By Moriah Gaynor, Contributor, Fea Money Financial Literacy School. Photo Credit Istock
Have you been burned by easily-avoidable blunders like accidentally signing up for a card with a crazy high interest rate, or inadvertently refinancing a loan that was better off untouched? When you take risks and lose, do you find yourself murmuring “I just don’t get what happened…” more often than not? Are you someone who doesn’t know what “financial literacy” is, yet thinks they know all they need to know about finances? Are you comfortable making “gut decisions” even when a loss could be catastrophic?
If these questions have you nodding your head, it’s clear that you’re confident, but that doesn’t necessarily mean you’re in total comprehension when it comes to making money decisions.
While your gusto is palpable and can lead to payoffs timid folk could never dream of, there are some major drawbacks involved when you don’t have a realistic understanding of your money knowledge and capabilities.
Doesn’t “Fake it Till You Make It” Work In Finances?
Unfortunately, financial decisions do not forgive and forget easily. When it comes to finances, confidence is only as good as the content it’s backed by; if you make a money mistake, it has the possibility to haunt you for years to come.
If you are unable to accurately gauge how much you know about an investment, you are more vulnerable to making preventable money mistakes, investing in less-than-ideal opportunities, and finding yourself in debt.
Being able to understand a risk is part of weighing whether that risk is worth it or not. Without being able to accurately evaluate an investment, you’re essentially investing blindly, as you are withholding information from yourself. Also, an abundance of confidence can prevent you from accurately predicting what would happen if an investment doesn’t work out, which is likely to place you in a tricky financial situation. If you don’t anticipate a loss, you can’t plan for one, or better yet, decide it’s not worth investing at all.
Okay-How Can I Learn?
So the good news is that education is teachable, and being willing to learn is a step in the right direction! Here are a few tips on how to not just educate yourself on financial matters, but also work on evaluating risks and following your head more than your heart in your decisions.
Tip 1: Go Straight to the Index of a Thick Financial Literacy Text
You don’t know what you don’t know, so for extra-confident types, it’s especially important to start by figuring out what’s missing from your knowledge.
A good place to start is at your local library! Try finding a large financial book and skimming the index. Indexes are a great way to expose yourself to a bunch of topics without really diving into them. If you see a term or topic in the index that you don’t know, make a note of it, and do some work later to learn that subject. If you don’t have a public library nearby or don’t have the time to swing by, you can also use the topic list on a financial literacy website to begin building your “to learn” list.
Essentially, this will help you build your own personal financial literacy class around topics you may not even know you don’t know!
Tip 2: Phone a Friend!
Two heads are better than one, so even if you’re confident you know all there is to know about an opportunity, it’s still worth reaching out for a second opinion.
With this, you’re not necessarily seeking education, rather you’re looking for a different perspective. For example, let’s say you did your research and are ready to invest with a company in field X; however, you reach out to a friend and hear they have recently invested in that field and were burned financially by it. That friend’s experience may reveal some additional considerations you would not have thought about because you didn’t have that experience.
While knowledge can be taught, experiences are earned, so reaching out and hearing other people’s experiences or input may reveal factors you could not have discovered on your own.
Tip 3: Think in Terms of Worst-Case Scenario
Being the confident person you are, you tend to not have a good gauge for what you’re actually risking, because in your mind, you’re sure to succeed. However, that’s not always the case, so to be entirely educated on a risk, you need to be prepared for both the best and worst situations.
To help add a dose of realism to your decision making, try envisioning what would happen if you lose. Be as specific as possible: Would you be in debt? How would this affect other finances such as a mortgage or student loan repayment? Would others around you be affected?
Predicting the worst possible situation can not only help you plan for mitigating the loss if you do decide to go through with the risk, but it can also help deter you from risks that have too treacherous losses to even attempt.
While you’ve got confidence to spare, that’s not always enough to guide you through tricky financial waters. It’s important that you take the time to expose yourself to ideas other than your own because while the financial situation you envision may be nice, it might not always be realistic.
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