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financial health

The Biggest Threats To Your Financial Wellness: Ignorance and Impulse

As we continue our series exploring threats to your financial wellness, we need to discuss two of the biggest issues for American personal finance: Ignorance and Impulse.

Much of the American public is uneducated about personal finance and how best to navigate the space. There’s too little training in how to teach yourself and train against your base impulses to succeed, especially as young people go through high school courses focused on STEAM skills. We’re preparing our youth to be successful professionals but we are failing to groom them for financial wellness. This can be a painful topic, as our lack of teaching the next generation can often reflect our own blind spots.

Financial Ignorance

If you’re like most Americans, your financial education primarily consisted of two lessons: how to balance a checkbook and supply/demand economics. But checkbooks are outmoded and don’t fit today’s digital landscape and supply and demand can’t be the sole guiding principles for your financial life. This unawareness is taken advantage of by predatory institutions who use confusing language to obscure the uneven nature of their business relationships. From payday loans to confusing jargon surrounding different account types, most financial vehicles work in favor of the institution rather than the individual.

So how can a person improve themselves to push back against these practices? Through education. Whether through community college courses, Udemy.com courses, retaining a personal advisor, or spending some time reading on Investopedia.com, a wealth of resources are available online.

When determining what content deserves your attention and, potentially, money, ask yourself “who benefits?” Many thought leaders in the industry can push out books, workshops, and other media as a means to augment their sales funnel. Avoid paying for these sorts of things when possible – your local public library likely has a wide selection of useful texts. If not, you can always request they purchase what you want to read.

Impulsive Behaviors

How many Amazon purchases did you make in 2008? Compare that number to last year, and we’ll bet it increased by a factor of ten. Impulse buying fueled by credit cards, saved billing data, and intricate marketing mechanisms targeting your impulses make this sort of purchasing a pervasive and sneaky way for companies to increase their revenue while decreasing your net worth.

Credit cards.  Lunches out.

Small behaviors can become big, problematic habits. If the average lunch out costs $10, and you’re going out for lunch 5 days a week, that can add up to $2,500 annually! (Compiling your small purchases and habits into large chunks can be an eye-opening experience – do you really want to pay $4,800 over 10 years for a gym membership you never use?)

If your spending is out of hand the best thing you can do is track everything. Keep a spending journal or spreadsheet. Use an online service to track where your money is going. Whatever you have to do, identify the problematic habits that are costing future you thousands of dollars. Once you’ve found them, you can change the problematic behaviors.

Master Your Future

You are the master of your financial future. Market upswings and downswings are going to occur and you have to be ready. Before making a big decision or impulse purchase, pause for a moment and explain why you are doing what you are doing – if saying it out loud doesn’t make sense, reassess your choice. However, you are only human – you will fail to control your impulses and you will make poor judgement calls. The trick is in recognizing when you slip and correcting for it ahead of time.

Build some discretionary spending into your budget. Give yourself an allowance. Make yourself save for big purchases the way you had to as a child. It’s not enough to just arm yourself with good behaviors, though. They have to be backed up by a sound financial logic and strategy that will carry you through the good times as well as the bad. Whether this means online courses, extensive reading, or engaging with a financial advisor, you have to figure out what works best for you and then stick to it.Ready to master your financial future? Learn more about our private client services and how we can help you build your wealth.

The Four Challenges to Building Wealth: Lost Opportunity Cost

As we kick off our series exploring the four challenges to building wealth, we’re taking a deep dive into lost opportunity cost. The choices we make every day affect our lives in far-reaching ways, from our diet and fitness routine to financial discipline. When you decide to do something you aren’t just choosing that option over others – you’re choosing its future over the others. How are your choices affecting your life and your future?

The Future Impact of a Dollar

When you decide to spend your hard-won money on something, you don’t just lose that dollar. You are effectively giving up any future potential that dollar had to gain interest or grow in value through saving and investing. It’s not the total balance that you’ve passed on though. An impulsive lunch out today could mean you don’t have the funds you need for a medical bill or car repair later.

It seems extreme, but many small choices add up to either financial freedom or a paycheck to paycheck lifestyle. Evaluate every dollar spent carefully; is the outcome of its use at this moment worth sacrificing its future?

Measuring Lost Opportunities

To help guide your financial decision-making, you can calculate the value of lost opportunity cost to help weigh your options. While pro/con lists are great tools for evaluation, the hard numbers and figures of opportunity cost help provide firmer metrics, something essential for financial decision-making.

To determine the cost of your lost opportunity: subtract the value of the choice you made from the most valuable choice. The remaining value is the lost opportunity cost. This assessment can be applied to choices throughout your life, especially those linked to personal finance.

Volatility in Investments

When evaluating investments, it is important that you account for volatility. As we’ve written extensively – market volatility can be disastrous for your returns. Two investments which have the same expected return are not equal – the least volatile one has less risk and, therefore, a lower opportunity cost. Assessing the risk of an investment is key to continued successes, especially when expected returns are similar.

Using Lost Opportunity Cost to Fix Personal Finance

An awareness and use of this economic principle can help you to solve some of your problematic behaviors holding back your financial health. Assessing the true, long-term costs of frivolous spending, high-interest credit card debt, and lackluster savings plans can be eye opening. Take the time to fully examine your financial life to determine whether you are willing to pay to cost of your lost opportunities. The clarity this will bring can improve your financial life and transform your world.

Wrap Up

Nothing costs as much as a lost opportunity. It’s a heavy concept to grapple with, but taking extra time to be more thoughtful and direct in your financial decisions will truly change your life. This is also a skill that you can apply to all areas of your life, not just your financial accounts.

Ready to arm yourself with the knowledge needed to grow your wealth in an uncertain world? Join us at JB WealthFIT to learn the difference between thriving and surviving.