Are These Psychological Biases Holding you Back from Building Wealth?

Our emotions are powerful and often influence the decisions we make in life, sometimes without us even realizing it. This is especially true in the realm of financial decision-making. At Sherman Wealth, we frequently discuss behavioral finance with our clients, emphasizing how our behaviors can oftentimes significantly impact the financial choices we make. As you build out your financial plan, it’s important to acknowledge your emotions and discuss how they impact your financial thought process.

Investment biases can get in the way of making objective financial decisions. By recognizing and understanding these biases, you can learn to avoid them and in turn, unpack your emotions to help build out your financial plan.  Here are some key behavioral biases to be aware of:

Loss Aversion

Loss aversion occurs when individuals fear an imminent negative outcome, such as a market downturn. This fear can prompt investors to sell their stocks prematurely when the market starts to decline. At Sherman Wealth, we stress the importance of long-term strategies and the value of “time in the market.” When you feel anxious about market fluctuations, your asset allocation may not be appropriate with your risk tolerance.

Bandwagon Effect

The bandwagon effect refers to the tendency to follow the investment decisions of the crowd simply because they are popular. It’s important to do your own research and feel confident in an investment decision rather than jumping on the latest trend.

Sunk Cost Fallacy

The sunk cost fallacy is the difficulty in moving on from a poor investment due to the time and money already invested in it. If an investment is continually underperforming, it might be best to stop investing further resources into it and consider moving on. Holding onto a bad investment just because of past commitments can prevent you from making better financial decisions.

Confirmation Bias

Confirmation bias is the tendency to seek out information that confirms our previous decisions, often clouding our judgment. Before making significant investment decisions, it’s essential to conduct thorough research to ensure you are making informed choices. Avoid relying solely on information that supports your initial views and be open to different perspectives.

Confronting these behavioral biases can help you make clearer, more rational financial decisions in the future. If you have any questions or would like to learn more about confronting and even avoiding negative behavioral biases, email info@shermanwealth.com or schedule a complimentary 30-minute meeting with us to revisit and create your financial plan. 

Your Mid-Year June Financial Checklist

As we reach the midpoint of the year, June offers a perfect opportunity to take stock of your financial situation. It’s a time to reflect on the progress you’ve made and adjust your strategies to ensure you stay on track with your financial goals. Here’s a comprehensive checklist to help you conduct a thorough mid-year financial review:

A good place to start when reviewing your finances is to take a look at your budget and expenses. Compare your actual spending against your budget for the first half of the year and identify areas where you overspent or underspent. Consider how your budget may shift from the winter/spring months into the summer months and adjust your budget categories as needed to reflect any changes in your lifestyle or financial priorities. Next, start to analyze your expenses. Look for patterns in your spending and identify any recurring expenses that can be reduced or eliminated. Consider using budgeting apps or tools to streamline this process and help identify blind spots.

An important mid-year financial exercise we like to work on with our clients is reviewing your financial goals. In the beginning of the year, you may have set some financial resolutions for 2024 or financial goals, for example, saving for a vacation, paying off debt, building an emergency fund. Think about this as a progress check- benchmark your goals and adjust timelines and strategies if necessary to stay on track. Also, it’s important to think about new goals as your life is constantly evolving. If you’ve achieved any of your initial goals, set new ones to keep moving forward. Consider long-term goals like retirement planning or saving for a significant purchase.

Next, taking stock of your savings balances and savings contribution rates is an important piece of your mid-year review. Ask yourself, “Do I have enough in my Emergency Fund?”. If the answer is no, it may be time to recreate a savings plan to build it up. Review your savings accounts and their interest rates. Consider if you need to open new accounts for specific goals or move your money to accounts with better interest rates. Prepare for upcoming expenses by anticipating major expenses in the second half of the year, such as holidays, vacations, or tuition. Start setting aside money now to avoid financial stress later. Build a financial buffer for unexpected expenses that may arise.

An important summer financial checklist item is revisiting your protection. It might be time to do an insurance needs analysis and estate planning review. Update your insurance coverage by reviewing your insurance policies, including health, life, auto, and home insurance. Ensure you have adequate coverage and that your policies are up-to-date as well as update your estate plan to ensure proper protection.

Taking the time to review and adjust your financial plan in June can set you up for success in the second half of the year. By working with a financial professional to constantly tweak your financial plan or work through some of the items on this checklist, you’ll better understand how to achieve your financial goals and maintain a healthy financial outlook. Remember, regular financial check-ups are key to long-term financial stability and success. If you have any further questions on the financial checklist items mentioned, email info@shermanwealth.com or schedule a complimentary intro call here.

How To Get Your Financial House In Order Before Buying a Home

There is definitely a great deal to discuss on the current housing market. Despite the volatility and higher interest rates, many of you are still in the market to purchase a new home. Whether you’re a first time home buyer or you are upgrading from your “starter” home, there are many tips you can implement and mistakes to avoid to improve your financial situation and ensure the process is more seamless. So let’s dive in. 

As you know, buying a home is a major purchase, maybe even the largest purchase you will make in your lifetime. So, it’s key that your financial house is in order prior to applying for a mortgage and taking on a large loan. So, first and foremost, ensure that your credit score and report are in good shape. Why? Because your credit is the lifeline of your financial life, and when it comes to purchasing a home, lenders will check out your credit to determine what interest rates you will be able to capture. If your credit is not so great, it may be possible you have a higher and more costly interest rate, making your home purchase more expensive than it needs to be. So, make sure you are paying your bills on time, always pay at least the minimum, pay down existing debt, and open multiple lines of credit, taking on “good debt”, that you can pay back responsibility. Check out our other blogs for more information on your credit score

Another tip to keep in mind when preparing to purchase a home is to ensure your emergency fund is sufficient and you have saved enough for the downpayment and fees. Given where current interest rates stand, your home affordability due to higher rates may look different than if you did the same exercise back in 2020, for example. So what does this mean? Well, buying a home comes with tons of unexpected expenses. Especially if it’s your first time, having only enough cash for the down payment and fees most likely won’t be enough to cover all the expenses coming your way. So, understand the all in costs, run an analysis on whether that fits into your financial budget and picture, and decide if you have an emergency fund sufficient to cover not only the home purchase itself, but remember about items such as furniture, wifi, utilities, and more. You don’t want to tie up all your cash in non liquid investment vehicles when you might need it for something else in the near future. So, consider opening a high yield savings account that you can park your cash reserve in, while also earning additional interest. We also recorded a great podcast episode with senior mortgage consultant, Jody Eichenblatt of PHM Loans, on his thoughts on the spring housing market and some best practices for those of you shopping. 

Along with saving enough cash for your big purchase, having a realistic and achievable budget is extremely important as well. We oftentimes see individuals stretch themselves too thin with their home purchase, making it more financially stressful to reach their other financial goals. Especially given where the economy is with inflation, we’ve been recommending individuals to re-visit and tweak their budgets. So, separating your wants versus your needs and really breaking down your financial goals is a great way to determine what your budget should be. We also recommend working with a financial advisor to dive deeper into this budget and build a strategy to hit all your goals in life. Purchasing a home is such an exciting and fulfilling achievement, so we want to make sure you go about it in the best way possible. We will continue to track the housing industry and mortgage rates as the Federal Reserve hopes to be able ot cut interest rates in the back half of this year and report back how this will impact you. If you have any questions, email info@shermanwealth.com