Handling Personal Finance Mistakes, Large and Small

Jenny writes in:

In 2008, my husband and I lost about 50% of our retirement savings. We got so scared that we moved all of our savings to very safe investments – cash and bonds. Then, the stock market rebounds and some of our friends have earned back at least half of what they lost, but we barely gained anything!

and Mal writes in:

Every once in a while, I get so proud of my financial progress that I talk myself into going on a big splurge. Like you, my weakness is books. I bought ten books last weekend, dropping almost $200 in the process. How can I get out of this splurging cycle?

As different as these questions seem, my advice to both Mal and Jenny is pretty similar. They’ve both made financial mistakes against a background of pretty good financial success. They both recognize that they made some sort of mis-step, and they both feel guilty about it.

What should they both do – and what should anyone who makes a financial mistake like that (myself included) do?

First, don’t beat yourself up over the past. It’s water under the bridge now. You can’t undo what is done, no matter how much you’d like. Instead, you need to always look at how you can improve your situation from where you’re at now.

Thus, the next step is to figure out what’s going on.

In Jenny’s case, I think she and her husband need to spend some time deciding for themselves whether they have the risk tolerance for the stock market. Obviously, we all want those tremendous “up” periods where a bull market causes stocks to jump through the roof. But to have those bulls, we have to have some bears as well, and your past shows you to be jittery about bears.

In Mal’s case, he needs to spend some time asking himself why he buys those books. For me, at least, such splurges have little to do with a love of reading. I usually do such things as an emotional response to things going on in my life – stress and so forth. Spend some time really looking at what’s going on in your life.

Once you’ve identified the problem, it’s onward to the solution.

For Jenny, the solution probably involves bumping up her family’s retirement savings a bit, regardless of the big gains in the stock market. In fact, if I were in Jenny’s shoes, I probably would not return to the stock market at all. The risk involved – and the risk of making a poorly-timed move on top of that – makes stock investing a less-than-optimal choice.

For Mal, the solution involves serious soul searching and identification of the problem, then a similar search for a solution. It might be a painful relationship. It could be something else entirely. If you can’t figure out what it is, you might want to consider seeking some professional help to help you figure out what it is. Purge-and-splurge behavior is usually emotionally based, and figuring out what’s behind those emotions and putting them to rest will help you with your whole life.

It’s a simple three step solution for any financial mistake.

First, don’t beat yourself up over it. It’s water under the bridge. Don’t dwell on it and look down upon yourself for a mis-step. Instead, look at your situation now and try to figure out where the best place to go from here is.

Second, identify the problem. Spend time reflecting on exactly why you made that choice.

Third, identify and implement a solution. Once you know what the problem is, take action so that the problem doesn’t repeat itself.

Good luck.

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14 thoughts on “Handling Personal Finance Mistakes, Large and Small

  1. Karen M. says:

    I think Mal’s issue could be the result of severe deprivation. This sounds like a dieter who says “I will never eat another sweet again!” and denies themselves all cake and cookies for a month or two only to go wild on the birthday cake. Book buying can be done in moderation and without spending $200 at a time. If buying (and reading) books is a hobby Mal enjoys, there is no reason that buying books can’t be worked into a budget. If the money is there to be spent without guilt on a regular basis, then (usually) there won’t be a spending spree every couple of months.

    I am financially responsible. And I am a reader. I use the library on a regular basis, but yes, sometimes I still buy books. Some things aren’t available at the library or sometimes I want something for reference.

    I don’t think this problem really involves some deep-seated problem. Just a lack of responsible and honest budgeting.

  2. Johanna says:

    For Mal: As long as you are making personal finance progress, I don’t think the occasional splurge is necessarily a problem. It only becomes a problem if you’re splurging so much that it undoes a big chunk of your progress.

    Something that helps me, and might help you, is the Borders Rewards program. They send you email coupons every week for a discount (usually 30% these days) off any one item. For me, these coupons are a huge incentive to limit my Borders purchases to one book at a time – if there’s more than one that I want, I can wait until the next week, when I’ll have another coupon. If you think that buying just one book (rather than ten) would be enough to get the “urge to splurge” out of your system, it might be worth considering.

  3. kat says:

    Books are a major part of my budget. I do use the library a lot, and have only purchased one new book in hardcover in two years. I have an excellent used bookstore I haunt for used books on a regular basis. They have a great trade policy, so I can indulge without breaking the budget. I learned to read early, and am a natural speed reader, so without careful planning I could really break the bank buying books. Book money in my budget comes right after basic needs-it goes mortgage, utilities, food, books, then debt paydown and saving. I don’t think I could function without something to read.

  4. guinness416 says:

    The books area a red herring folks. I know every comment thread here involves people falling over themselves to point out how more-literate-than-thou they are, and expect if it were pay per view TV events he was buying the responses would be different, but regularly spending a few hundred bucks in one shot on something and regretting it afterward is an issue and Trent’s advice is spot on.

  5. Johanna says:

    @guinness: You’re right that certain “good pleasures” tend to be treated differently than other “bad pleasures” among personal finance folks. But I thought Karen’s advice was spot on too, and equally applicable to pay-per-view TV, or drinks at a bar, or designer clothes, or anything else that someone might enjoy.

  6. kat says:

    I wasn’t trying to say I was more “literate than thou” just that you can budget for the things that are important to you and avoid the spluge problem. I have friends you do this with sports packages, movies, fabric, yarn, all kinds of things. It’s a question of avoiding the famine/pigout problem. You have to work in the things that are important to you-be it an item or high end high calorie chocolate. that is the only way a budget or a diet will work for the long term.

  7. Johanna says:

    Also, I will say right now that I will not be participating in any more-literate-than-thou contests, because I know I would lose.

  8. Doug says:

    Jenny’s situation is a good reminder that many people make investing decisions based on emotion (fear & greed) rather than reason. Trent’s advice is a good starting point: Jenny and her husband need to determine their real risk tolerance and then determine their asset allocation. Maybe they’re so risk averse that they shouldn’t be in the market at all. They could use a retirement calculator to determine if they should increase their retirement savings, based on type of investment.

    If they do put a portion of their retirement savings back into the market, then they should consider rebalancing annually. At the end of 2008, I held my nose and forced myself to move money from my bond funds back into my stock funds to rebalance my account (I’m near retirement and want to maintain 50-50 or so). As a result of the rebalancing and the market’s performance, my balance is back to where it was prior to the economic collapse (I’ve since moved money back into bonds to rebalance again). The goal of rebalancing is to keep your investments in line with your risk tolerance. Sometimes it results in positive returns as well.

    Back to Jenny: if they decide to put money back in the market, I’d do it gradually, a kind of dollar cost averaging. If they have, say $24,000 (to make the math easy) to put in the market, I’d put $2000 a month in the market. If the market moves upward significantly in the next 12 months, they would miss some of that. On the other hand, if the market moves down signficantly, they would be buying at lower prices. It’s just a way of reducing the risk a little.

  9. JuliB says:

    I get books every week through paperbackswap.com . All it costs is the postage to mail books out to other people via media mail.

    How often books come to you probably depends on your reading tastes, but I tend towards the less popular.

    I get “new” books so frequently that I never feel deprived.

  10. JuliB says:

    Jenny – Don’t feel like you have to put all in the market. My 401K at work goes into a money market fund. My roll-over IRAs are fully in the market. Whatever percentage you feel comfortable with is what you should shoot for. I don’t like the feeling of being 1/2 wiped out by a low in the market, so I’ve protected myself against that. Sure – I’ll never triple my money over night, but I don’t expect too…

  11. CB says:

    The main problem with the stock market is that most of us are just funneling our dollars into it and paying the fees for managed funds, that in almost all cases don’t even match the market. We don’t learn enough to make good investments in individual stocks.

    Index funds are low fee and match the market, and that can be good or bad depending on where the market stands. The advantage of the stock market is that one can buy shares in companies of value whose stock price is below value and that have a track record of success and a future that is amenable to success. Index funds can be gamed, too, and one of mine has been a good one, the other poor (both from the same financial institution whose goal is to make money off my investments, not necessarily guarantee me any return).

    It takes interest, attention, and some self education–but who has more life energy invested in your investment money than you do?

    I’m working my way through Phil Town’s “Rule #1″ and “Payback” and am going to evaluate all of my investment based on value, not price, and will also invest the time to cover about five stocks. Of course, I’ll leave all of those index funds and basic mutual funds in place until I have recouped all of my investment dollars.

    As with any approach, I’m taking from it what I feel works for me, but now with the internet, we can learn a lot more about companies than possible before.

  12. jim says:

    I think Trent and Karen both make good points about Mal’s situation. It could be either situation or even a combination of both. If Mal loves books and has no budget for books then I think adding some book spending in the regular budget is a good idea. But Mal should also take Trents suggestion and consider if there are other reasons for the spending such as depression or stress.

  13. prufock says:

    I would add “Fix what you can” to the advice. Not much that can be done to change Jenny’s decision, but Mal could return any books for which he still has the receipt.

  14. Cheryl says:

    For Mal: write down the titles and return the books if you still have the receipt. Go to paperback swap and find them, or get them on ebay or half.com and relist when you’re done. Or go to the library and request them, if they don’t have them, they can usually get an interlibrary loan.
    For movies, I add the ones currently playing at the theater to my Netflix wishlist, so when they come out on DVD, I’ll have them shipped to me. The library in town also has a nice collection of movies. The library nearby even loans artwork!

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