MSE News: The secret to avoiding bad financial decisions

miss-tified

I'll start by saying I am not anyone's best advisor in these matters and I'll also say that my outcomes have been better than the decisions I've made. For your information and possible amusement here's the very short version of my story: at age 25 I bought a central London property in 1986 with a friend and borrowed more than I could afford- it cost £44,000 - rented one of the two bedrooms - shared my bedroom with my friend - sold property four years later for £101,000. My share of sale after paying mortgage was £16,000. Quit my very good job, paid off £4,000 debts, invested £10,000, used £2,000 to fund trip round world. Only mistake was taking husband (aka financial and emotional drain). Back in London three years later with no place to live and no job, but with reserve funds from previous investment. Ditched husband.
Got job and place to live, got made redundant, got new job, got made redundant again, started own business, met new man, all good! Business went well, got investment, planned expansion, got side-swiped by credit crunch, business faltered, new man lost job and his property - sold to "we'll buy your place for a song three days before you're due for eviction and we'll rent it back to you for a fortune and help from housing", then my mother needed money for nursing fees abroad. Debts now in excess of £45,000. Sighs and woes! Invested in vodka, hid head in sand, took loans to try and pay debts, spent more time on phone with debt-chasers than with business sales prospects, eventually got debt management plan £25 pcm - sorts things for a while. Business improving slowly, hooray, perhaps can afford a week's UK caravan holiday one day sometime next year? Perhaps not - mother died, no will, no money, no other family, where to find £4,000+ for funeral? More sighs and woes.
Current position: an uncertain future, a pension plan that means I'll be working until I drop, a debt that at current rate will be paid off when I'm 148 years old, and a "Freedom Pass" due in four years time.
So, what do I have to show for all of this?
Someone asked me recently, "You're really good at what you do, how come you're not rich?"
I replied, "But I am rich, I'm very rich, richer than most people I know, and it's nothing to do with money".
What do I mean and what do I have to show for all of this? I mean that I if I cared enough about money then I'd have more of it, and what I do have is this: I have a lovely central London flat in NW1, a fabulous loving relationship now 13 years strong, a business that provides enough to keep the wolves away from the doors, eight really, really good proper friends who have been with me for between the last 12 and the last 34 years, two beautiful and talented grown-up god-daughters who keep telling me how much they love me, half a century of the most fabulous memories and amazing experiences, and a life that I like even more now than at any time before now.
Risks? Oh yes please, but I prefer to call them adventures. Regrets? Just the marriage - but the divorce worked out OK. Have I made poor financial decisions? Oh for sure! Have I had poor outcomes? In my view, I've had wonderful outcomes. My glass is neither half-full nor half-empty. My glass is entirely the wrong size for most peoples’ ways of measuring. I guess it all depends on your perspective and how you define things. I'm rich like a fruit cake and you are most welcome to think of me that way ;-)

January20

Million_Percent wrote: »

We took a five year mortgage fix in early 2008 just as the so-called credit crunch was kicking in. Nobody knew what interest rates would do. As it turned out we ended up paying over the odds for 5 years. I don't regret the decision even though a different decision might have saved us quite a bit of money. We opted to fix our mortgage at a rate that we knew we could afford at time when interest rates could have soared. It was the right decision at the time and I'd do the same again in the same situation.

I did exactly the same thing at exactly the same time. I was really disappointed! Some of my friends had very low interest rates, and were clearing their mortgage faster but I had to remind myself of the reason I had made this choice: I wanted the peace of mind of the same mortgage payment every month. I made the wrong decision but it was the correct decision at that time, even if I regretted it.

At the moment, I am on the base rate, overpaying as much as I can. I keep a close eye on the interest rates but it's still very much a guessing game isn't it? One thing I've learned: 5 years is a very long time so I don't think I will tie myself up for that long ever again. 2 or 3 years at most.

ShiverMeTimbers

I'm 70 now and still feeling the ill-effects of decisions made or not made at or before age 25. The first was due to not understanding the workings of compound interest - investing small amounts from every pay cheque, as soon as I started earning, without ever touching it would have made me a millionaire by now. Yes - it is possible. But nobody ever told me. Believe me - I am telling my grandchildren and they are getting personalised practical, funded investment lessons from Grandpa!
Allied to that was my major bad decision - I inherited over £3,000 from my parents at too early an age (theirs and mine). Quite a sum 45 years ago. And I spent it! I've had to work far too hard to keep head above water ever since.
It's all OK now but could have been so much better. We look forward to making up for lost time during our seventies!
There was a final bad decision more recently - buying a major kitchen appliance from Currys - and suffering their appalling service. But maybe that's another story.

batvink

Nice article.

I recommend reading Thinking Fast and Slow by Daniel Kahneman. It helps rationalise your decisions in life (we are inherently irrational)...and it's quite entertaining and easily understandable.

Your example of the coin toss is easier understood if it is expanded, in relation to the rest of the article. For most decisions it is easier to rationalise if you ask what the outcome is if the option is taken repeatedly. If you spin a coin once, you may win or lose money (regardless of the cost). If you can't afford to lose a pound, you can't afford to gamble for £100. But if you spin 20 times, then on average:

1. You will win £1000
2. You will lose £10

Therefore the predicted outcome is +£990 for a £10 stake. It is also clear that if you are really unlucky, you still only have a 1/1,048,576 chance to make a loss of £10 (2^20).

This also shows the predicted percentage of customers unhappy with your advice!

In respect of the examples, if you plan to change your energy supplier every year to get the best deal, then the calculation above shows that you are mitigating serious damage from a particularly bad decision in any one year. As the timescales lengthen (e.g changing mortgage provider only 2 or 3 times in the life of the mortgage), then your ability to mitigate shrinks.