Why Do People Make Bad Financial Decisions?

Let's be honest, we all make bad spending decisions from time to time. Unfortunately, some of us make more bad choices than others. If your dangerous decisions are becoming a habit, then it might be time to sit back and think about whether there's a reason for your pattern of poor investment choices.

There are plenty of ways you can mismanage your funds, from overspending, to compulsively shopping, and even under-estimating your budget. While we're all guilty of making these mistakes sometimes, science suggests that there could be a strong link between your current financial status and your spending habits.

Financial Stress Makes Us Spend Dangerously

According to a study published in 2013, poverty is capable of changing our cognitive function. The scientists in this study conducted research asking people to think about an important financial decision while testing their ability to perform in specific reasoning tasks. The results indicated that people with a lower income were more likely to perform poorly when the costs they were considering were high, with a 13-point loss in their IQ score. Alternatively, those with higher amounts of income performed well regardless of the expense in question.

The study might not be all-inclusive, but it lends credence to the idea that people who are struggling with money might not be able to think rationally about money. When you're already panicking about your income, you're not in a great position to make investment decisions about your future, which means that the poor continue to be poor because a lack of ability to make good decisions.

Many Of Us Shop Compulsively Too

If problems with cognitive function weren't enough to worry about, studies suggest that about 8% of Americans are compulsive shoppers too. According to a study from Stanford University, a lot of Americans simply can't make rational decisions about their purchases, and the research even suggests that compulsive shopping might be a type of obsessive compulsive disorder. In fact, the American Psychiatry Association now officially classifies compulsive shopping as a mental illness under the category of OCD.

Whether it's stress about finances stopping us from making good decisions about our future, or poor financial choices made as a result of mental illness, there are countless things that might be keeping people in poverty. Regardless of the reasons behind your negative choices, it's important to remember that it's not just those with limited cash that make bad decisions. Even the most financially successful and clever individuals will make mistakes with their money at one time or another.

The question is: "What can you do about it?"

How to Improve Your Financial Decision-Making

If you're concerned that you're constantly making bad choices with your finances, then the first step involves actively deciding to make a change. Making better financial decisions doesn't mean dwelling on why you make those choices, but thinking about what you can do make them less often. The following simple tips could help you to end the downward spiral that occurs with dangerous money-based decisions.

  1. Make your Budget Realistic

Another way to improve your chances of making smarter financial choices is to think up a realistic monthly budget and make sure that you stick with it. Take your time and carefully evaluate each of the monthly expenses that you need to address, before allocating the appropriate amount to pay on a weekly, daily, and monthly basis. You could consider downloading a money management app or tool to help you, and cut back on some of the luxuries you enjoy too, such as expensive coffee and entertainment. Most of the time, actively setting a budget will allow you to determine where you're wasting the majority of your money.

  1. Think About Your Financial Decisions Carefully

One of the most important habits of financially successful individuals is that they rarely make decisions about money on a whim. Most people who are doing well with their cash will take the time to carefully analyze the decisions they need to make, and weigh the pros and cons before making a choice. By spending time before you spend money, you can potentially find an alternative, and less expensive option to a high-cost issue or desire.

  1. Stay Focused on Your Goals

Finally, when it comes to making choices about how and when you should spend your money, try to think about all the long-term and short-term goals you have for your cash. This includes simple goals like paying for your bills, and more personal goals like being able to afford your perfect vacation or splash out on a new car. With your goals in mind, you'll be able to better decide whether each purchase is really worth it.

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