Have you ever found yourself splurging on items while on vacation or around the holidays you would not typically buy or pay a premium for? Despite knowing those purchases are likely a poor use of funds or perhaps overpriced, you may find yourself justifying those purchases as being acceptable because it is the holidays or because you are on vacation. In the field of behavioral finance, the re-valuing of expenses because of special circumstances is considered a form of mental accounting.
There are two primary types of mistakes individuals make regarding personal finances. The first falls into the category of Technical Mistakes. Our educational system does not provide individuals with a solid base of knowledge around personal finances. It certainly does not teach us more complex technical concepts, such as the time value of money or beta vs alpha. A skilled CERTIFIED FINANCIAL PLANNER™ professional can help you both plan and navigate the complicated subjects of investment management, retirement planning, estate planning, risk management (insurance), and tax planning strategies. However, there is a second category of mistakes we make around finances to which even the most skilled financial technicians often fall prey to.
The opening example of mental accounting is just one instance of a larger group of Mental Money Mistakes we make, which is the second category of money missteps. Various cognitive biases can have a substantial impact on your personal finances. Inertia or “status quo” bias can prevent us from dealing with important financial items like estate planning, participating in 401ks at work, or putting a financial plan together for retirement. Loss aversion often results in individuals holding and/or selling the wrong investments at the wrong time. The interesting thing about these mental money missteps is that even those who are technically savvy often still make these types of mental errors when it comes to personal finances.
Over my fifteen-year career in finance, I have and continue to work with some of the top minds in behavioral finance, financial planning, mental health, and with higher education professors to grow my expertise in helping my clients avoid both technical and mental money mistakes, and to educate the public regarding how to avoid these common blunders.
My team and I are on a mission to better educate the general public on both technical and behavioral finance matters. We will be releasing articles and conducting seminars regarding some of the most common technical and mental money mistakes we see individuals, couples, and families make in order to serve the broader community. You can find more information regarding these articles and upcoming events at our website maestrofp.com. In the spirit of Valentine’s day, you will find an article titled “Money and Relationships” as the debut article.
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Securities offered through Raymond James Financial Services, Inc., member FINRA/SIPC. Investment advisory services are offered through Raymond James Financial Services Advisors, Inc.
Opinions are those of Shawn Waked and not necessarily those of Raymond James. This material is being provided for information purposes only and is not a complete description, nor is it a recommendation.