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3 Ways Fear Can Harm Your Finances

Posted By Miranda Marquit On 02/27/2013 @ 12:03 pm In Personal Finance | 5 Comments

We don’t often think of fear as something that can negatively impact our finances. However, our fears and biases [3] can wreak havoc on what’s happening with our money.

You might not realize it, but fear might be having a negative effect on your money. Here are 3 ways that fear might be harming your finances:

1. Fear of the Truth Can Slow You Down

One of the hardest things to do is face the truth about your finances, especially if you are in debt. Daniel Egan has a graduate degree in Economics from the London School of Economics, and studied psychology as well. He worked for Barclays in the Behavioral Finance division, and is now with Betterment. “Once you get past what people think of as a management amount of debt, it can be extremely uncomfortable to look at it.”

Egan says that this fear can put your finances on hold, since you are afraid to face the situation, and you might put off getting out of debt. If you aren’t able to face the truth about your finances, you can improve the situation.

2. Fear Prevents You from Taking Action

We hear about being paralyzed with fear, and this applies to money as well. Egan says that fear of the stock market might keep you from investing effectively. He also points out that fear of the results of certain actions, like asking for a raise, can harm your long-term wealth potential. “This is one of the areas where there is a lot of experimental and observational evidence,” Egan points out. “Fear plays a role that is a little more subtle in these cases. We are afraid to ask for what we think we are worth.”

3. Fear of Risk Leads to Missed Chances

While you need to manage your investment risk [4], it’s also important not to be so afraid that you miss out on certain chances. “The perception is that the stock market is too risky,” Egan points out. “So you never get invested, even though it would be appropriate.” He also points out that there are risks involved in keeping your money in a “safe” place. “Inflation [5] is a risk,” Egan says, “but many people don’t recognize it.”

Even more disappointing is when you leave the stock market too early. People tend to jump ship when the market is sinking — even though this is the opposite of what you should do. “The problem with buy low, sell high from a behavioral perspective is that you are supposed to be buying when it’s scary for you to do so,” Egan says.

However, you do need to be aware that this can be a double-edged sword. You can’t be so afraid of missed chances that you end up making moves out of desperation. Don’t let your fear of being too afraid lead you to invest in a scam [6].

When You Should Be Afraid

While it’s true that fear can harm your finances, it’s not always bad to use fear as a mitigating factor. In some cases, excessive exuberance can be problematic as well. There is such a thing as taking too much risk. You want to have just enough fear to temper your situation if you have a high emotional risk tolerance. A healthy amount of fear can also help you protect your portfolio long-term with the help of appropriate diversification [7].

Egan also points out that a little uncertainty and fear about the future can be healthy for your finances, when properly directed. “People don’t like to think about negative life events,” he points out. “But you need to. You need to be a little afraid of what will happen if you aren’t ready.”

As a result, Egan suggests estate planning, as well as building an emergency fund. “Identify these problems in advance. You have a better chance of having a more calm conversation, and a better ability to plan.”

(Photo: Kevin B 3 [8])


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[2] Email: mailto:?subject=http://www.bargaineering.com/articles/3-ways-fear-harm-finances.html

[3] fears and biases: http://www.bargaineering.com/articles/3-biases-mess-finances.html

[4] manage your investment risk: http://www.bargaineering.com/articles/understanding-investment-risk-types.html

[5] Inflation: http://www.bargaineering.com/articles/wages-keeping-pace-inflation.html

[6] invest in a scam: http://www.bargaineering.com/articles/5-ways-investment-scam-stinks.html

[7] appropriate diversification: http://www.bargaineering.com/articles/portfolio-diversified.html

[8] Kevin B 3: http://www.flickr.com/photos/22850192@N03/8290599649/

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