Many people don't approach their financial lives rationally. They spend time on things that matter much less. Grant Webster at AKT Wealth Advisors in San Diego spotlights four things that many do wrong, and how to fix them:
I recently came across a picture on social media of two men using the escalator to go to... the gym, where they are presumably going to work out. Yes, instead of walking up the stairs as an added workout boost, they chose to use the escalator. I don't know what is stranger: that they both took the escalator instead of a small flight of stairs, or that a gym has an escalator to begin with.
The funny thing is that we make these seemingly irrational choices every day. Whether it's in our everyday lives or when it comes to money. Below are four examples of how we sometimes make irrational choices with our finances:
1. We think getting a tax refund is getting free money. I honestly cannot count how many times I've heard the following phrase from a friend, family member, or a random person in passing:
"I can't wait to get my tax refund this year. I hope it's bigger than last year."
They then proceed to use what they believe to be "free money" for whatever big-ticket item they have been thinking about buying for the first four months of the year. After all, it was just free money.
If you happen to be one of these people, I do have some pretty important, life shattering news for you.
A tax refund means you paid too much in taxes throughout the year. When you file your tax return and realize you overpaid, the government sends the overpayment check back to you.
In other words, getting a large tax refund means you let the government use your money (for free) throughout the year.
Rational tip: Don't actually try to get a tax refund each year. Adjust your tax withholdings and ensure you don't give the government a free loan. How do you do this? Talk to your tax preparer to see what changes may be needed. You can also contact your HR department and change your withholdings (to have less taxes taken out of your paycheck).
2. We don't spend time understanding our investments, or how we save and spend. We tend to spend more time on our fantasy football rosters, watching the newest Netflix shows, and updating our social media profiles than we do understanding the roots of our financial trees—what we are invested in and how we spend our money.
Rational tip: Focus on what you can control; ignore what you cannot.
What you can control:
- Your spending and saving
- Your asset allocation
- How much you contribute to your investments
- Reducing your taxes (to a point)
What you can control, to an extent:
- Your longevity (to a point)
- Your earnings
- Career progression
What you cannot control:
- How the markets perform
- What the government does
- Tax rates put in force by the government
- Inflation (which brings us to the next point)
3. We think being in cash is safe and hoard money in our checking accounts. When people are afraid to begin investing—what do they do? They keep their money in the bank, where it is accumulating dust. Nice and safe, right? Not really.
Let me ask you this: Do you remember what you paid for a movie ticket when you were 16 years old? How about today? For me, the price for a movie ticket is up from $6 when I was sixteen to about $12 today. I am 30 years old, so in just 15 years or so, the cost doubled.
This subtle increase in prices is called inflation. Inflation is one of the many reasons we need to invest.
Inflation can creep up on you without you knowing. It is like the extra pound of weight we gain each year. You may not notice it at first, but it will catch up to you.
Rational tip: Decide how much cash you really need and invest accordingly. Earning 0.05% in a savings account won't get you too far in the long run. At that rate, your money will double in roughly 1,440 years.
4. We automate everything in our lives—except for our basic finances. It is difficult for most of us to get our finances organized because we have to think about it. When we overthink something, we make it complicated and then we don't follow through on it. We ask ourselves questions like:
- How much should I save this month?
- Should I contribute to investments this month?
- When are my bills due?
The more we have to think about something, the more we are going to fail to take action.
Rational tip: Set up your automatic financial machine.
Make sure your basic financial accounts are talking to each other. When you get paid, are you automatically funding your 401(k)? When your paycheck makes it to your checking account, are you automatically transferring money to your savings account? Are bills paid automatically and effortlessly? Are credit cards paid automatically or do you risk paying late fees by forgetting to mail a check? Automate your financial life and you may find you have less financial stress.
A little dose of rationality is good for us all. So who are you, the person going up the escalator to the gym or the person who takes the short set of stairs up to the gym?