning software, and link your accounts online. Then, you can see everything in one place and keep track of your balances on a daily basis.
Recognizing your spending triggers is the key to understanding why we make the financial decisions we do. So the next time your head and heart are in conflict, go with the logical decision and trust that your heart will eventually fall into place. It might not be easy, but over time you will find it easier to make rational decisions — independent of your state of emotions.
Pathfinder Planning LLC provides personal financial planning advice and asset management for a simple fee to young adults and working families in North and South Carolina through group classes, one-on-one planning, and ongoing advice.
Your Financial Mom blog posts are not meant to be legal, accounting or other professional service advice. Content represents the opinion of the author only. Pathfinder Planning LLC is not responsible for the accuracy or validity of content contained in third-party comments.