We’ve all made them, at one level or another. So what’s at the heart of bad financial decisions?
In a recent GOBankingRates survey, nearly 7 percent of respondents said they’ve never reached a point where they are comfortable with basic money skills. More than 57 percent said they think that lack of financial understanding has affected their ability to be financially prepared for the future.
Asked how much they think a lack of financial literacy cost them in the past year, 10.5 percent said more than $10,000. Perhaps even more telling, only 27 percent said it hadn’t cost them anything.
Combine a lack of financial confidence and know-how with tough economic conditions, and you’re even more vulnerable to making questionable financial choices, experts say.
“It gets down to the basic psychology of a human being,” said Jake Heisler, certified financial planner with Quaker Wealth Management in Moorestown, New Jersey. “In high-anxiety situations, there’s the urge to just do something. That leads to wrong decisions.
“Fear and greed, fight or flight … they don’t apply to finances.”
Not that the aforementioned tough economic times are mandatory for bad financial decisions, which folks have been making for, well, as long as there have been finances.
“Things have been more difficult in the last one or two years, with inflation and the economy, but people still have the same type of struggles,” said Bev Miller, a Ramsey master financial coach based in Pennsylvania. “It’s a little more intense for some people.”
Here are eight signs you may be about to make a poor financial choice, followed by some tips on how to make good ones.
You’re Making a Decision Without Pausing To Consider Your Emotional State
For small as well as large financial choices, self-awareness is essential for good decision making, Heisler said. He emphasized “taking a breath” and putting some time in between where you find yourself emotionally and your final move. This will help you cut down on those impulsive decisions you regret later and dodge the “anticipation-was-better-than-the-actual-thing” trap.
“Checking in on your emotional state is important,” Heisler said. “Are you happy? Upset? What is your response to that emotion?
“Ask a second question: What’s making me feel this way?”
You’re Saying or Thinking Things Like, ‘I Don’t Have a Choice’ or “What Else Am I Supposed To Do?”
Miller sees this line of thinking as a very large red flag.
“You always have a choice,” she said. “And there is always more than one choice. You might not know all of your options. So let’s figure out some of the other options.”
She sometimes sees clients trying to justify decisions they’ve basically already made, with all-or-nothing thinking. For example, “I have to take on $100,000 in student loan debt. Otherwise I’ll just have to work a minimum-wage job my whole life.” Or “I have to drop $50,000 on this new car. It’s either that or walk to work every day.”
Solution? Realize there is almost always a middle ground, with help from a financial expert as needed.
You Don’t Understand the Details of the Decision You’re Making
Some of us plunge headlong into financial decisions — even big ones — without understanding the implications. How much will you end up paying over the life of a loan? How does this lease really work? Do you really understand the potential risks and rewards for this investment?
If you aren’t sure, it’s worth getting sure before you make the move.
“You have to read the fine print,” Miller said. “And if you get bogged down in the gobbledygook, the way they write it, you need to talk to someone and ask, ‘What does really mean?'”
“A financial advisor, sure,” Heisler added. “A friend in the industry. You’ve got to do your homework. And the larger the purchase, the larger the homework assignment.”
You’re Making a Financial Decision Under Pressure
This one is pretty straightforward but worth noting. Decisions made under duress tend to be rushed and less informed. Financial decisions are no different.
Solution: Get clear of the pressure if possible, take that deep breath and gather more information.
You’re Hesitant To Share the Financial Decision With Loved Ones
The urge to hide something is a tell-tale sign: You aren’t confident or proud about the financial choice you’re making.
“You might not care what other people who you don’t know very well think,” Miller said. “But when it comes to the people you care about, if you have that pause before letting them know, that’s a check on your conscience.”
You’re Thinking Only Short-Term
Here’s another one that may seem obvious but that many people struggle with. It’s vital to think ahead and consider how a financial choice will affect you down the road.
Try seeing financial decisions through this lens: “Am I going to be proud of this decision a month from now? Two years from now? Which choice will be best for me in the years to come, even if it feels painful now?”
You’re Making a Decision Based on the ‘Sunk Cost Fallacy’
You may have heard this one referred to as “throwing good money after bad.”
“We fall prey to the sunk cost fallacy when we are so emotionally attached to the time or money we have lost that we allow ourselves to continue down the wrong path or make a bad decision about the future based on that loss,” Miller said. “We try to justify continued investment or commitment by saying that otherwise our previous investment will be wasted.”
- Be aware of this fallacy and on the lookout for it in your life
- Be willing to admit your past financial mistakes
- Develop a clear vision of what you want your future to look like and base your decisions on that
- Ask yourself, “If this situation did not already exist, would I purposely create it?”
You Aren’t Listening to Your Gut
Your instincts may be your best friend – and your last line of defense against a poor financial choice. Don’t blow ’em off.
“If something is feeling off,” Heisler said, “that’s a telltale sign that there’s a bad decision looming.”
Final Thought: Heart vs. Brain
Don’t forget to incorporate both into your financial decisions, Miller advises.
“Both get a vote,” she said.
The right decision is almost always a balance of the two. If you completely reject the viewpoint of your heart or your brain, you’re going to make a bad decision.
“Without your heart, you become Ebenezer Scrooge,” Miller said. “Without your brain, you wind up with financial disaster.”
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