Admitting your money mistake is the hardest part
Because I write about finance and business, people sometimes assume I am a fearless investor who makes only genius decisions about money.
This is not so.
It's true that I am fairly frugal. I am also fiercely independent, and there is no independence like economic independence.
But I'm still not immune to letting a money mistake linger for much longer than it should.
You probably know someone who has let a financial situation get out of hand, stretching out the period between the first sign of trouble and the reality check that persuades them to make a change.
Maybe that sounds a lot like you.
Look, being wrong isn't fun.
9 Biggest Money Mistakes
|Making late payments||Ignoring fees|
|Living beyond your means||Overlooking small expenses|
|Not saving for a rainy day||Avoiding risk|
|Buying on impulse||Cashing out retirement savings|
|Doing it all yourself||Read our 9 ways to keep your cash.|
Most people have been taught that errors are shameful, so we tell ourselves stories ("Everything will miraculously be fine!") that help us avoid admitting we've made a wrong turn.
Various psychological experiments have shown the pleasure we feel from gain is less than the pain we feel from loss. So we try to avoid the pain of a loss by averting our eyes from situations that have clearly gone wrong.
Sometimes we're defending a choice we made ourselves. Other times it's a choice that was handed to us.
Maybe you inherited stock from your grandmother. It's not performing well, and it isn't a good fit for your portfolio, but you keep it because, after all, you don't want to sell the thing Grandma passed along.
It's bad enough when we have to admit the mistake to ourselves. It's worse when we have to admit the mistake to a spouse or (especially awful) a person whose money we were investing.
A friend of mine rehabilitated a building in a partnership that involved four people.
When the time came to sell the finished building, one of the partners refused to sell for the market price the group had achieved.
He had invested his wife's money and promised her an unrealistic return on the project. As a result, he dreaded telling her about a final price that was less than what he had projected.
Fortunately, my biggest blunder didn't involve anyone else.
When I was in my 20s, I started a self-employed pension (SEP), the freelancer's version of a 401(k). A financial professional actively managed my money for some unremarkable price that I've since forgotten.
After six or seven years, the financial manager raised his rates.
The new tab was 5% annually, which is an entirely ridiculous sum.
There's little to no empirical evidence that anyone can reliably outperform the market. Managers who outperform one year typically underperform or match the market the years before and after their market-beating feat.
Asking someone to pay 5% annually for market-beating miracles borders on outrageous.
I was a good bit younger then, but I still knew the price was too high. Yet this was the first place I'd set up a SEP, and I felt sort of sentimental about it.
I wasn't yet confident in my ability to look after myself. This guy had a sort of reassuring fatherly aspect.
So I let the situation drag on for about eight months. I even visited the manager to hear his fairy tale about the system he'd use to consistently make me big returns, even after he took his absurd cut.
Then I got a grip and fired the manager.
I moved the money into a combination of low-fee index funds (mostly) and individual stocks (a little), and it's done well.
It would have done even better if I'd pulled the plug earlier.
Knowing that, I try to remember that these situations rarely improve while I'm ignoring them. I work to shorten the time between the day I notice a problem and the day I do something about it.