How Unpredictability Makes You Terrible with Money (and What to Do About It)

Corona. The global financial crisis. Restructuring at work. These big life challenges make our brain short circuit, and we make bad decisions. Why? And, what can we do to stop the terrible choices?

Coronavirus is one heck of a ride. There’s no certainty around timeframes, the virus itself, or our lives in general. Lockdown, no lockdown, more lockdown, travel bubbles, lockdown number 19,498,003, and we all go a bit nuts. The uncertainty of Corona, and other similar situations, do funny things to your brain.

Uncertainty is exhausting and it wears you down over time. There’s only so much your brain can process at any given time, and something like Corona just pushes it too far. We’re thinking about our immediate situation, our kids, and that takes up our time, energy, and attention. This means that long term planning and thinking go out the window. It’s difficult to think about retirement in 30 years when we think the sky is falling next week.

Saving, and making good financial decisions, needs a visionary long term view. And unpredictability is a threat to that, making our goals and thoughts short term.

Short term thinking means risky behaviour

If you’re stuck thinking short term, there’s two outcomes. You’ll either start taking more risk, or you’ll become more risk averse.

Risk averse people are trying to control the situation and gain certainty. They do this by removing chance around their money management. An example of this is when the financial markets tumble, the value of our investments and KiwiSaver takes a hit too. Risk averse people will pull their money from their investments or change to a lower risk profile. Rather than ride out the storm, they would rather lock in their losses so that they know for sure how much they’ve lost.

This is short term thinking because the market always recovers. They have lost money needlessly.

Risk taking behaviour is when someone makes dodgier, more speculative financial investments or take on larger debts. After all, they think that next week the sky is falling, might as well throw all their money on the roulette wheel, they have nothing to lose.

While these risk-takers could make big bucks, there’s also the chance they won’t, and lose money that had previously been invested in far more moderate ways.

Where do you sit? Do you panic, or do you find yourself throwing money in uncertain directions?

How can you stop yourself from poor financial choices?

When everything is in flux, don’t make big decisions. Your financial adviser should be able to talk you off the metaphorical ledge, and give you peace of mind. They know what they are talking about—they’ve seen this happen before, they understand the markets, they are professionals at making good financial decisions.

They will remind you that this too, will pass. Maybe that new pool paid for by increasing your mortgage is not such a good idea after all, as you’ll just have to pay the mortgage on that rather than airfares to your favourite tropical locations when flying resumes again. A good adviser will help you feel like you’re in control, so you’re less likely to make bad choices.

But if you want to safeguard yourself, you need to take the long term view.

How to not panic when you face uncertainty

Blame your brain for your reactions. Brains are wired to want instant gratification. Go to the gym, or sleep in? Eat the cake, or the carrot? Our brains naturally have a short term focus, so combining that with uncertainty in our lives and you have a recipe for disaster. You can overcome this pre-wiring though.

Set your goals

What are your financial goals? Think long term, like a long holiday, or a new home, or paying for your kid’s university fees. Or maybe some aspirational goals, like starting your own business, or finally buying that classic Chevrolet or Jaguar you’ve always dreamed of.

If you’re really struggling to come up with something, ask yourself: Where do I want to be in three to five years? What would you like to accomplish?

Now you have some goals, it’s time to safeguard them.

Protect the important things in life

Short term planning can also stop us from acknowledging the events that could be catastrophic in our lives. It’s tough to imagine getting sick or injured, and the far-ranging consequences. But stop for a few minutes and spend some time thinking about the outcomes to you and your family should you lose your house, car, income, or your life.

Talk to your financial adviser or insurance agent about getting house, contents, car, and most importantly, income, health, and life insurance.

Smash your savings goals

Those goals you made? You need to put money aside for them. While you might think you’ll make oodles on cryptocurrency or some hot new stock your doctor’s brother’s friend’s neighbour recommended, chipping away at a boring savings plan is far more likely to yield long term results.

Set up your savings plan. Make it automatic- the bank can remove that money before you even get a chance to look at it. This sets you up for success; make sure you use all the tricks you can to enable the best outcome.

Don’t panic, talk to the pros

If the markets crash, there’s huge uncertainty in your life, acknowledge that your finances is one way you might try to feel in control of the situation. Fight the urge to make changes or decide things when there’s so much uncertainty.

Finally, talk to your adviser. That is what they are there for. Call Sam today if you need a post-pandemic-pocket-protecting-plan. He’d love to help.