The True Cost of Financial Mistakes

“More people would learn from their mistakes if they weren’t so busy denying that they made them.”
-Anonymous

the true cost of financial mistakes

Have you ever made a bad financial decision?

In a recent 2024 polling, Quicken found that 8 in 10 Americans have some pretty intense financial regrets. Among those regrets are not building up an emergency fund (what we call the emergency/opportunity fund) and not investing more aggressively. While we have opinions on the effectiveness of the latter, the former makes one thing abundantly clear: hindsight is 20/20. Many people don’t commit to an emergency/opportunity fund because they’ve got other priorities. However, in the long run, they wish they’d saved SOMETHING, even if it wasn’t much.

Furthermore, an older study from September 18, 2012, Consumer Federation of America report revealed that 67% of middle class Americans acknowledged making a “really bad financial decision,” one that resulted in an average loss of $23,000. “Middle class” was defined as households with an annual income between $30,000 and $100,000.

Did upper income Americans (those with household incomes in excess of $100,000) fare better? Not exactly; a slightly smaller percentage – 61% – reported making a really bad financial decision, but the resulting averaging loss was $61,000 – an increase of 265%. (Apparently money alone doesn’t make you smarter.)

Here are other interesting findings from the survey: While over 80% of the respondents rated their ability to make financial decisions as “good” or “excellent,” the survey also found a strong correlation between financial loss and the absence of expert financial input. In fact, among the middle class cohort, 17% said they “wouldn’t seek any information or advice, and just make a decision.”

So…while almost two-thirds of the respondents acknowledged making a “really bad financial decision” (and almost half, 47%, admitted making more than one), four-fifths of those surveyed said they were “good” or “excellent” at making financial decisions. And at least one fifth of the group was so confident that they wouldn’t want any outside input before making their “good” or “excellent” decisions. Something is not adding up here!

Quantifying the Impact: The True Cost of Fiancial Mistakes

Maybe it would help to put the cost of these “really bad” financial decisions in perspective. The loss that results from a bad decision is not only the immediate dollar amount, but also the opportunity cost—what could have been earned in the future if the money had been used elsewhere, like placed in high-yeild savings. For example, suppose a bad financial decision that results in a $50,000 loss occurs at age 40. With life expectancy now approaching 80, the financial impact of this decision generates a pretty lengthy opportunity cost period. If a 5% annual rate of return is used, the 40-year opportunity cost of a $50,000 mistake is $351,999—a seven-fold increase! (see Figure 1).

The impact of a $50,000 loss, compounded at 5% annually:

Opportunity cost is the hypothetical calculation of a very real financial concept. Although the rate of return and amount used for calculation are variable, the point is important: lost money has an ongoing and increasing cost. Keeping this in mind, we make some further observations:

1. Early Decisions are Costly

In terms of impact, the most costly financial mistakes are the ones made early in life, because the lost opportunity cost accrues over a longer period of time. This puts a very different perspective on the too-common encouragement from financial planners to younger clients to be more aggressive and take greater financial risks earlier in life. The rationale is that younger investors can “afford” to take risks (for instance, investing most or all of their money in stocks) because they’ll have more time to recover from losses. Yet in reality, early losses actually only lead to larger deficits later, because, like assets, their impact will grow with time.

2. Protection and Growth Go Hand-in-Hand

Avoiding and minimizing financial loss plays a significant role in long-term wealth accumulation. Poor financial decisions, wasteful spending, faulty accounting, a stock market crash… anything that results in unnecessary shrinkage of net worth will negatively affect your financial potential. By choosing assets that PROTECT your dollars from market fluctuation, creditors, taxation, and other “wealth eroders,” you can drastically improve your growth curve.

Think of it this way. Would you rather have a 50% chance of reaching your full potential, or a 100% chance of reaching at least 90% of your potential?

3. More Return is Not Necessarily Better

The best financial advice is not the kind that squeezes more return out of your existing assets, but one that helps you minimize losses. It may not make for as interesting cocktail conversation as trying to predict which company stocks could bring millions to shareholders, yet it delivers consistent, profitable results.

Don’t choose your advisors and strategies based on hope, optimism, or ideal “upside potential,” but rather on the safety and sustainability of recommended methods. You can’t plan for the future because the future is unpredictable. Yet you CAN prepare for the unexpected with assets that provide certainty–certainty of growth, protection, and liquidity.

Beyond the Numbers

There is another, perhaps less obvious cost to financial mistakes: the emotional toll.

Financial shame and regret can be paralyzing, contributing to low self-esteem, avoidance of money matters, even “financial infidelity,” which is the term for when spouses and partners hide their investment losses or over-spending from their significant others.

What can be done to mitigate the emotional impact of bad financial decisions? The first step is one not generally associated with finances: Forgiveness.

When there is so much shame wrapped up in our poor financial choices, forgiveness—for the self AND for others—goes a long way toward healing. After all, you did the best with what you knew at the time, and it’s likely that the people who love you did, too. Forgiveness allows you to drop the baggage, so that you can turn your mistakes into a learning experience and make positive changes.

Don’t know where to start? Reframe the situation to see the “bigger” lessons. See the “money stuff” as an invitation to learning and personal growth. And as you continue to navigate your finances, be gentle with yourself. Rather than dwelling on what they label “mistakes” and “failures,” allow yourself to move forward free of regrets with the wisdom gained from the experience. Your positive mindset can drastically expedite financial recovery!

Need a Prosperity Thinker at Your Side?

If you’re uncertain of your financial choices, don’t go it alone! Having a financial guide to bounce ideas off of can help you to make choices you’re proud of, that actually get you closer to your objectives! We’d love to help you think prosperously. Contact us today at welcome@prosperitythinkers.com to see how we can help.

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