How to overcome a costly financial 'oops'

Bankrate.com

Middle-class Americans believe their ability to make sound financial decisions is "good" or "excellent," yet more than 2 out of 3 admit they've made at least one "really bad financial decision." Nearly half have made more than one.

The typical median cost of these bad financial decisions was $5,000. The average cost? A whopping $23,000.

Read how others recovered from a financial 'oops'

It's all according to an analysis of a national survey last year of 2,015 adult Americans by ORC International and an examination of the Federal Reserve Board's 2010 Survey of Consumer Finances.

If you've made your own costly financial decisions such as taking on too much mortgage or credit card debt, not saving enough or making a bad investment, at least you're not alone. If it's a recent mistake, know this: You can move forward.

Where did things go wrong?

Assessing the report's findings is difficult because consumers may define "bad decisions" differently, and their definitions may differ from those of experts, says Stephen Brobeck, executive director of the Consumer Federation of America, which released the report with Duluth, Ga.-based Primerica.

In his experience, the most serious bad decisions generally involve allocation of financial resources. While one who carries large debts and refuses to save won't necessarily experience financial difficulty or perceive these as bad financial decisions, "All experts would consider this person living much too close to the edge of a cliff," Brobeck says.

He says a second major category of bad decisions involves specific product purchases, including mortgage loans, credit cards and investments. One example is being seduced by a credit card issuer advertising six months of no interest charges, but then the issuer imposes interest at a rate of 24 percent.

Reno, Nev.-based money coach Todd Tresidder says the "real hallmark of a financial mistake is when the decision causing it is not driven primarily by financial motivation." It's a lesson Tresidder, founder of the Financial Mentor website, learned personally when he sold a business he had founded simply because he wanted a break from the day-to-day grind.

The business could have become a relatively passive revenue stream for years -- more lucrative in the long run than the initial sales proceeds, he says. "My own mistake was driven by a lifestyle change. I really didn't think creatively about the financial implications of it," Tresidder says.

Other clues that a financial decision may have been a mistake: losing sleep, being consumed with negative thoughts/self-doubt, hiding the decision from family or friends, feeling stressed, and beginning to look for a quick fix, says Bill Losey, a Wilton, N.Y.-based CFP professional.

Make a comeback

While a costly financial mistake will leave you feeling low, there's no reason to dwell on it. Doing so will only prevent you from a recovery. The decision can't be reversed, but current and future behavior can be changed, Losey says.

"Focus on what you can control. Your net worth does not determine your self-worth. Treat the bad decision as a learning experience and as an opportunity to help others avoid making the same ones," Losey says.

Laura Stover, president of a Bryan, Ohio-based financial and retirement planning firm, says the financial flub can be part of the learning process.

"Much success can come from past failures," she says. "The journey of a thousand miles begins with the first step -- education." To her, that means seeking professional guidance and empowerment through knowledge.

Some people still will need the ongoing support, advice and coaching that a fee-based or fee-only financial adviser can provide in helping avoid future mistakes, Losey says.

Ask the right questions

"When it comes to making mistakes or taking risks, it's what we don't know, or what questions we don't ask, that could be costing us severely," says Brad Zucker, president of Las Vegas-based Safe Money Advisors Inc.

"Historically, we may have purchased investment and financial products first and then discovered how they affected our income and tax planning later," Zucker says. "The correct course of action is to discover your true needs and desires, and build the proper plan first, just like you would if you were building a house."

That means learning the right questions to ask, digging deep, and getting all the critical facts before making any purchase or taking other action.

Brobeck says the key to minimizing the chances of making bad money decisions is to think hard about how you spend, borrow and save, and to recognize that if you're not saving at least 10 percent of your paycheck, you're placing yourself at risk.

Careful consideration is also protection against product purchase mistakes. Brobeck advises deciding specifically what type of product makes the most sense for the situation, such as a savings account rather than a stock mutual fund for your rainy-day fund.

Tresidder reminds that it's most important to focus on the finances when making money decisions as opposed to focusing on lifestyle or relationships. Yet, he says, you still should acknowledge that decisions affect many areas of our lives.

Just don't go too far in avoiding mistakes. "After making bad financial decisions, I've seen people become overly cautious and avoid risk," Losey says. In the other extreme, he has seen people take excessive risk to make up for mistakes -- also not a good idea.

"There are many potential risks," Stover says. "One needs to find balance and define the goal of their money to achieve the proper safe-to-risk ratio."



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