A friend of mine bought a new car last week. We’ll call him Greg. His car had broken down three times in the few weeks prior to buying his new car, and each time left him stranded on the side of the road.
He was sick of dealing with it. And he didn’t want another vehicle with the same problems. He was fed up, so after the third breakdown, he scrapped his car, and went straight to the dealership.
He used the $200 he got for scrapping his car to pay basically nothing down on a $55,000 BMW. Yes, he went to a BMW dealership of all places.
He didn’t get pre-approved, or look for a lower interest rate (his credit isn’t great), so he’s paying over $1,000/month for his new car… for the next five years. He’s car-poor now, and can’t afford to do much of anything outside of working to pay off his car… and this was supposedly a solution to reduce stress.
In one moment—or one emotion—Greg went from not having a car payment to having an $1,100 car payment, every month, for years to come. And yes, Greg realizes this was a huge mistake, and yes, he gave me permission to use his story.
What went wrong with Greg?
Not having a great car is a temporary problem. Breaking down on the side of the road is a temporary problem. Needing a better car is a temporary problem.
Life is full of temporary financial issues. If we keep our emotions at bay, we can find a temporary solution. For example, Greg is moving in three years. He could’ve easily found a car for under $3,000 to last him those three years.
But nope. He spent $55,000. Because he let his emotions get the best of him. He spent over $50,000 more than necessary, because he wanted the emotional comfort of knowing his car won’t break down.
And that isn’t something he knows: it could break down today. Many new cars don’t come with a spare these days. One flat tire could derail his expensive solution. Sure, it’s just a flat tire, but being stranded was the feeling he was trying to get away from.
Temporary problems require temporary solutions.
When you spend $55,000 on a permanent solution to a temporary problem, you’re overreacting. You’re letting your emotions get the best of you.
You have to control your emotions when it comes to your money… if you want to keep your money.
If we want to raise money-smart kids, we’ve got to teach healthy responses to stressful situations. Your emotions will always be the first thing that comes into play when a large financial decision needs to be made.
What separates those who make a responsible decision, from those who make a decision that ruins their life, is the ability to accept those emotions, take the time to think, and make the best choice.
We have to teach our kids about the emotional involvement in finances.
Buying a new car when you really could’ve fixed your old car, or bought a less expensive car, is only one example.
Here are two more real-life examples of emotional involvement I’ve seen recently:
- Dip Buyers – No, not Copenhagen. I’m talking about the stock market dip. As people have watched the stock market tank, some are trying to “take advantage of the dip,” and they’ve sunk thousands into stocks, when they would’ve been better off investing in index funds or saving the money… because they know nothing about stocks, among other reasons.
DoomsdayCoronavirus Preppers – As governments have shut down entire cities, and many have lost their jobs, people are panicking. In a recently example I heard about, someone spent over $3,000 on shelf-stable food and hygiene products to prepare for a potential “18-month lockdown.” The problem is, he didn’t have $3,000, so now he’s $3,000 deeper in debt.
The COVID-19 pandemic isn’t the only thing causing people to spend out of their emotions. Think gambling addicts and alcoholics who can barely afford rent, much less a bottle of Jack Daniels. Think smokers who could really use that extra $300/month they spend on cigarettes to pay off debt.
These are all emotional-spending problems. A permanent solution to a temporary problem is usually the most financially disastrous emotional-spending problem, but emotional spending comes in all sizes.
We need to educate our kids on things like this before they leave home. If they understand that these situations will come up, they can be ready to battle the emotions that come along with the situations.
How to Handle Emotional Spending
If you’ve made permanent decisions to temporary problems, or struggled with emotional spending, let your kids learn from your mistakes. Sure, you may need to work through the mistakes yourself to avoid doing it again, but while you’re at it, let your kids know how it happened and how they can avoid it.
If our children have a solid understanding of emotional spending, they’ll know it when they see it, and they’ll know how to handle it.
Here are a few ways to handle emotional spending:
- Sleep on large purchases – If something costs more than $500, don’t buy it the same day you first consider buying it. Always sleep on it. Here’s an example: DirectBuy is a membership club that sells “wholesale” products. When you go to their presentation, they tell you your decision to join or not must be made that day, before you leave. Of course you didn’t plan to sign up for a $3,000+ club when you left the house, so don’t. It’s a sham anyway; DirectBuy is the timeshare of retail.
- Seek input from others – If you’re considering buying a new vehicle or making any large purchase, reach out for help, and make sure the person you reach out to is where you want to be financially. If he or she is doing well financially, listen to the advice. If they’re drowning in debt, don’t ask them in the first place. We tend to listen to the first person who opens their mouth; don’t fall for that.
- Kill impulse buying – Impulse buying is the epitome of emotional spending. It’s a bad habit, and one you don’t want your kids picking up. Explain the concept of impulse buying to your kids. Show them how products are placed in specific spots, such as the checkout line, to initiate impulse buys. And for God’s sake stop buying the stuff in the checkout line.
Emotional spending can be tamed. The first step is awareness. You have to be aware you’ve been emotional with your money, and you have to learn to see when it’s happening. We’ve all done it, and we’ll all continue to be tempted.
I understand emotional spending isn’t something you can just determine to stop doing, and then stop. It could happen again. We’re going to make mistakes with our money, but being aware, and teaching awareness to our children, will help control it.
Further Book Reading
- Dollars and Sense by Dan Ariely & Jeff Kreisler
- The No-Spend Challenge Guide by Jen Smith
- Why Smart People Make Big Money Mistakes and How to Correct Them by Gary Belsky & Thomas Gilovich