When it comes to your finances, there are a couple of ways to sabotage yourself. One is not putting enough thought into it.
The other is putting too much thought into it.
Overthinking – becoming obsessed with minor details, twisting yourself into a pretzel, getting overwhelmed with choices and doing nothing – can be just as damaging to your financial future as the opposite.
“It’s the paradox of choice: The more information we have, the less we can process it all, and the brain kind of short-circuits,” says Melody Wilding, an executive coach and author of the new book “Trust Yourself: Stop Overthinking and Channel Your Emotions for Success at Work”.
Sound familiar? It’s not just a few of us: 73% of those ages 25-35 struggle with overthinking, according to one study from the University of Michigan.
You don’t have to tell financial advisers, who see this all the time. Just ask Dana Anspach. The founder and CEO of Scottsdale, Arizona advisory Sensible Money has one client, a Fortune 500 executive, who has too much money concentrated in company stock.
“He constantly overthinks what the share price may do,” says Anspach, who admits the dithering makes her want to reach for the “shot glass and the bottle of tequila”.
When forced to exercise options and sell, her client sits on the cash, "overcomplicating the decision of when and how to invest it," Anspach adds, noting that in the past seven years, so-called "analysis paralysis" has cost him nearly $500,000.
Indeed, in one famous study by author and Columbia Business School professor Sheena Iyengar, the more investment choices people had in their 401(k) plans, the lower percentage of participation – even if there was the free money of a company match.
And having more choices did not make plan participants better choosers. The more mutual funds savers could select from, the more they tended to retreat into bonds and cash.
How can you overcome this tendency to overthink things, and actually make a solid money decision – even if it’s not perfect? A few pointers:
Take the decision out of your own hands
If you have to actively decide to save something at the end of every month, that is 12 different times a year when that decision (or lack of decision) could go wrong. But if you schedule those paycheck deductions, you are removing your own worst tendencies from the equation.
“Don’t decide. Automate,” says Kerry Taylor, a Toronto-based money expert and founder of the site Squawkfox.com. “Reducing friction and the need to make financial decisions is the magic of behavioral economics. I’m so into it.”
Give yourself a deadline
The brain’s natural tendency is to go around and around, ad infinitum. So counteract that by limiting yourself to a defined period to make a money decision.
“Many of my clients ‘timebox,’ and put a cap on how much time they can spend deliberating,” says Wilding. “Limit the number of resources you will consult, rather than going down an endless rabbit hole. Pick a date, put it in the calendar, and even commit to it publicly.”
Consider opportunity costs
If you are obsessing over investing in the perfect stock at the perfect price, that is one decision. But the larger and more important decision, viewed over the long-term, is being in the market or not being in the market.
That is the kind of mindset Anspach faced with another client, who was fixated on getting the ideal price for his current home before buying a new one in his desired location. While he hemmed and hawed, the housing market in his target community shot up – and his dream home is now going to cost $200,000 more than he thought.
Perfect is the enemy of good
Sure, we would all love to make a brilliant investment decision, like buying Apple stock (AAPL) for a few bucks in the early 2000s. But even if your decisions are not perfect, you can still make good ones. It may not always be a home run, but singles and doubles will still get you around the bases.
“We tend to fall into trying to find the most perfect possible option, because we’re so afraid of choosing wrong,” says Wilding – one of whose clients made an elaborate spreadsheet comparing various kitchen blenders, and still couldn’t pull the trigger. “But the cost of inaction can be huge. By not making a decision – that’s a decision, too.”
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