We All Have Financial Blind Spots

Homesteading blogger Melissa Norris recalls some of the odd things her great-grandmother would collect. She wasn’t a hoarder. But she would religiously save aluminum foil, jars, and even plastic. Her financial habits were even more unique. She kept her savings as cash, hiding it away in paint cans in the basement.1

Knowing nothing else about her, we might conclude that this woman was at the very least eccentric, if not possibly suffering from a form of mental illness.

But Norris tells us that her great-grandmother grew up during the Great Depression. For many years she lived in a world where the rule “if you can’t reuse it, you’ll do without it” was a daily reality. She witnessed firsthand the devastating effects of banks failing and families losing everything they had saved.

“if you can’t reuse it, you’ll do without it”

Given these circumstances, it’s understandable and even reasonable that Norris’s great-grandmother might behave this way. In the same way, everyone’s view of what makes good financial sense is heavily colored by their individual life experience.

In his book The Psychology of Money, financial author and fund manager Morgan Housel explains that just because you’re a smart person doesn’t mean that you’re going to be smart with money. Because of our backgrounds we look at things like investing through the lens of our experience. In other words, we all have blind spots.2

For example, we tend to think that our personal experience with money makes up the whole of financial reality. We don’t consider that what we’ve seen represents a very thin slice.

Housel writes, “Your experiences with money make up maybe 0.00000001% of what’s happened in the world, but maybe 80% of how you think the world works.”

The problem with this illusion is that it can cause people to make financial decisions based on circumstances that no longer exist.

Nearly a hundred years ago, when banks without the backing of the FDIC were failing, it might have made sense to keep savings as physical cash. But today we can agree it’s not a particularly prudent way to hold substantial sums of money.

In a similar way, your biases can work against you when you don’t take into account your changing financial needs over time.

As Housel notes, “Most of the time it’s not that your financial plan breaks, it’s just that you are a different person than you were 10 years ago.”

“Most of the time it’s not that your financial plan breaks, it’s just that you are a different person than you were 10 years ago.”

Your goals and actions at age 50 should not be the same as they were when you were 30, no matter how young you feel.

This inherent blindness to our own financial biases is why getting counsel from an independent financial expert is so vital. A Family Wealth Partner trusted advisor can not only help you with a plan that best reflects reality, but also one that can be adapted as you move through the stages of your working life and into retirement.

Sources:

1.       https://melissaknorris.com/10-things-our-grandparents-reused-during-the-great-depression/

2.       https://www.cnbc.com/2020/12/13/overcoming-common-financial-blind-spots.html

3.       Image - https://thecfoagency.com/you-and-your-financial-future/

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