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. 

Back To School Fall Financial Planning

As the leaves begin to change and summer passes, fall is the perfect time to reassess your financial situation and prepare for the final stretch of the year. This season offers an opportunity to fine-tune your finances, ensuring that you’re on track to meet your goals before the year’s end. Let’s take a look at some Back To School fall financial planning items you can review over the next few weeks.

Review Your Budget and Expenses

With summer vacations behind you and the back to school activities and holidays approaching, it’s essential to review your budget. Evaluate your spending over the past few months and adjust your budget to reflect any changes in your income or expenses.

Maximize Retirement Contributions

Fall is a good time to assess your retirement savings and make adjustments if needed. If you haven’t maxed out your contributions to your 401(k), IRA, or other retirement accounts, consider increasing your contributions before the year ends.

  • Catch-up contributions: If you’re over 50, take advantage of catch-up contributions to boost your retirement savings.
  • Employer matching: Ensure you’re contributing enough to receive the full employer match, if available.

Plan for Year-End Taxes

Tax season might be months away, but planning now can help you avoid a last-minute scramble. Consider the following:

  • Review withholdings
  • Tax-loss harvesting
  • Charitable donations/ Donor Advised Funds 

Evaluate Insurance Needs

As the year draws to a close, it’s a good idea to review your insurance policies to ensure you have adequate coverage. With open enrollment season around the corner, it’s important you are reviewing all benefits available to you and maximizing those that may be beneficial to you.

Prepare for Holiday Spending

The holiday season can be financially stressful, so it’s wise to plan ahead.

  • Set a holiday budget: Determine how much you can afford to spend on gifts, travel, and festivities, and stick to it.
  • Start saving now: If you haven’t already, consider setting aside a portion of your income to cover holiday expenses, using the bucket strategy.

Review Your Investment Portfolio

Fall is an opportune time to reassess your investment portfolio to ensure it aligns with your financial goals and risk tolerance. Given the recent market correction and volatility we’ve seen, it’s important to ensure your asset allocation is truly right for you and your financial goals.

  • Rebalance your portfolio: If your asset allocation has drifted, consider rebalancing to maintain your desired risk level.
  • Consider end-of-year opportunities: Evaluate potential investment opportunities or adjustments before the end of the year.

Plan for the Upcoming Year

Finally, use the fall season to set the stage for a financially successful new year.

  • Set financial goals: Begin thinking about your financial objectives for the upcoming year, such as saving for a major purchase, paying off debt, or investing in education.
  • Update your financial plan: If your life circumstances have changed, consider updating your financial plan to reflect your current situation.

Taking the time to review and adjust your finances this fall can help you end the year on a strong note and ensure you are on track to hit your financial goals. By taking a few moments amid the Back to School craziness to focus on some of your financial homework, you can add value to your financial wellbeing and you’ll be better prepared for the holiday season, tax time, and any unexpected expenses that may arise. If you are seeking a fall financial check in or tune up, email info@shermanwealth.com and we are happy to help!

Implementing and Revisiting Your Summer Savings Plan

Frequent financial check ins throughout the year are prudent to a solid and evolving financial plan. As your life gets more complicated, your financial plan and advice may change. So, periodically revisiting your savings plan is a great way to benchmark your financial progress, and ensure it remains aligned with your financial goals and life changes.

If you have yet to implement a savings strategy, there is no time like the present! The first step in creating a savings plan is to establish clear, achievable financial goals. These goals could be short-term (emergency fund, vacation), medium-term (buying a car, home renovation), or long-term (retirement, children’s education). Having specific goals provides direction, motivation, and allows room to create a strategy to achieve them.

Understanding your current financial status is crucial before setting up a savings plan. This involves calculating your net income, tracking your expenses, and analyzing your spending habits. Review your budget closely, identifying if your budget allows you to allocate a portion of your income toward your savings goals. If not, attempt cutting back areas of oyur budget to allow for a savings strategy. A realistic and strong budget balances your income with your expenses while prioritizing savings.

Different savings goals may require different types of accounts. For instance, an emergency fund should be easily accessible, while retirement savings might benefit from longer term, diversified tax-advantaged accounts. Next, automating your savings ensures consistency and reduces the temptation to spend. Set up automatic transfers from your checking account to your savings accounts for that “out of sight, out of mind” mentality.

Life changes and financial circumstances can shift, so it’s important to revisit your savings plan regularly. Reviewing your plan helps you stay on track and make necessary adjustments. Financial setbacks or unexpected expenses are inevitable. What matters is how you respond to them. Whether it’s an unexpected expense or a change in income, having an emergency fund or strategizing with a financial advisor can help you stay on course.

Implementing and revisiting your savings plan is an ongoing process that requires diligence and adaptability. By setting clear goals, understanding your financial situation, budgeting wisely, automating your savings, and regularly reviewing your plan, you can achieve financial stability and work towards your long-term goals. Remember, the key to a successful savings plan is consistency and the willingness to adjust as your circumstances change. If you are looking for an accountability partner in building and revisiting your financial plan, email info@shermanwealth.com or schedule a complimentary intro call here.

August Financial Checklist: A Mid-Year Financial Tune-Up

As summer draws to a close and we head into the latter half of the year, August is the perfect time to give your finances a mid-year checkup. With back-to-school expenses looming, and the holiday season not too far off, getting your financial house in order now can help you stay on track for the rest of the year. So, let’s dive into some checklist items you can work on this month.

Review Your Budget 

August is a great time to revisit your budget. Take a look at your income and expenses over the past few months. Are you staying within your budget, or are there areas where you’re overspending? Adjust your budget as necessary to reflect any changes in your financial situation. This can include:

  • Unexpected Expenses: Did you have any unexpected expenses? If so, how did they impact your overall budget?
  • Upcoming Costs: Are there any significant costs on the horizon, such as back-to-school supplies or holiday travel?
  • Savings Goals: Are you on track with your savings goals, or do you need to make adjustments?

Review Your Global Asset Allocation

When reviewing your financial strategy this August, it’s crucial to assess your global asset allocation. Ensure that your investments align with your current risk tolerance and financial goals. Especially during extremely unpredictable or volatile periods in the market, it’s important to ensure your asset allocation remains comfortable and aligned with your risk. If you’ve experienced changes in your financial situation or outlook, you may need to rebalance to maintain a portfolio that can weather market fluctuations and keep you on track toward your objectives.

Re-Evaluate Your Financial Goals

Financial goals are not set in stone. They should evolve as your life circumstances change. Take some time this month to reassess your short-term and long-term goals:

  • Emergency Fund
  • Debt Repayment
  • Retirement Savings

Prepare for Open-Enrollment Season

Insurance is a critical component of financial planning. August is a good time to review your coverage. With open enrollment season around the corner, make sure you are maximizing the benefits available to you within the workplace as well as outside coverage.

Tax Planning 

It’s never too early to start thinking about taxes. A little planning now can prevent a big headache later:

  • Review Withholdings: Make sure you’re withholding the right amount from your paycheck. If you received a large refund last year, you might want to adjust your withholdings to keep more money in your pocket throughout the year.
  • Estimated Taxes: If you’re self-employed or have other sources of income that aren’t subject to withholding, make sure you’re on track with your estimated tax payments.
  • Charitable Donations: If you plan to make charitable donations, consider doing so now to take advantage of the tax deduction.

Update your Financial Documents 

Keeping your financial documents up to date is essential. Take time in August to:

  • Update Beneficiaries: Review and update the beneficiaries on your insurance policies, retirement accounts, and any other financial accounts.
  • Review Your Will: If you have a will or estate planning documents, make sure it reflects your current wishes. If you don’t have one, consider creating one to ensure your assets are distributed according to your wishes.
  • Organize Important Documents: Gather and organize important financial documents, such as tax returns, insurance policies, and investment statements.

Taking the time to review your finances in August can set you up for a more secure and organized second half of the year. By checking in on some of the items listed above, you can make sure your budget is on track, your goals are aligned with your current situation, and you’re prepared for any upcoming expenses.

A little financial housekeeping now can make a big difference in your financial well-being for the rest of the year. If you have any questions about how to maximize your financial situation or on reviewing your portfolio, email info@shermanwealth.com or schedule a complimentary intro call here.