Do your finances keep you up at night?
Photo: Bhoj Rai. Source: Unsplash
Researchers have found that folks often fall into six common errors when they deal with their money: risk-takers, hoarders, retail-therapists, cash-splashers, controllers, and avoiders. Each of these mistakes is avoidable – and they typically stem from personal issues that have little or nothing to do with money. Instead, they may be compensating for some personal needs they have.
Risk takers have a bias towards action. Given a choice between waiting and doing, they almost always choose to do something. They tend to be overconfident, and trade frequently. Paradoxically, they don’t usually measure their performance in any tangible way. That’s because they’re focused on the next opportunity, rather than learning from the past. Trading fires up the endorphins in our brain; it can be addictive.
For hoarders, money represents security. They often stockpile cash rather than invest it. If they were raised at a time when money was tight, they may find security in a large bank account. While we all need an emergency fund, there’s no reason to let cash build up excessively. At a time when interest on bank deposits doesn’t even equal inflation, the real value of cash is steadily eroding.
Retail-therapists feel good about shopping: shopping makes them happy. They don’t even have to buy things for themselves. Just pulling out their credit card can boost their self-esteem. At the extremes, these folks resemble alcoholics—stashing bags of new purchases around the house, the way problem drinkers stash empty bottles. Both women and men can indulge themselves this way. These folks often end up with debt problems.
Cash-splashers are conspicuous consumers, and it’s the having, not the getting, that’s the thrill. They are likely to wave their checkbooks at charity auctions, and spend money on visible, frivolous things. They’re unlikely to quietly go to the front of a restaurant and quietly cover the tab. Rather, they’ll make an announcement that the meal is on them. Often, these people are motivated by wanting to be admired. But there’s nothing admirable about showing off.
Public Domain. Source: Pixabay
Controllers are obsessive about bank balances, credit card points, and comparison shopping sites. They want to keep on top of money matters, but sometimes this is because they have lost control in other areas of their lives. And – let’s face it – life can be unpredictable. While keeping on top of money matters is a good thing, controllers can make it too much of a good thing.
Finally, there are the avoiders: ostriches who bury their heads in the sand. Bills and bank statements lie unopened. Either they are easily distracted, or they don’t want to decide, because making no decision is always easier than the possibility of making the wrong decision.
The way to break out of these habits is to have a plan and stick to it. Start by keeping a money journal, and make entries for purchases and investments. Work into it gradually, starting by reviewing your finances for a half hour every week or so. This may be like shock therapy to a controller, but the rest of the people on this list need to address – not avoid – their money issues. Ultimately, you want to have a budget – one that includes long-term investments, as well as categories for day-to-day spending.
Photo: Michael Jarmoluk. Source: Pixabay
Because the most meaningful things for us come from experiences we share. And they don’t have to be expensive – like going to the park or the library with kids, or cooking a meal for friends. As Art Buchwald – the political columnist and satirist – once said, the best things in life aren’t things.
Douglas R. Tengdin, CFA
Chief Investment Officer