By Sam Bediako Asante, Investment Consultant
Most bad financial decisions stem from emotional reactions, lack of knowledge, or external pressures.
Over the past decade, it has been realised that investors make terrible financial decisions, often ignoring proper financial advice. It has also been witnessed that people invest their life savings in crypto Ponzi schemes, unregulated investments, and extremely risky ventures. Through these experiences, It is realised that most of these bad decisions are motivated by certain factors.
Here are 10 key reasons why people tend to make poor financial choices:
One of the strongest drivers of bad financial decisions is the fear of missing out (FOMO). Whether it’s a trendy cryptocurrency or a fast-rising investment, people are often swept up in the hype, wanting to capitalise on a “can’t miss” opportunity. Unfortunately, acting on FOMO usually leads to poorly researched and highly volatile investments.
Solution: Always take the time to research any investment, no matter how promising it may seem. Stick to a long-term investment strategy rather than chasing after the latest trend.
2. Overconfidence
Many people believe they know more about investing than they actually do. This overconfidence can lead to poor decisions, such as investing heavily in high-risk assets or neglecting to diversify their portfolio. Investors may also think they can time the market, which often results in losses.
Solution: Recognise your limitations and consult with professionals. Diversify your investments and stay humble in the face of market uncertainty.
3. Lack of financial literacy
A significant reason behind bad financial decisions is a simple lack of understanding. Many don’t understand the basics of investing, managing debt, or how financial markets work. This knowledge gap can lead them to fall for scams, make uninformed investments, or fail to save adequately.
Solution: Improve your financial literacy by taking courses, reading books, or working with a financial advisor. The more you understand, the better equipped you’ll be to make informed decisions.
4. Impulse spending
Impulse spending is a common issue. People often prioritise immediate gratification over long-term financial security, making unplanned purchases that can strain their budget or reduce their savings. This can lead to mounting debt and difficulty meeting financial goals.
Solution: Stick to a budget and implement a waiting period (such as 24 hours) before making any significant purchase. This can help curb impulsive decisions and ensure your spending aligns with your long-term goals.
5. Emotional investing
Fear and greed can cause investors to make decisions based on emotion rather than logic. Selling investments during a market downturn due to fear or chasing high returns during a boom period out of greed can lead to missed opportunities and locked-in losses.
Solution: Develop and stick to a long-term investment strategy, even when markets fluctuate. Avoid making decisions based on short-term emotions and focus on your long-term financial goals.
6. Following bad advice
People often make poor financial decisions after following bad advice from unqualified sources – whether friends, family, or even social media influencers. This advice may come with good intentions but can lead to disastrous outcomes, especially when it’s not backed by proper financial analysis.
Solution: Seek advice only from credible, qualified professionals like certified financial planners. Always verify the credentials of anyone offering financial advice, especially if the advice involves large sums of money.
7. Chasing high returns
Many investors are lured by the promise of quick, high returns without understanding the associated risks. High-return investments often come with high volatility, and inexperienced investors may lose large sums of money.
Solution: Be wary of investments that promise unusually high returns. Understand that risk and reward go hand-in-hand, and balance your portfolio accordingly.
8. Ignoring inflation and interest rates
Failing to account for inflation and interest rates can lead to misunderstanding your financial position. Inflation erodes the purchasing power of money, meaning that savings that aren’t growing at a rate that exceeds inflation are losing value.
Solution: Ensure your investments grow faster than inflation. Choose savings and investment vehicles that provide returns capable of beating inflation over time. Also, be mindful of interest rates when taking on debt to avoid paying more than necessary.
9. Living beyond their means
Lifestyle inflation – the tendency to increase spending as income rises – can trap people in a cycle of debt. Many people take on loans or use credit to fund a lifestyle that’s not sustainable, leading to long-term financial instability.
Solution: Stick to a budget to avoid lifestyle inflation. As your income increases, prioritise saving and investing. This approach will help you build wealth rather than accumulate debt.
10. Procrastination
Procrastination is one of the most dangerous habits in personal finance. Delaying important decisions – such as saving for retirement, paying off debt, or creating an emergency fund – can lead to significant financial challenges down the line.
Solution: Start making financial decisions today, no matter how small. Automating your savings and investments can help combat procrastination and ensure you stay on track with your financial goals.
Conclusion
Most bad financial decisions stem from emotional reactions, lack of knowledge, or external pressures. While it is easy to fall into these traps, being aware of these common drivers can help you avoid them.
Financial success requires discipline, education, and long-term planning. If you struggle to make sound financial decisions, working with a professional financial planner can provide the guidance you need to stay on track and make intelligent, informed choices with your money.
