Skip to main content

Retirement Planning Webinar for Federal Employees: June 20 @ Noon EST

«  View All Posts

Personal Finance

Simple Ways to Avoid Financial Mistakes

April 5th, 2016 | 3 min. read

By Jacob Schroeder

If you didn’t know, April is National Financial Literacy Month. Ironically, one thing everyone should learn about finance is that all the knowledge in the world can’t guarantee financial wellness.

You can find numerous examples: the hedge fund managers with Ivy League degrees who lost big in the market, or the many successful people who fell for Bernie Madoff’s Ponzi scheme. It isn’t financial illiteracy that causes these kinds of mistakes, but rather greed, overconfidence and misguided trust.

Although financial education is essential, it is only half the story. Your behavior also matters – a lot.

Understanding how bonds work will help you appropriately invest your money. But, if you don’t implement a plan to diligently save, you can’t expect to accumulate enough money to invest.

April, as most Americans do know, is the first month of a new baseball season. So maybe it would help to think of a pitcher. Simply knowing how to throw a baseball doesn’t make you a good pitcher. You need to execute the right mechanics to command your pitches.

The right mechanics, or behavior, can also greatly increase the likelihood of achieving your financial goals. Below are some ways that can help you practice good financial behavior so that you spend, save and invest smart.

Write down, rate and share your financial goals.

Real, tangible goals can improve your behavior. However, it may not be enough to simply have a set of goals in mind. A study at Dominican University found that people were far more likely to accomplish their goals when they wrote them down, rated them, and then shared the information and their progress with a friend.

You can do the same to accomplish your financial goals. Write down and prioritize your goals along with the estimated cost of each one. You can then determine how much you should automatically save from each paycheck to achieve them by the date you desire. Share this information with someone to help you stay committed and motivated.  

Place roadblocks in front of your emotions.

Behavioral economics, which explores the psychological reasons behind our economic decisions, has revealed people are prone to certain inclinations that can lead to financial mistakes.

For example, people are more concerned about financial losses than gains, which can make you act too conservatively with your money. Also, people are often overconfident, which can cause you to ignore important warning signs.

You can’t override your brain, but you can implement strategies to keep your emotions under control. For example, establish a specific waiting period for yourself before acting on any major financial decision, such as that “hot” stock tip from your neighbor. This gives you time to let your emotions cool and more rationally process information. Even better, consult your financial plan. That’s the purpose of a financial plan, to objectively show you what you need to do to achieve your goals.

Tune out the noise.

All those ads you see on TV, in the paper or online may be more effective than you think. A 2010 study published in the Journal of Consumer Research found that exposure to advertisements, including when you are not actively paying attention, can condition you into preferring a particular product, even when you have information about the superiority of another product.

This phenomenon can impact your spending habits. Ultimately, to prevent advertisements from influencing your behavior is to reduce your exposure to them. Watch less TV or use an online service with limited commercials (who likes commercials anyways?). Read more books and less magazines.

The same goes for financial news. Financial pundits are often hyperbolic and concerned with the latest news story. Most likely it has nothing to do with your specific financial situation.

Get help.  

Bill Gross is one of the most successful investors of all time. Yet, even the “Bond King” has his own financial adviser. Why? It may be all the complexities that come with managing his substantial wealth. Or, there could be an ulterior motive: to stand in the way of trouble.

The responsibilities of a financial adviser go beyond recommending appropriate investments or efficient tax strategies. A primary role is to provide objective guidance that helps people avoid doing anything they will regret, kind of like a behavior coach. This has real financial benefits.

According to a Morningstar study, help from an adviser to make smarter financial planning decisions, such as with asset allocation and withdrawal strategies, can lead to an annual return increase of 1.82%. That can add up to almost 29% more income in retirement.

As you continue on your financial journey, digest all the financial knowledge you can. Knowledge is power. But, also remember another important aphorism: action speaks louder than words.

 

Pocket_Guide_thumbnail.jpg
Take our insights on financial behavior
with you on the go. Download
The Personal Investor’s Pocket Guide to Good Financial Thinking.