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December 22, 2020

What to do if you’ve made a bad financial decision

Everyone makes a bad financial decision at some point. Whether your mistake is racking up credit card debt for that fancy exercise equipment you swore you’d use every day, buying too much house for your money, or selling off your investments at the hint of a recession, recovery is possible.

This list is far from comprehensive, but it does give you a starting point for figuring out how to deal with the aftermath of a bad financial decision. Keep reading below!

The sunk cost fallacy: Individuals commit the sunk cost fallacy when they continue a behavior or endeavor as a result of previously invested resources (time, money or effort) (Arkes & Blumer, 1985). What does this mean for our daily financial decision?

Let’s say you bought a pasta machine for $200 so you could cook more at home and have fresh pasta whenever you want. Unfortunately, you don’t get to use the pasta machine much. It requires special tools and classes to learn how to cook pasta. It may be smart to leave the pasta machine alone but since you already spent $200 to buy the machine you end purchasing special pasta tools for $50. The tools do not help, and even if you didn’t spend the extra money the $200 would not have come back.  By buying more tools for a machine you were not going to use, you lost not only the $200 but also another $50 and hours of your time.

If you make a bad financial decision, it may feel like the only course of action is to keep chugging on. It may in fact be more harmful to continue to invest time and resources into your bad decision.

Back out if possible: Most large purchases (including houses and cars) have a window of time where returns and refunds are still possible. Regardless of whether the paperwork has been signed, you can read through the contract and see if you can figure out a way to get your money back. For things like subscriptions and automatic payments, it may be worthwhile to talk to a customer service representative on the phone if you have not yet used the product.

Make rules and stick to them: These rules don’t have to make sense to anyone else, but if they stop you from making bad financial decisions in the future, feel free to use them. For example, you may decide not to make a purchase over $200 unless you’d be willing to spend double the sticker price on the item. Or you may decide to only buy things on a Monday. We also like personal finance expert Ramit Sethi’s rule of only picking one category of your life in which you can spend guilt free, be it clothes, food, convenience, or home decor. The flip side of that advice? Be ruthless in cutting out extra spending from all other expense categories you may have previously been tempted by.

Slow and steady wins the race: If you’re one of the people who panic-sold all their investments in the beginning of the year, you’ve probably learned this lesson by now. Same goes for hoarding essentials, spending money on things you didn’t intend to during a ‘last chance’ sale, etc.

If you’ve jumped out of the market, dollar-cost average your way back in. Dollar-cost averaging involves investing a set amount of money on a regular schedule, regardless of market moves.

Examine the emotions that lead you to making money decisions out of fear or a feeling of scarcity. Often, it comes down to how we learned about money growing up. For more insight on how emotions impact finances, click here.

And finally, use the mistake as a lesson and motivator: Even if you’re stuck with the consequences of your decision, use it as an opportunity to learn. Especially when it comes to consumer debt, remind yourself the next time you’re tempted to put the expense on your credit card or personal line of credit.

Using mistakes as motivators instead of discouragement allows you to grow and fix your financial situation faster. Motivation is what you’ll need to build momentum and gain traction toward success.

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