5 Reasons Why We Make Terrible Financial Decisions

Have you ever made a bad financial decision only to realize it after it’s to late?  Believe me I’ve been there several times from experiences from buying a timeshare, to timeshare resale companies, to getting the wrong mortgage.

Yup, I’ve made some huge mistakes and they’ve cost me hundreds and in most cases thousands of dollars over the years.  Their isn’t a day I wish I could go back to those times and changed my decision.  Oh how much money I would have today just because I didn’t make those terrible financial decisions.

As bad as those decisions were I can’t help but think of  why I made them.  I could probably blame everyone else for these mistakes from the sales agent who sold me the timeshare to the loan officer that closed my bad mortgage, but the reality is I’m the only one to blame for my mistakes and I have to live with them.

As a result I’ve spent a lot of time determining exactly why I made these mistakes and below are 5 of the top reasons I’ve come up with why we make terrible financial decisions.

Not Enough Information

The first reason is pretty obvious and that is going into a financial situation without all the facts.  A good example of this was when I bought a timeshare in Aruba on my honeymoon.  I thought with a timeshare I would be able to travel abroad more often and the cost would be far less than renting a hotel room all the time.

On top of that I was also under the belief that if I wanted to sell my timeshare down the road I could sell it for more than I bought it because I thought the unit was tied to the property. However, a few years later I learned otherwise and what was worse was that timeshares are impossible to sell and the fees to keep it were horrendous.

If I would have done my research before buying I would have learned that timeshares are one of the worst things to buy and it would have saved me a whopping $4500.  Can you say OUCH!

Mental Framing – Whether or Not

Another way we get caught up in making bad financial decisions is with mental framing.  Mental framing is basically getting caught up in a whether or not situation.  For example you might want to buy a brand new car right now so you may be asking yourself whether or not you should do it.

The problem with mental framing is it traps us in a position that we think is right.  In fact with mental framing we tend to think their are really only two answers when it comes to solving the problem.  We either want to buy it or we don’t.

In order to overcome this issue we need open ourselves up to multiple answers instead of just whether or not we will buy something, and secondly we need to put numbers to what we are buying.

For example, in a whether or not situation we may want to buy a $15,000 car which sounds great because it’s the car you really want and it’s brand new.  However when we add a third option and say we could buy a car that’s just two years older that only cost $9000 we instantly see that a bigger savings and realize maybe the $15,000 car isn’t the best option after all.  In the end what would you rather do pay $15,000 for a new car or get one that 2 years older and save $6,000.

If you’re like me I would choose the second option because I’m going to get about the same car and save $6000.  If you would like to learn more about mental framing here is a great podcast by Derek Halpern which talks about making better decisions.

Denial 

Denial is another huge reason we fall into a bad buying decision.  This is the process were you want to buy something so bad that you will literally go out and look for the answers that will back up your decision.  The problem is you are only looking for the answers you want to hear and this were you can get into some real trouble.

Think about it, have you ever wanted something so bad that you would literally tell yourself you need it because of some vague reason even if the reason wasn’t true.  This one could probably stem back to when I bought my timeshare as well because I bought it and I thought it was the one thing I needed to make me happy and realize my dreams.

The result ended up being a lie to myself because I only thought it would make me happy and the reality was it was far from it.

To over come this problem you need to be willing to talk to people who will give you a more opened view on the idea such as a friend, family member, or even your spouse that would be willing give you an honest answer.  These people will help you think through the situation before you make a mistake.

Because I Have The Money

This is a big one I here every now and then from a few people I work with, specifically during tax time.  They believe since they got some extra cash that they can now go and spend it all.  The problem is they typically end up spending it on all the wrong things.

For example, I had one guy tell me we was going to buy a four wheeler just because he had the money and a few months later he needed to buy a new vehicle for his wife to drive to and from work.  This is typically when I hear this person complain that he can never get ahead because he’s always tight on money.

The truth is just because you have the money doesn’t mean you need to spend it.  On top of that some people will never be good at managing their money no matter what you tell them or how much they have.  In fact a few people I know live paycheck to paycheck each and every week but never manage to think about saving one dollar of it till it’s already to late.

If your only reason for buying something is because you have the money, you need to find a new reason.

My Friends Have It (Keeping Up With The Jones)

Finally, the last reason we make terrible financial mistakes is because my friends have it.  When it comes down to it we as people want to be happy and when we see others happy we think, if we have what he has it will truly make me happy.  The result is typically the reverse of this though.

I’ve seen people with everything from boats, to ATV’s, to campers, to the nice house and yet they are still not happy.  I use to think this back several years ago in my early 20’s.  All my friends had a snowmobile because that was the thing to have.  So I bought one and learned over time how much I really hated having one.

Not only was my snowmobile a high maintenance ATV, but it took premium gas and synthetic oil to run it.  Then one year I ended blowing a bearing out on the crank shaft an it cost me nearly $1000 to fix it.  All of this just to impress a bunch of friends.  Shortly after that I end up selling my sleds and sticking hobbies that were a lot less costly.

So have you ever made a terrible financial decision?