Nobody knows the future, but you can often predict what’s coming next. Meteorologists, pathologists, pollsters and other professionals do it all the time by sifting through evidence and determining what the coming days or years will look like.
That’s helpful to remember the next time you’re facing a major financial decision. After all, as anyone who has made money mistakes knows, if you look back on the choices you made just before things went south, there were usually signs indicating that you were about to stumble into something unpleasant or unwise. You just ignored the signs. So the next time you’re applying for a loan or planning an expensive vacation you aren’t sure you can afford, look for these five signs. They may convince you to choose a better path instead.
You are being influenced by someone who isn’t a professional. People don’t always get into financial trouble on their own. They often have help from a spouse egging them on or a sibling, parent, friend or co-worker. You might ask for advice and get bad suggestions in return. You might be offered unsolicited advice that you end up taking and later wished you hadn’t. Any number of things could happen.
Ashley Feinstein, a money coach based in New York City, recalls when several years ago, a colleague was bragging about a hot new stock he’d invested in. “I didn’t want to miss out on the fun and upside, so I jumped in and bought some shares,” Feinstein says.
She ended up losing her money and paying fees to the brokerage company, to boot. Looking back, Feinstein realizes she made a critical error.
“He was a friend, not a professional,” she says. “I was acting on emotion or not wanting to miss out on an exciting opportunity,” Feinstein says. “And I rushed into the decision.”
This isn’t to say you should never listen to your father’s sage financial wisdom or your college buddy’s philosophy on spending. Just because they aren’t financial advisors doesn’t mean they aren’t right. But it’s worth considering exactly who is inspiring or encouraging you to spend money.
For instance, if you’re about to lend $10,000 to your brother who wants to open his own restaurant, is he someone who has experience in the food industry or someone who can at least run a business? Or is this just your brother, whom you love and means well but can’t cook or balance his own checkbook?
You haven’t done your homework. If you haven’t considered the negative consequences that could arise if your financial move goes bad, then clearly you’re asking for trouble.
Certainly, many consumers could be better educating themselves on money matters. According to the 2014 Financial Literacy Survey of 2,016 adults, conducted by the Harris Poll for the National Foundation for Credit Counseling, 41 percent of respondents gave themselves a grade of C or worse on their knowledge of personal finance.
Or consider the survey TD Bank released earlier this month, showing that 69 percent of 2,031 American millennial adults (ages 18 to 34) have never taken a financial course, seminar or workshop. Americans’ knowledge of financial issues doesn’t necessarily get better with age either. Only 20 percent of retirement-age Americans were able to pass a basic quiz on how to make their savings last throughout retirement, according to a 2014 study from the American College of Financial Services, which surveyed 1,019 adults ages 60 to 75 last summer, all of whom had at least $100,000 in household assets.
In other words, a lot of people are woefully deficient in their knowledge of money matters — a fact you might want to remember the next time you plan to splurge or take out a loan without thinking things through.
“I’ve seen plenty of people make terrible decisions … Most people spend more time researching their next barbecue grill than they do thinking about what type of mortgage to use for a home purchase,” laments Randy Kurtz, president of BetaFrontier, a financial advisory firm in Chicago.
You have no practical reason for spending the money. It’s one thing when you’re spending money that will help you get from point A to point B — think student loans. But you might be toying with trouble if you’re paying for a want versus a need.
Steve Silberberg, a business owner in Hull, Massachusetts, did just that years ago, when he bought a used car for $1,400 because he really wanted a convertible. It had a “T-top” cover, which was rather infamous for leaking.
“It was made worse by living in a wet climate: Seattle,” Silberberg says. “It was really stupid because the other car I had was nicer and more reliable even though it was a sedan. I almost never drove the car I bought and ended up parting with it for a song after moss started growing inside.”
Looking back, Silberberg realizes the purchase was driven more by emotion than practicality.
“I could only drive one car at a time, and nobody really needs two cars,” he says, adding wistfully: “Maybe a Maserati as a second car. But certainly not a crappy, leaking used car.”
You are panicked or are feeling pressure. There are no absolutes. You might panic or be under pressure and still make the smart choice with your money. But certainly when your heart is racing and your palms are sweaty, you should sleep on a financial decision for a few nights, if you can.
Leisa Peterson, a certified financial planner and wealth coach in Truckee, California, says that when the market fell in 2011 and was followed by predictions of interest-rate hikes, “I freaked out and moved my large 401(k) account out of the market and into a stable bond-fund account. It turned out to be a terrible decision.”
The market recovered quickly, and Peterson says she found it difficult to decide when to get back in. All in all, she figures she lost $50,000.
“I have regretted my reactive decision and learned the hard way what it really means to not react to downturns,” Peterson says.
Your gut is telling you “no.” And why is your gut signaling that spending all of this money is a bad idea? Probably because it is. So don’t ignore your gut.
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5 Signs You’re About to Make a Bad Financial Decision originally appeared on usnews.com
