Making The Most Of Our Money Mishaps

In financial planning, perfection is difficult to achieve, and pursuing it may be harmful. It’s perhaps more accurate to say that financial planning is mostly an exercise in error management and minimization. You, like major league batters in baseball, three-point shooters in basketball, and football quarterbacks attempting to complete passes, may find yourself missing the mark more often than striking it. In the case of investing (and the Russell 3000 index from 1983 to 2006), for example, only 25% of stocks were responsible for all of the market’s gains!

Mistakes with money are common.
These discrepancies are unavoidable when investing in collective and competitive free markets, but what about us as individuals? Well, behavioral economics has demonstrated that more than a century of traditional economic theory was founded on a fundamentally erroneous assumption: that we, as humans, would make rational financial decisions.
The truth is that our System 1, our impulsive, instinctual, often irrational, fast-thinking core processor in our brains—our gut, if you will—is responsible for the majority of our decisions, financial and otherwise. Then we use our System 2 processor, which is more deliberative, procedural, and slower to consider, to rationalize the decision we just made.
If you have any doubts, consider that this dynamic is likely the only reason we ever “needed” that restaurant-worthy double oven, commercial-grade zero-turn lawnmower, 80-inch high-definition TV, car that goes from 0-to-60 in 2.9 seconds, or the trendy shoes that somehow help the environment and bring about world peace if we only buy them off of Instagram. (You can guess which one I’m guilty of…)
ADDITIONAL INFORMATION FOR YOU
It’s not so much that we’re essentially faulty as humans as it is that we’re fundamentally complex; that we can’t divorce ourselves from our feelings; that we’re made up of body, mind, and spirit. It’s a lovely, tangled paradox.
So, for starters, kindly forgive yourself for the numerous financial blunders you’ve made thus far. Also, keep in mind that there is a method to make the most of your errors. Here’s how to do it:
1) Think about your experiences. “We do not learn through experience…we learn from reflecting on experience,” observed John Dewey. We have the chance to engage our rationale in the moment or minutes that follow, no matter how impulsively we behave in the moment. We can effectively re-train our future behavior through introspection, followed by the building of habits and the creation of defaults (see following point).
While reflection was once a natural part of life, we don’t do it nearly as much these days, owing to the fact that every gap is quickly replaced by some type of stimulus, most often derived from our smart phones, tablets, or the aforementioned 80-inch high-definition TV.
However, it is also true that we appear to regard time spent thinking as a waste of time. It’s ironic, therefore, that some of the world’s most accomplished people have set aside time to ponder. If you’re easily sidetracked, like me, keeping a notebook can help you both catalyze and visualize your thoughts.
2) Establish habits and defaults. Forming a new habit and/or setting a new default after reflecting on a prior mistake is one of the most effective techniques to avoid repeating it. For example, if you constantly overspend on groceries when you go to the shop, buy your groceries online so that you can see the exact amount you’re spending before you check out and make changes as needed.
Create a default with your 401(k) provider that will automatically increase your retirement plan contributions by 1% each year, coinciding with your regularly scheduled cost-of-living raise, if you’re struggling to increase your retirement plan contributions because you’ll see less money in your paycheck today. (It’s easier for us to pledge money we haven’t yet received than it is to pledge money we already have.)
Rather than fighting our own psyches, we may work with them.
3) Increase your margin. And, perhaps most crucially, because we’re “predictably irrational,” it’s beneficial to plan ahead for our inevitable financial missteps. The greatest benefit of budgeting discipline is that it allows you to avoid the burden of living paycheck to paycheck by simply setting aside a savings cushion. It’s nice to start with some unexpected finding money (your tax return, a small inheritance, an unexpected gift or bonus), but consider considering setting up a monthly amount that covers the unexpected.
You’re not going to hit a thousand, make every three-pointer, complete every pass, or handle life in a financially sound manner. But the goal is growth, not perfection, and you can learn from your mistakes if you choose to./nRead More