8 signs that you are about to make a bad financial decision
We all made it, on one level or another. So what is the essence of bad financial decisions?
In a recent GOBankingRates survey, nearly 7 percent of respondents said they’ve never gotten to the point where they feel comfortable with basic financial skills. More than 57 percent said they believe a lack of financial literacy has affected their ability to prepare financially for the future.
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When asked how much they believe a lack of financial literacy has cost them in the past year, 10.5 percent answered more than $10,000. Perhaps most telling, only 27 percent said it didn’t cost them anything.
Combine a lack of financial confidence and know-how with tough economic conditions, and you’re more likely to make questionable financial choices, experts say.
“It comes down to basic human psychology,” said Jake Hessler, a certified financial planner with Quaker Wealth Management in Moorestown, New Jersey. “In cases of high anxiety, there is an impulse to do something, and that leads to wrong decisions.
“Fear and greed, fight or flight… do not apply to finances.”
Not that the aforementioned hard economic times are mandatory for bad financial decisions, which people were also making, as long as there were finances.
“Things have been more difficult in the last year or two, with inflation and the economy, but people still have the same kind of struggles,” said Bev Miller, a Ramsey-based principal financial coach based in Pennsylvania. “It’s more intense for some people.”
Here are eight signs you may be about to make a bad financial decision, followed by some tips on how to make good decisions.
You make a decision without stopping to think about your emotional state
For financial choices both small and large, Hessler said, self-awareness is essential to making good decisions. Emphasize “taking a breath” and setting aside some time between where you find yourself emotionally and your final move. This will help you reduce those impulsive decisions that you later regret and avoid the “expectation was better than the actual thing” trap.
“It’s important to check your emotional state,” Hessler said. Are you happy? Upset? What is your response to those feelings?
“Ask a second question: What makes me feel this way?”
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You say or think 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 big red flag.
“You always have a choice,” she said. “And there’s always more than one option. You may not know all of your options. So let’s explore some of the other options.”
Sometimes you see clients trying to justify decisions they’ve already made, with an all-or-nothing reasoning. For example, “I have to take on $100,000 in student loan debt. Otherwise, I’ll have to work a minimum wage job my whole life.” Or, “I have to spend $50,000 on this new car. Either that or I walk to work every day.”
Solution? Realize that there is always a middle ground, with help from a financial expert as needed.
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You do not understand the details of the decision you are making
Some of us get caught up in making financial decisions—even big ones—without understanding the implications. How much will you eventually pay over the term of the loan? How does this rental really work? Do you really understand the potential risks and rewards of this investment?
If you are not sure, it is worth checking before you take this step.
“You have to read the soft line,” Miller said. And if you stumble upon gobbledygook, the way they write, you need to talk to someone and ask, ‘What does it really mean? ”
“Definitely a financial advisor,” Hessler added. “A friend in the industry. You have to do your homework. The more you buy, the bigger the homework.”
You are making a financial decision under stress
This one is pretty simple but noteworthy. Decisions made under duress tend to be hasty and less informed. Financial decisions are no different.
Solution: Decompress if possible, take a deep breath and gather more information.
You are reluctant to share the financial decision with your loved ones
Wanting to hide something is a tell-tale sign: You’re not confident or proud of the financial choice you’re making.
“You may not care what other people you don’t know very well think,” Miller said. “But when it comes to people you care about, if you pause before telling them, it’s an examination of your conscience.”
You only think in the short term
Here’s another one that might seem obvious but that many people struggle with. It is necessary to think ahead and think about how the financial choice will affect you in the future.
Try seeing financial decisions through this lens: “A month from now, will I be proud of this decision? Two years from now? What is the best option for me in the years to come, even if it feels painful now?”
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You are 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 become so emotionally attached to the time or money we’ve 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 lost.”
solve it?
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Be aware of this fallacy and look for it in your life
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Be willing to admit your past financial mistakes
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Set a clear vision of what you want your future to look like and base your decisions on that
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Ask yourself, “If this situation didn’t already exist, would I have created it on purpose?”
You don’t listen to your gut
Your instincts may be your best friend — and your last line of defense against bad financial choices. Don’t blow them up.
“If something happens, it’s a clear sign that a bad decision is on the horizon,” Hessler said.
Final thought: heart vs. brain
Don’t forget to incorporate both into your financial decisions, Miller advises.
“They both get a vote,” she said.
The right decision is always the balance between the two. If you completely reject the point of view of your heart or mind, you will make a bad decision.
“Without your heart, you become Ebenezer Scrooge,” Miller said. “Without your brain, you end up in a financial disaster.”
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This article originally appeared on GOBankingRates.com: 8 Signs You’re About to Make a Bad Financial Decision
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