When it comes to our money, we all try to act rationally...
yet we often fail. I call this phenomenon "money madness."
Back when the economy was strong, our bad money habits might not
have hurt us very much -- but these days, financial irrationality
can be much more costly. Here’s how to recognize if you have any of
these five common forms of money madness -- and how to cure them...
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Gut
player. You always trust your instinct on money
matters. You hang on to stocks because you "have a good feeling
about them" -- even though their prices have become very high or
have plunged way beyond the rest of the market’s dive. You bought
your house or your car because you "fell in love with it" -- even
though it cost more than you meant to spend.
Even experienced money pros sometimes fall into this trap -- they
convince themselves that their instincts are right, and therefore
the numbers must be wrong.
Solution: Describe the situation to
your spouse or a friend, and solicit his/her input. Money novices
often ask the smart questions and raise the crucial topics that
"money experts" fail to confront when they trust their instincts.
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Home-run
swinger. You want big, fast payoffs on your
investments. You’re willing to take big risks to hit financial home
runs.
Truth: It isn’t really big financial
gains you’re after -- it’s the adrenaline rush that comes from
taking risks.
Solution: First, make a list of the
times that you have tried for a big financial score and failed.
Figure out and record how much each of these losses has cost
you.
Next, set up a plan that automatically takes money from your bank
account and puts it in a diversified portfolio of investments
appropriate for your goals and time horizons. Any mutual fund
company can help you do this. An automatic plan takes future
investment decisions largely out of your hands, making it more
difficult for you to impulsively gamble with your savings.
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Prisoner of
spending. You waste money on things that you don’t
need and run up credit card bills that you can’t afford to pay.
Solution: Take a one-month
sabbatical from credit cards each year. You’ll likely discover that
you don’t enjoy spending nearly as much when you have to hand over
your hard-earned cash rather than just whip out a credit
card.
And by the end of the month, you should have a better idea of what
kinds of things you truly need.
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Money
mute. You can’t or won’t talk about your current
financial situation, even with your spouse. This could be costing
you money.
Examples: If you can’t tell your
spouse that money is tight, he/she might overspend. If you can’t
talk to other couples about your budget constraints, they might
pressure you into spending more on activities, such as eating out,
than you can afford. If you don’t level with your accountant,
insurance agent or investment adviser, you might incur penalties or
take on more risk than you can tolerate.
Solution: Start a conversation by
bringing up more general -- and somewhat less stressful --
financial topics, such as the state of the overall economy or even
how money matters were handled in your family when you were a
child. Then, in the same conversation or a follow-up, segue into
your own current situation.
Alternatives: Ask your spouse to
review the family’s finances with you so that he is able to share
in your concerns. Discuss these topics first with a friend or
mentor as practice for financial chats with others. Consider
communicating with financial advisers via e-mail, which many people
find psychologically easier than discussing money matters face-to-
face.
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Money
measurer. You regard each financial setback as a sign
of personal failure and a character flaw.
Solution: "Measure" other aspects of
your life as well, and you’re more likely to see that your finances
are just one small part of who you are.
Example: Give yourself a one-to-10
score for each of the following, with 10 meaning that you have
succeeded completely: your friendships... your family... your
health... how much you enjoy your spare time... how much you enjoy
your career... and how much you help others.
Next time you’re feeling bad about your battered investment
accounts or what you consider to be unimpressive wages, put things
in proper perspective by considering these other scores as well. If
your scores in these areas are lower than you would like, at least
some of them can be quickly improved. Inviting acquaintances over
for dinner can boost your friendship score... spending a Saturday
volunteering with a charity can boost your "helping others"
score.