There are 2 kinds of decisions: Emotional and Rational

You have probably heard before that emotions and financial decisions should never be mixed. There’s a bit of a problem with that though: making emotional decisions is hardwired into your DNA and it’s how your brain works.

Charles Darwin first wrote about this idea in the 1800s; he wrote that emotions actually have a critical evolutionary purpose. In order for us to pass on our genes to the next generation, we’ve been hardwired with emotions as a way to process information and ensure survival. You experience an emotion like “fear” for example, so that you know when there is danger and can react to it. Your brain is constantly evaluating information and situations, and then develops an emotional response as a way of telling your body that it needs to act.

The point here is that emotions are engrained in us. They’re innate, they’re natural and they’re an intrinsic part of who we are as humans. The problem is that they can affect our judgment and cause us to make poor decisions—more specifically, poor financial decisions.

Financial decisions are rarely based solely on rational decision-making. This can obviously be quite dangerous because emotion (specifically misplaced emotion) has a big impact on our financial thinking. The best way to “inoculate” yourself against emotional decision-making is to be clear on your values and to have a long-term vision. When you have a plan that aligns with your core values, and you use that plan to guide your decision-making, then there isn’t much room left for emotions, because your plan is constantly there escorting you through decisions while also guarding you from misguided emotions.

Most of our clients who have created substantial wealth have been more patient than most. They’ve worked to create a tailored plan and then have stuck with that plan, and as a result they have insulated themselves from emotional decision-making.

If you are very clear on what financial independence means to you, have set aside assets for that purpose, and hold those assets in an asset protection structure, then you are less likely to be “irrational.”