financial independence

Why Emotions are the Enemy of Financial Independence

Spock would have been the ideal financial advisor…

Embrace your inner Spock and purge yourself of all human feeling if you really want to achieve financial independence.

When watching old Star Trek reruns, I often become jealous of Spock. As an emotionless Vulcan, he never let his feelings get in the way of big decisions. I’ll bet he had a damn healthy investment portfolio.

That’s because, in so many cases, emotions can make us do things that are fiscally irresponsible, preventing us from achieving Financial Independence.

There are many examples of this, but here’s a short list of the enemies of FI:

  • Greed: it feels good to make a lot of money fast. So good in fact that we often embrace casino-like get rich quick schemes such as: bitcoin; start-ups; Ponzi schemes (excuse me, multi-level marketing companies), hot stock tips, and all other manner of investments that promise impossibly high and impossibly fast returns. Greed can be a positive as it challenges us to achieve more financially  – but unchecked, it can badly cloud judgement and lead to disaster.
  • Pride: To paraphrase the Bible: “Pride goeth before the fall, especially if one is day trading.” You are not smarter than every other stock analyst and hedge fund out there, identifying an underpriced stock that they have somehow overlooked. You cannot make money in the long run by sitting at home and trading stocks, based on “fundamentals”. Yes, you should be confident in your financial acumen (see “self doubt”), but stop just short of delusion.
  • Fear: it’s good to be wary of taking a big financial risk. But sometimes having the fortitude to ride out a dip is the most important factor in long term fiscal health. Famous fear examples: selling your investments when the market is collapsing; selling real estate during a dip (most markets are now above their 2007 peaks, even after the 2009 real estate collapse); never getting into the stock market in the first place. Look at it this way: if nobody ever lost 100% of their money in this investment (e.g, S & P 500, downtown condo), then it’s probably OK to risk at least a small part of your portfolio on it.
  • Self Doubt: as in “finances are too complicated for my tiny mind to understand, therefore I will outsource my financial management to a commission based salesperson consultant.” If you know nothing about money, I wouldn’t just dive in and start investing.. But I also wouldn’t go running to a so-called “expert” who may not have your best interests at heart. Maybe start somewhere in between, like Googling “how should I invest my 401k”? The more you read, the more you learn, and the less you will doubt your own judgement.
  • Insecurity: as in “I will feel more secure when I own my own home free and clear. Therefore I will strive to pay off my 3% mortgage before attending to my 18% credit cards.” Security is important – why else would we be killing ourselves to achieve financial independence? But sometimes, just to make ourselves feel better, we do things that are not in our best (financial) interest. Like paying off ultra low interest loans such as mortgages or student loan debt. Like avoiding all debt at all times when it can be used strategically to make a smart investment (e.g., exorbitant tuition at an Ivy League school)
  • Shame: I once had a job which featured daily e-mails from my boss and co-workers, explaining very articulately why I was failing at my job, usually suggesting consequences. The public humiliation (many were cc:d on these e-mails) was not fun. But, I knew in my heart that, fiscally speaking, I was better off staying in this job until I found a better one, so I stuck it out. I probably saved myself at least six month’s salary (a good six figures) by getting paid as I was seeking employment elsewhere. It was a horrible experience, but I do take pride in the triumph of rational thought over emotion. When we struggle on the job, often in a very public way, it can be tempting to cut and run – to quit to pursue your passion, or even just to escape. But, giving in to your emotions can have significant consequences, and move you further away from the (financial) goal that made you take that job in the first place.

One of the great things about financial independence is its ability to shield us from many of these emotions. As I have written before, when financially independent, we feel more confident, less desperate, and less vulnerable to the consequences of excessive greed and hubris. That’s why achieving FI is such a worthwhile goal. But ironically, the very emotions that FI protects us from can in fact keep us from achieving it in the first place.

It’s not easy turning emotions on and off. But we can at least ask ourselves “why” before making any big financial move. Why are you selling your stocks, investing in bitcoin, quitting your job – is there a high likelihood that this action will move you towards FI, or just a gut response to a temporary emotion?

Recognizing the reasons for our actions is the first step towards being a rational investor. And this will ultimately let us save our emotions for holiday movies and family reunions –  keeping our bank accounts safe from our emotional ups and downs.  

Have you given in to emotion, with significant financial consequences? Tell me about it in the comments below!

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