5 effective tips that could help you cut impulsive financial decisions

06 June 2024

Impulsive decision-making can be useful in some circumstances. Yet, when it comes to finances, it could lead to choices that aren’t right for you and even harm your long-term financial security. Read on to find out how you could cut the effect of impulsive financial decisions.

When you think of impulsive financial decisions, your mind might turn to shopping first. How often have you picked up something extra when grocery shopping or purchased an item online after spotting an advert?

Indeed, according to a report in the Independent, the average shopper in the UK makes seven big impulse buys each year. The most common reason for impulse purchases is to enjoy a treat, but the average person spends almost £184 a year on items they later regret purchasing.

It’s not just shopping where impulsive decisions can affect your finances either.

You might make a snap decision when you’re dealing with large financial choices too, such as how to invest your money. It could mean you haven’t fully thought through your decisions, and it may affect your long-term finances.

If you want to reduce the number of impulsive financial decisions you make, here are five effective tips that could help.

1. Give yourself a breathing period

If you’re making a large financial decision that could affect your future, give it the attention it deserves. After making a financial decision, wait a few days before you act on it – you could find your mind has changed after you’ve given it further thought.

So, if you’re thinking about withdrawing a lump sum from your pension or changing your investment strategy, give yourself a breathing period to consider if it’s the right course for you.

It’s a simple step that could be useful if you’d benefit from finding out further information, or if emotions are clouding your judgement. You might also want to speak to someone during the waiting period, such as your partner or financial planner, to gain a different perspective.

You may still decide to go ahead with your initial decision, and having spent more time weighing up your options, you could feel more confident about the outcome.

2. Separate your money into pots

It can be difficult to balance different financial needs. Giving different pots of money a defined purpose could help you assess whether you’re in a position to make an impulse purchase.

For instance, you might have an account that contains your disposable income that you can use for spontaneous spending if you spot something you’d like. In contrast, if you know the money in another account is your emergency fund or earmarked for your retirement, you might be less likely to dip into it when making an impulsive purchase.

3. Question what’s driving your decisions

There are a lot of factors that could be driving your impulsive decisions. Interrogating the reasons could highlight when emotions are affecting your judgment.

For instance, are you considering investing in a particular asset because you’re worried about missing out? Or are you tempted to splash out after you’ve had a hard day at work?

Emotions could impair your ability to effectively assess which option is right for you and your long-term plans. So, next time you are about to make a quick financial decision, ask yourself what could be behind your reasoning. 

4. Tune out the noise

From the media to talking with friends, there can be a lot of noise that affects how you feel about your finances and the decisions you make.

Investing is a great example. On any given day you might listen to or read the news and find headlines about company stocks that are “skyrocketing” or “tumbling”. These types of headlines can elicit an emotional response that might lead to an impulsive decision.

After hearing about an investment opportunity that’s delivered exceptional results over the last few months, you might be excited to be a part of it. On the other hand, if you hear a company you invest in is having a rough time, you might be fearful and consider withdrawing your money.

Try to tune out the noise. When you created your investment strategy, you likely considered a whole range of factors, including your reason for investing and your risk profile, to invest in a way that suits you. So, focusing on this, rather than the noise, could reduce the number of impulsive decisions you make. 

5. Create a tailored financial plan

A tailored financial plan could lead to you better understanding your finances and feeling more comfortable with the decisions you’ve made. As a result, you might be less tempted to make impulsive changes.

For example, if you’re retired and you’ve calculated the income you can sustainably access from your pension to create lifelong security, you may be less likely to take out an additional sum without assessing the long-term impact it could have first.

As financial planners, we can work with you to create a tailored financial plan that reflects your life goals. We’ll also be here to help you understand the effect your decisions could have on your long-term finances.

Please contact us to arrange a meeting to talk about your financial plan. 

Please note: This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.

The value of your investments (and any income from them) can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.

Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.

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