Maybe you made some poor investments, overspent on a luxurious vacation or failed to save for emergencies — all of these scenarios can leave you feeling defeated. The good news? You can get back up.
Not only that, but you can also end up better than you ever imagined after learning from your mistakes. Below are some steps to take to recover from your money blunders .
According to Robert R. Johnson, a chartered financial analyst (CFA) and professor of finance at Heider College of Business, Creighton, the first step to recovering from your mistakes is recognizing that there are no shortcuts to putting yourself on a solid financial foundation and building wealth.
“The most realistic way to build wealth is to have the money deducted from your paycheck before you receive it,” he said.
Johnson recalled a University of Chicago professor named Richard Thaler who received the Nobel Prize in economics for his work in behavioral finance — the premise of which is that “human beings aren’t rational profit maximizing machines, but often succumb to behavioral biases.”
One of the biggest behavioral biases that humans succumb to is the bias toward immediate gratification over delayed gratification.
“That is, our present selves tend to win over our future selves,” he continued. “It is very difficult for many people to imagine their future self and give up that vacation or new car today in lieu of having money to retire on in the distant future.”
Johson recommended that people try and automate as many financial decisions as they can. He said, “One has to make saving money a habit. And habits — good or bad — develop over time.”
One of the easiest ways to get into the habit of saving money is to make it automatic.
“If you don’t receive that money and have to make the decision to spend it or invest it, you will act like you never earned it — essentially, out of sight, out of mind.”
For instance, you can have an amount taken out of each paycheck and put directly into an investment fund — Johnson suggested a low-cost stock index fund . This strategy means you will be putting money into the market whether stocks are rising, falling or treading water.
“You will practice dollar cost averaging and build significant wealth over the long run,” he added.
Johnson also noted that automatic savings plans can take many forms. For example, you can have a specific dollar amount or salary percentage taken out of each paycheck and put in a retirement plan or savings plan.
Moreover, one of the biggest advantages of automatic plans is the lack of constant involvement.
“If we are enrolled in an automatic savings plan, inertia and the inherent laziness of people tend to work in our favor,” said Johnson. “That is, once enrolled in an automatic savings plan, people tend to stay enrolled.”
Don’t Just Save, Make It a Point To Invest
Unfortunately, it isn’t enough to simply save. As Johnson put it, “That is a necessary condition for building wealth, but not a sufficient condition for wealth accumulation. Individuals need to be taught to invest for retirement and not to save for retirement.”
For him, the surest way to build true, long-term wealth and higher net worth is to invest in the stock market. And starting early is the key to successfully building wealth all thanks to the effect of compound interest.
“Albert Einstein is rumored to have said that ‘compound interest is the greatest mathematical discovery of all time,'” said Johnson. “Whether he said it or not is irrelevant, but time is the greatest ally of the investor because of the ‘magic’ of compound interest.”
In order to achieve true financial security and wealth, Johnson said to focus on both saving and investing, not just one or the other.
He continued, saying, “One needs to develop the discipline to save and developing that habit early in life is extremely important. It is also important that people embrace investing and not simply saving.”
Realize That Building Wealth Is a Marathon, Not a Sprint
That is, you can’t make up for poor past decisions overnight.
“In the 1985 shareholder letter for his company, Berkshire Hathaway, Warren Buffett wrote, ‘No matter how great the talent or effort, some things just take time: you can’t produce a baby in one month by getting nine women pregnant,'” added Johnson.
Ultimately, no matter your financial blunders, according to Johnson, the greatest asset for building wealth is time. And you can use it to your advantage starting today.
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