There is a dramatic disconnect between good intentions and actions that cause people to make money mistakes. One of the most important financial decisions people can make in their lifetime, is to plan and save for their future retirement. There are three main factors that lead people to money mistakes. Are these influencing your financial decisions?
1. RESISTANCE TO CHANGE. We are going along a certain path engaging in money habits and it’s difficult to break out of that situation.
- EXAMPLE: Spending each paycheck until there is nothing left to save.
- WAYS TO OVERCOME: Have the bank automatically deduct a small amount per check directly into a retirement account.
2. PRESENT BIAS. Impatience or the inability to plan for long-term.
- EXAMPLE: You feel like your retirement situation is hopeless or you don’t understand it, so you put it off.
- WAYS TO OVERCOME: Meet with a financial planner or enroll in a financial education program.
3. LOSS AVERSION. Do you feel the pain of a loss more than you feel the joy of a gain of the same size? Some studies suggest that psychologically, losses are twice as powerful as gains. This can lead us to take more risks, if it means avoiding a sure loss.
- EXAMPLE: We spend more money on car repairs because we’ve already spent so much on the car.
- WAYS TO OVERCOME: Think in terms of getting to where you want to be tomorrow, and what is that investment worth today.
"The trouble with not having a goal is that you can spend your life running up and down the field and never score." Bill Copeland