As a Certified Financial Planner in Utah and founder of Rock House Financial, there are 5 money mindsets that I see hurt investors again and again. These attitudes may not feel like obvious financial planning mistakes at first, so I want to make sure you’re aware of them.
It may sound counterintuitive, but the best plans don’t start with simply saving money. The most prudent way to plan for a secure and robust financial future is to start with your goals. Where do you want to be in five years, or in 10 years? Where do you want to be in 30 years, or in 40? How do you want to live your life? What do you want to do in retirement?
Once you know your goals, you can put plans in place to achieve them. Solid plans include knowing your spending patterns and your income concretely, every month. That way, you know how much your lifestyle costs and how much disposable income you have to save. You also know if your spending exceeds your income. When you take on a lot of debt, reaching your goals can feel (and sometimes be) impossible.
Most short-term goals, such as buying a home, traveling, starting a family, building a business and retiring, require savings. While blindly saving is better than not saving at all, it’s more strategic when you determine what you’ll need and how much you need to save to achieve your goals.
In my many years of experience helping families plan for retirement, remembering your goals helps us remember what’s important and focus on our long-term plans. The following 5 mindsets that can deter you from that.
If things are going well, it’s human nature to project current circumstances into the future. If you’re having a lot of success at work, for example, it’s natural to assume that that success will continue. If your stock market investments are up, it’s natural to feel that it’s the result of good choices and stock-picking skill.
But overconfidence can be harmful. As we all learned in 2020, life doesn’t always go as planned. Market volatility is a constant. Work isn’t guaranteed. Assuming that positive trends will continue is dangerous. (Did you read our recent blog post: 5 Financial Threats You Don’t See Coming?) The key is to manage potential future risk.
Have a Plan B. Talk to your financial planner about life insurance. Insure your assets. Make sure to manage your portfolio’s asset allocation to minimize risk while maximizing returns.
The Fear Of Missing Out (FOMO) has driven many a saver and investor away from prudent paths.
First, FOMO can drive you into too much expenditure to meet your savings goals. Even if you think you’re buying something for good reasons, FOMO spending isn’t driven by prudence – it’s driven by the next new thing and what everyone else is doing.
FOMO can also cause you to invest unwisely. Fads nearly always exist in markets, whether it’s tulip bulbs, dot.coms or Bitcoin. Some can reward investors, but far more often, in my experience as a Certified Financial Planner in Utah, FOMO faddish investments only work for a certain time period. Many people are left holding the bag, which has become nearly worthless.
A sturdier strategy is to work with a financial planner who will choose prudent, long-term investments that will hold their value. (Are you working with the wrong financial planner? Click here to find out.)
Keeping Up with the Joneses
Keeping up with the Joneses sometimes overlaps with FOMO.
The Joneses are those mythical neighbors who always have more than everybody else – and they have it first. The Joneses were the first to get a large-screen television, a Smartphone, a new car. It can even be an expensive education for their children. Peer pressure in adults is a real thing. And it’s dangerous.
Wanting to have a life like the Joneses have is perfectly fine – if that is your goal! It’s important to keep your goals firmly in mind, whatever they may be. The Joneses, after all, may have a very different situation than you. Spend, earn and invest to achieve your goals, not someone else’s.
Rose-colored glasses, or being overly optimistic, can be a good thing in a world of negativity and angst, but it can also lead to overconfidence. You don’t have to plan for the worse, but when you don’t consider the what-ifs in life, you’re usually not prepared for the unexpected.
The key to correcting rose-colored vision is to take those glasses off. Look at your financial plan clearly and assess the positive and negative. If this is hard for you, contact the team at Rock House Financial. Locally owned and independent, Rock House Financial is passionate about helping you create a more confident financial future. All of our Certified Financial Planners in Utah are fiduciaries who offer fee-only financial planning, investment management and tax strategies to help you minimize financial stress and achieve your goals. We don’t use fear tactics. We make sure you address possible what-ifs, so you’re prepared for whatever life brings.
Fear of Investing
Putting your cash in a mattress is highly unlikely to lead to your goals. Not only that, but the value of cash uninvested actually diminishes over time, due to inflation. Inflation rises, on average, 2 to 3 percent per year. In other words, $100 this year could only be worth about $98 next year, and it’ll continue to drop year after year.
Unfortunately, many people fear investing, for several reasons. You can help manage that fear with 2 concepts.
First, look at history. Over time, market volatility usually smooths out and leaves investors with long-term gains. The U.S. stock market, as measured by the S&P 500, for example, has risen almost 10 percent annually over the last near-century, despite major drops on occasion, including during the Great Depression of the 1930s and the Great Recession of 2008-2009.
Second, make sure your investment portfolio is balanced properly. Portfolios are often allocated between stocks (to maximize returns) and bonds or cash (which sport lesser returns but are stable and not volatile in price). Talk to your financial planner about your asset allocation and how it relates to your risk tolerance.