Nine Ways You May Be Sabotaging Your Own Financial Stability

Be Honest With Yourself

By Mandy Woodruff

As human beings, our brains are booby-trapped with psychological barriers that stand between making smart financial decisions and making dumb ones. The good news is that once you realize your own mental weaknesses, it's not impossible to overcome them. Here are nine of the biggest barriers...and some good strategies for fighting them:

Scenario 1: You're about to buy an engagement ring so you do some research on prices. Most people say three months' salary is the general budget, so you freak out and request a credit line increase.

What's really going on: Anchoring.

Anchoring happens when we rely too heavily on the first piece of information offered when making decisions. After encountering the "three month" rule, you find it hard to make a logical decision based your own financial reality or your relationship. You may not have three months' worth of salary to splurge on a diamond, but you decide to spend within that range because you are anchored to that idea.

Scenario 2: You're 27 years old, in excellent health and just got promoted. You're so high on life that you can't fathom a time when you'll no longer be young, fit, and financially stable.

What's really happening: Myopia.

Because you are unable to picture yourself in old age, bad health, or cash-strapped, you're less likely to save for unexpected events or your retirement. Myopia can be blamed for many depleted retirement savings account in the U.S. "Seduced by temporal myopia in their younger years, many people get around to saving seriously for their retirement far too late in their career, in their forties and fifties in many cases, which greatly reduces the amount of money they will have available for their retirement," says Shlomo Benartzi, a behavioral finance economist and author of "Save More Tomorrow."

If you're lacking motivation, try this handy experiment: Use Merrill Edge's Face Retirement generator, which will take a photo of you as you are today and generate an image of what you'll look like in retirement. Benartzi's own research has shown that this kind of reminder can actually give people the kick in the butt they need to start saving for retirement.

Scenario 3: You're watching the market closely and see that a certain stock has been tanking over the last few months. You give it another month, watch it drop again and decide to sell it off before history repeats itself.

What's really going on: Gambler's fallacy.

When investors rely on past events to predict the future, they're shooting themselves in the foot. If a stock is flying or floundering for a year, that doesn't mean it will continue to do so in the next year, or even few months to come. The same thing happens when you buy a lotto ticket because your buddy next door just won $10,000 in a drawing. Just because he won doesn't change the odds of you winning at all.

Keep your decision-making grounded in the real facts. Analyze your investments before making any sudden moves or following trends.

Scenario 4: It's open enrollment season for your company's health care plan and the list of plans is so confusing that you put it off for days until, finally, the deadline rolls around. You give up, re-enrolling in whatever plan you already have.

What's really going on: Avoidance.

This is a form of procrastination that could really cost you. There are a lot of meaty topics in finance, most of which are about as fun to research as it is to get a root canal. But if you miss a dentist appointment, you can easily reschedule. Screw up your health care election and you could be stuck with the wrong plan for an entire year and pay dearly for it.

Another area prime for avoidance: 401(k) plans. You know you've got to enroll so you just skip around until a decent plan name "speaks to you." Not only could you have signed up for a plan with high fees or the wrong allocations for your risk tolerance, but you will only wind up paying more fees when you finally realize your mistake and have to switch plans.

In addition to a wealth of helpful tools and articles online, many retirement plan providers offer free advisors who are on call to help navigate you through the elections process. If they don't, It could be worth it to book a one-time consult with a fee-only financial advisor.

Scenario 5: A tech company you love just went public and you're dying to buy in. You decide to do your homework, but you skirt over the negative headlines, instead clicking on posts singing the company's praises.

What's really going on: Confirmation bias.

Investors aren't machines. We've got feelings and like any normal human being, we can't help but selectively filter out opinions that don't mirror our own. In doing so, we create a false sense of security that can lead to some pretty boneheaded decisions.

If you want the full picture, you've got to seek out information that contradicts everything you thought you knew about a company before you can hope to form a balanced opinion.

Scenario 6: It's April 2008 and the stock market has just hit rock bottom, taking half of your retirement savings down with it. Shell-shocked and devastated by the loss, you demand that your financial advisor pulls every last investment out of the market immediately.

What's really going on: Loss aversion.

Loss aversion plagues even the most experienced investors, making them avoid potential gains because they're too afraid to take a risk.

Anyone who ditched the stock market for fear of further losses after the 2008 crash can blame loss aversion. The average pre-retiree 401(k) balance actually doubled since the recession. People who fled the stock market and never rebalanced their portfolios only rebounded by 25%.

Loss aversion can also have the opposite effect, causing investors to cling too tightly to losing investments. Because it hurts to admit that they picked a loser, they focus on selling off winners and hope the losers will rebound over time. If they aren't careful, they wind up with a portfolio full of duds.

Scenario 7: You're a savvy investor and you know you've got the goods to beat the market. So you jump in and start trading like a madman, trusting your gut and your own due diligence not to lead you astray.

What's really happening: Overconfident investing.

It takes seriously overconfident investors to kid themselves into thinking they can beat the market when even the people whose full-time job is to beat the market fail so frequently.

Terrence Odean's oft-mentioned study, "Trading is Hazardous to Your Wealth," isn't just a cute bedtime story for investors looking to stroke their egos. It actually shows that frequent trading caused by overconfidence can kill your returns.

Of more than 66,000 households using a large discount broker in the mid-1990s, those who traded most often (48 or more times a year) saw annual gains of 11.4 percent, while the market saw 17.9 percent gains, Odean found.

Scenario 8: You're still working on building up your emergency fund and you just got a birthday check for $100. Instead of adding it to your savings account, you treat yourself to a new coat or a haircut.

What's really going on: Mental accounting.

Mental accounting takes place when we assign different values to money depending on where we get it from. If you had earned that $100 by working overtime one week, chances are you'd treat it more like regular income and save it.

Mental accounting is a big reason why we spend more money with credit cards than using hard cash. It just feels "less" like money to us and therefore it's much easier to spend.

Instead, repeat this mantra: "Money is money, no matter how I get it." And the next time you use your credit card, ask yourself if you'd be spending that money if you were using cash instead. If the answer is no, hold off.

Scenario 9: A housing development in your county just went belly up and you've heard investors are snapping up cheap plots for a steal. You've got no experience flipping houses but what the hell? You're not about to miss out on a hot ticket like that.

What's really going on: Herd mentality.

You've spotted a hot trend and you don't want to be the only schmuck out there who didn't book a seat on the bandwagon. As human beings, it can be very uncomfortable standing still while the rest of our peers head the other way looking like they're having a ball. It's in our nature to want to join the party.

This causes a lot of problems when it comes to investing. If you're willing to change course every time the herd moves, you'll end up trading a lot more frequently and seeing your returns nibbled to bits by transaction costs alone, not to mention what will happen if the herd leads you astray.

Cotton on to a trend too late and you'll just lose out when the herd moves on to hotter territory later on and your stock plummets. It's just a vicious cycle that will only lead to selling low and buying high. The only way to profit from a trend is to get there before anyone else and the odds aren't in your favor.

More From Business Insider:

Increase your money and finance knowledge from home

Basics Of The Stock Market

Stock Market 101 - everything you need to know but were afraid to ask!

View Course »

Income Investing

Grow your nest-egg.

View Course »

Add a Comment

*0 / 3000 Character Maximum


Filter by:

I have tried many love spells and had no success. I was online and came across Dr obodo ( I was having an issue with my partner we have both been separated for 4 months. I thought I would try one more time. I did it and everything changed, he came back to me and ask me to forgive him. Now we are married and planning to have children soon.Thank you so much for all your help!.

October 18 2013 at 5:49 PM Report abuse rate up rate down Reply

I"ve been a custom jeweler for many years. Here's my advice; go find a member of the American Gem Society. While it's still no guarantee, you are much more likely you will well and honestly treated at an AGS store. The person behind the counter should act like a guide. He or she is there to help you, not to talk you into anything, not to get you to spend money you can't afford. They are there to help you protect you from yourself, but never to try to fool you in any way. Don't be intimidated. Ask questions. One question to ask is " If you were buying this item, what would you buy and why?"

September 30 2013 at 11:08 PM Report abuse rate up rate down Reply

Scenario 8 is complete BS. If someone gives you a gift of money, you should enjoy it. Treat yourself. If you are that cash strapped, that gift money isn't going to save you anyway.

September 30 2013 at 10:25 PM Report abuse rate up rate down Reply

Just have Obama subsidize it for you... or better yet ...get a grant for that ring... you laugh, it's coming...

September 30 2013 at 9:36 PM Report abuse rate up rate down Reply

The mistake is buying the ring and saying "I Do"...

September 30 2013 at 9:33 PM Report abuse rate up rate down Reply

Mistake. Reading a column that relies on making up scenarios that go with pre-conceived , silly catch phrases to prove your "point".

September 30 2013 at 7:07 PM Report abuse rate up rate down Reply
Jim Becker

Whatever you do, don't make the mistake of going to a jewelry store, especially Kay's, go to a jeweler. Kay's is only about sales, not service and not quality.

September 30 2013 at 6:50 PM Report abuse +1 rate up rate down Reply
Bryan Citrowkse

My wife picked something she like from Macy's (Not a Diamond) and we were out the door for under $400. I picked up a simple new ring from ebay for $22. we spent the money we saved on a 14 day trip to mexico.

September 30 2013 at 5:54 PM Report abuse rate up rate down Reply

You can buy a "used" diamond for half of the retail value! Just go to somewhere like Leo Hamel in San Diego. They call them "vintage" not "used"!

September 30 2013 at 5:47 PM Report abuse rate up rate down Reply

I opened my IRA, when I was in college. My father made me understand that it's never too early to think about retirement, even when you havent' started working full time.

Another point. While the stock market does go up and down, meaning that you shouldn't panic about selling with every dip, no one ever went broke selling a stock too early. I've sold stocks, thinking that they have peaked, only to see them move higher. But, it's better than thinking a stock hasn't peaked, and then watch it completely tank.

September 30 2013 at 4:32 PM Report abuse rate up rate down Reply