By Paul Miguel, CFP ™, CIMA ™

A fifty-page financial plan, can become useless when life comes at you fast. The reality is Its better to use a mindset that allows you to frame a decision-making process to navigate the curveballs that life throws you.

To increase our chances of achieving financial independence, we must identify and manage our inherent biases and preconceived notions/judgements about finance which are preventing us from making effective financial decisions.

I have helped guide hundreds of wealth management clients, as a result, I have observed that there are common biases that tend to hold us back from achieving financial goals.

Leverage Aversion Bias

Leverage is borrowed capital (or debt) used to increase the profitability of a financial plan or investment policy.

Meanwhile debt can be viewed as a two-sided dynamic instrument which that can be used to increase your chances of financial success.

In a low interest rate environments we can use leverage to build “human capital” such as paying for college or building a new business. However there are several factors which influence your decisions. Your financial goals, available interest rates, current tax rates, credit history and availability, as well as your time frame, all influence your financial plan.

Despite much of the universal “advice” to avoid and eliminating debt, the reality is that if we borrow at low rates we can use debt to our advantage.

Mental Accounting Bias

Sometimes we need help connecting the dots between different areas of our financial Lives. In doing this we can fail victim to Mental Accounting Bias which creates different mental “accounts” for different accumulation goals or areas of a financial plan.

Mental accounting bias can be common in our late 20s and 30s due to guess what? LIFE. At these ages we usually have a lot going on and putting our life into different silos can “simplify” our financial life. This isn’t a bad thing however we need to be aware of it. For instance, it can be good in some ways for budgeting and saving implementation. Unfortunately, it can also often dissuade us from doing logical things with money such as paying off high interest accounts, paying taxes, or investing at higher expected returns.

Pessimism Bias

One of the largest dangers to wealth creation for us is pessimism bias. Pessimism bias causes us to overestimate the probability that bad things will happen.

We know that investing in diversified growth portfolio is great strategy for funding long term goals and dreams. However one of many reasons investing is difficult relates to the optimism or pessimism (depending on the person) associated with investing.

Lets face it, creating a financial plan s a challenging because of life happens.

We must overcome our biases to make the best financial decisions while considering the changes which happen in life, however we can be successful in goal by planning for the long-haul.

FEATURED AUTHOR

As always if you have questions or concerns regarding creating an emergency fund, investing, real estate, insurance, or planning for the future, don’t be afraid to speak with qualified financial advisor. Smart Asset has a great tool to find an advisor in your area or feel free to email me (contact@surgifi.com) to help you on your path to financial independence.

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