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7 'psycho' money traps and how to beat them |
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How to outsmart your brain: Deposit gift money into the same account as your other savings and
let it sit, commingled with your other funds, until it no longer feels separate from your other money. Over time, you'll begin to treat it
as you would your own earned money. As for retirement accounts, Romzy likes to encourage cautious clients to consider putting just a portion
of their retirement funds into investments just a little riskier than usual. This should be true, he says, especially in cases in which you
get a match from your employer, in which case you've already earned a 100 percent return on your money just with the match.
"I might suggest they buy a bond fund, a U.S. stock fund, a commodity fund, a real estate fund and an international stock
fund. They'll eventually see that their 'riskier' investments begin to outperform their safe conservative ones," he says. That's often enough
to break the "sacred money" hold.
7. The lost-money fallacy
Once we own something -- a house, an investment stock, a car --
we often irrationally keep it or even put more money into it, even
when it's time to walk away.
That's exactly why folks are often hesitant to sell
losing stocks, says Cheryl Krueger, president of Growing Fortunes
Financial Partners in Schaumburg, Ill. "Although everyone knows
stocks aren't guaranteed, some people irrationally want to hold
on to loser stocks 'until they earn their money back,'" she says.
"This can be especially dangerous for people with very few stocks
in their portfolio, since they don't have much diversification to
begin with." However, while they wait for the stock's price to go
up, they could actually lose money on more appropriate investments.
Other examples: You continue making expensive repairs to your older car because you don't want to "lose" the repair money you
invested in the car last month, three months earlier and six months before that. In today's market, you might also feel antsy about selling
your house for 15 percent less than you bought it, even though you know the sale price is reasonable today.
How to outsmart your brain: Remind yourself that spent money no longer figures into your financial
decisions. It's gone. Would you buy that losing stock today, given its performance, if you didn't already own it? If not, it's time to sell.
Next time, establish a stop-loss limit (the price at which you will sell a stock) as soon as you buy it, before you get attached to it. Finally,
would you put $1,000 into repairing that beater car if a relative had given it to you for free last week? If not, leave the mechanic's shop --
now. You're trying to financially prop up a sinking ship.
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