In today’s Office Hours, Eric answers Alex’s question: As a financial advisor, what is the most common mistake you see people making with their personal finances?
This was a hard question to answer because there are a LOT of mistakes people make. The common factor for all of them? Emotions.
Have a question? Post it in the comments, tweet it to us at @BrotmanPlanning, or post it on our Facebook and it may be used in a future episode of Office Hours!
[00:00:00] Eric Brotman: This is Eric Brotman, the host of Don’t Retire… Graduate!: Podcast that teaches you how to advance into retirement rather than retreating. Welcome to office hours where we answer listeners’ questions about personal finance, retirement readiness, and more. We received a question from Alex who asked, “as a financial advisor, what is the most common mistake you see people making with their personal finances?” And Alex, it’s a great question and there are so many, it’s difficult to distill down to one because there are lots of mistakes that are made by, uh, by clients, by individuals, by families. And to, to, to say that one is more common than the other is a little bit difficult. Uh, but I would say almost all of them are related to behavior.
They’re related to blind spots or they’re related to emotion. And so if, if we’re going to distill this down to one, the most common mistake is, is to react emotionally to things that should not be emotional. It’s important to be dispassionate about financial decisions, just like it’s important to be dispassionate about certain business decisions.
That doesn’t mean you’re not human. It just means that being reactionary to things when they get emotional or when, when there’s impact on you that way is generally a bad idea. Um, and there’s so many behavioral finance studies out there that talk about how behavior runs these, these big mistakes, but let’s distill this down to something measurable, which is a common mistake that people make behaviourally is they want to talk about the things that are fun about their finances.
So in the same way that, uh, that somebody at a casino might say, oh yeah, I won 50 bucks, but they’ll never tell you the six times that they lost 50 bucks. It’s because they want to tell you about that one win despite the fact that they’ve lost. And this is not to compare financial advice to gambling.
It’s just a simple example, but a lot of times, people want to talk about their investment portfolio. They want to talk about their, their winners. They don’t want to talk about their losers and they sure don’t want to talk about the things that matter more than your investment portfolio to your overall success.
Things like your risk management, things like your insurances, things like your employee benefits. These are boring. No one wants to talk about them at the water cooler at the cocktail party. And yet there are bigger determinants to success than the portfolio is. The portfolio is a small piece, but it’s the piece people spend the most time obsessing about.
And at the end of the day, uh, it’s, it’s been said that more people spend more time planning their next vacation than they do planning their financial future. It’s alarming. And I don’t know if you’ve been to Disney world lately, but that takes a lot of time. So if you’re going to, if you’re going to have a balanced financial plan and you’re going to be dispassionate about the financial decisions, it needs to be a comprehensive plan.
It can’t just be a portfolio because having a portfolio without all of the other elements of a plan is a lot like building a castle and not digging a moat around it. The castle itself is vulnerable to predators and creditors if you don’t have a good moat. So being, uh, not loss-proof, uh, but being, um, uh, defensive enough to withstand some of the things that happen to us in our financial lives is so important and it’s, it’s the biggest mistake I think people make is not paying attention to those things. You know, every time you read about or see the Titanic, um, it might’ve been the most beautiful ship in the world, but they’re there the hull wasn’t ready for an iceberg and there weren’t enough lifeboats.
So the plan worked until it didn’t and it went very wrong when it did. This is exactly what happens in people’s financial plans. Everything goes along swimmingly for five or 10 or 15 years. And then there’s a big mistake, whether it’s the tech bubble in 99 and 2000 or the great financial crisis and the credit crisis in 2008 and nine, or whatever’s ahead of us, Alex.
I mean, none of us know, none of us saw a two year pandemic coming. None of us saw, you know, all of these various things as they occurred. And we certainly don’t know what’s next. So to distill this down to one thing, I would say the most common mistake, the most common mistake is failing to deal with the things that are less exciting and less fun to talk about. It, it means not having the right foundation.
And so to me, with all the other litany of mistakes people make when it comes to their mortgages or it comes to their cashflow, or it comes to their spending habits, or all, there’s so many. But to me, it comes down to that one. And so I hope that was helpful. Um, if you’re, if you’re interested in looking at your plan in a comprehensive way, Alex, I hope you’ll give us a shout because we’d love to do that.
And it’s going to be more than the portfolio, cause that’s a little piece. So thanks for your question. If you’d like to send us a question, which we might answer in a future episode of office hours post it on our Facebook page or tweet us at @Brotmanplanning. If you like what you hear, please subscribe to our podcast and leave a rating on Spotify or wherever you listen to your favorite shows.
Please also check out our books, workbooks, and online financial literacy resources at brotmanmedia.com. Thanks for coming to office hours. Be sure to tune in for new content every Thursday. For now, this is your host, Eric Brotman, reminding you don’t retire. Graduate!
