Financials

You May Be Sabotaging Your Own Financial Stability

As humans, we don’t always make smart financial decisions. From impulse buys to psychological barriers, sometimes we make dumb choices. However, even with our mental weakness, it is possible to overcome destructive ways and store a nice nest egg for the future. We are our own worst enemy when it comes to our financial situation. Here are some things that can ruin our finances.

Anchoring

One of the main things that we do that is so detrimental to our finances is called anchoring. This is where wespecial rely heavily on information others give to us regarding a purchase. If someone tells us that you cannot get a home for under $150,000 that is in a worthwhile neighborhood, you can rest assured that anytime you see a house under this price, you will remember this. We often don’t do the research by ourselves, but take some random person’s word for it. Just like the old theory that a salary for an engagement ring should equal three months’ salary, who comes up with this stuff? We should set our own budgets based on our ability to repay and not what everyone else is spending.

Myopia

You probably have never heard of the term myopia before. Most people see themselves as always being a fit and young person that is in the picture of health. While it is good to have an optimistic outlook, realty must be considered. Sure, you don’t want to see yourself sick, cash-strapped and in financial hawk. Because many people don’t see tomorrow as anything other than sunny, myopia is ruining their financial futures. Saving for your retirement in your 40’s or 50’s is way too late. The time to prepare retirement is now regardless of your age. So many people deplete savings and retirement accounts thinking that they will never see this age, but time flies by so quickly.

Gambler’s Fallacy

Many people play the stock market and make good money. The worst thing to do is to use the past history to predict the future. Just because a stock is flying high for a year doesn’t mean it will continue to do so. It’s like buying a lottery ticket, just because someone in another state won doesn’t mean that you will. One winner doesn’t change your odds of winning. So many people may want to sell their stocks for fear of losing money. Rather than using the ups and downs of the stock, make decision on grounded facts. Always analyze investments and don’t follow trends.

Avoidance

Many people love to avoid something, especially a financial decision. Procrastination can really cost big money. Dealing with your finances is not like a missed doctor’s appointment where you can re-schedule. If you miss the deadline for your company’s health insurance selection, you may be stuck with the highest rate plan all year. Unlike a missed appointment that can be fixed, you could be stuck with inflated premiums for a year. Don’t put off what needs to be done today. The same can be said of investing in 401K and other type of accounts. Putting this move off is hurting your retirement.

Confirmation Bias

Do you often make decisions just based on the good reviews and skip over the bad ones? There are a lot of people who only want to see the good, even when the bad is starring them right in the face. People always tend to look for an opinion that mirrors their own. If you do this it is called confirmation bias. You can make the decision in your head and use blogs or other media information to back your investment. However, this really doesn’t mean that this investment is the right choice. A decision needs to be made by analyzing all the facts, both good and bad, before acting.

Loss Aversion

This one is a big one. So many people are afraid of losing their investments and act or react accordingly. Just like when the stock market crashed in 2008, many people told their investors to pull their money. However, being afraid of losing can make people make poor decisions regarding their financial decisions. Those who pulled their money out of the stock markets were victims of loss aversion. Investors in the crash who grabbed what was left and ran, only rebounded by twenty five percent. Those who stayed the course recovered their funds and then some. Nobody is going to have a portfolio full of winners, sometimes its hanging onto the losers and hoping that in time they too will turn a profit.

Overconfident Investing

Those who are confident in their investments are good, but what if you are too confident? People who are arrogant fool themselves into thinking that they can beat the market. There are people who make full time jobs out of trying to beat the stocks, but they usually end up failing. Decisions should all be based on cold, hard facts and nothing else. Save intuition and gut feelings for gambling, not the stock market.

Mental Accounting

Oftentimes we look at our money that we earn from employment as the money that should be saved. However, if we get birthday money, financial gifts for Christmas and any other time of the year, we often want to spend or treat ourselves to something. This is called mental accounting. It is where we put financial values on the money and its importance. While a person should have a budget for things they need and want, putting away that teen_smallbirthday money can add up quickly too.

This is also true of people with credit cards and cash. Most are more apt to spend more on their credit cards than they are cash. The theory is buy today and pay later and this form of mental accounting can be trouble.

Herd Mentality

The biggest financial issues we have are caused from herd mentality. If our friend caught wind of a housing development hat went bankrupt and now the plots are dirt cheap, you may be inclined to buy with the masses. Sure, investors might be snatching up these properties, but they may have experience and capitol to back them. If you have no experience flipping houses, you should avoid making such a rash decisions. Just because everyone else is doing it doesn’t make it the right choice for you and your family.

 

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