People Make Too Many Mistakes with Their Finances

967 words | 4 page(s)

It is useless to argue that money is an integral part of our everyday life. They enable us to obtain all the things essential for our physical comfort. They ensure our safety and stability, maintaining, in such a manner, our emotional well-being. They allow us to make plans for the future and to evaluate our performance in the past. It would, then, seem that each of us should be a skillful financial manager taking into account the important role that money play. However, the main paradox resides in the fact that our experience of managing money does not necessarily ensure our proficiency in this domain. Practice shows that people tend to make too many mistakes with their finances in spite of the fact that each person has a rich experience of financial management. One, they trust their intuition excessively. Two, they do no assess the consequences. Three, they focus entirely on expenses neglecting other elements of financial management.

To begin with, a common mistake that takes roots in the specificity of a human nature is the overreliance on intuition while considering finance-related options. There is no consistent explanation for why people tend to associate money issues with some irrational phenomena such as luck or chance. Although this association might be appropriate for the casino settings, real-life finances have nothing to do with this romanticized fatalism. Instead, they are closely related to analytical thinking, careful evaluation, and accurate calculations. In this regard, an acknowledged performance coach Tony Robbins describes a widespread mistake that resides in trying to enter the market intuitively, without assessing the existing conditions or trying to predict the short-term consequences, relying completely on the pudding bag. He explains that it is a delusion to assume that someone can successfully “time the market” by pulling “the funds in and out as it swells and dips.” (para. 7). This does not mean one should ignore the inner voice while taking an important financial decision. However, it is important to realize that such decision should be underpinned by a rigorous estimation. The more meticulously we approach our calculations, the sharper our intuition becomes which means that there are more chances that it can guide us in the right direction.

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Next, it is the inability to calculate the long-term consequences and the excessive centeredness over the short-term benefits that play false with a large percentage of people trying to manage their finances. This mistake is mainly characteristic of those who possess some savings that were initially supposed to be spent in future but the circumstances encourage these people to spend them today. In this situation, the underpinning motives are very clear. Thus, a person seeks to resolve, by all means, the current problems, hoping that he will manage to accumulate more money by the time these savings will be needed. Unfortunately, this strategy is a no-win one in most cases. In her video, Orman warns the audience against giving in to the temptation to use up the rainy day fund arguing that they risk finding themselves in even a far more unfavorable position shortly after the immediate problems are resolved and the new challenges emerge (“Should I Take Money Out of 401K Retirement Plan to Pay Off Debt?”). She explains that such strategy is especially unreasonable when applied to those savings that are kept in the form of investments. In this case, apart from the savings themselves, one also loses at least a 5% return that these savings would earn as an investment instrument. Regretfully, even a clear understanding of the associated consequences does not prevent people from committing this mistake for the nearest benefits are too attractive to resist.

Finally, one of the most typical mistakes resides in identifying money with expenses. Thus, many people believe that the best and, more than that, the only way to accumulate wealth is to ensure that their income prevails over their expenses. As a result, people buy a cheaper car, prefer low-cost insurance plans and avoid purchasing anything that does not have a discount. On the face of it, this strategy is fairly sound one from the standpoint of rationality. However, just as the previous mistake, this approach fails to see the so-called “big picture,” otherwise speaking, it overlooks the long-term prospects placing an entire focus on the short-term benefits. In this regard, Ramsey argues that expenses are “the most overlooked, overrated criterion” in financial management (156). He warns his readers against prioritizing this criterion and, instead, suggests considering such aspect as the long-term value. Thus, for example, before choosing the cheapest insurance plan, one should better analyze whether this plan can cover the relevant needs; if not, it might be rational to buy a more expensive one for all the expenses will be compensated in the long run.

In conclusion, let us consider a bigger picture for our discussion. One might argue that this paper describes only three mistakes which people make with their finances what does not necessarily give us grounds to speak about “too many” mistakes. However, it is important to focus on the scope of the mistakes described rather than on their quantity for each of these unfavorable behavior patterns stimulates further faults and inappropriate decisions resulting, after all, in financial losses.

The key message of this paper resides, thereby, in the idea that financial management requires a thoughtful and balanced approach. In this view, wealth should not be calculated by juxtaposing immediate revenues to expenses. Instead, it is critical to visualize the long-term perspective and to assess critically the long-lasting consequences which each financial decision implies. Effective financial management, in this regard, is not confined to avoiding minor mistakes and trying to “time the market.” A truly effective strategy involves adopting a systematic approach to financial management that helps to consider any decision in a thoughtful and far-seeing manner.

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