Made a financial mistake? Try these three steps.

Jenny writes in:

In 2008, my husband and I lost about 50% of our retirement savings. We got so scared that we moved all of our savings to very safe investments – cash and bonds. Then, the stock market rebounds and some of our friends have earned back at least half of what they lost, but we barely gained anything!

and Mal writes in:

Every once in a while, I get so proud of my financial progress that I talk myself into going on a big splurge. Like you, my weakness is books. I bought ten books last weekend, dropping almost $200 in the process. How can I get out of this splurging cycle?

As different as these questions seem, my advice to both Mal and Jenny is pretty similar. They’ve both made financial mistakes against a background of pretty good financial success. They both recognize that they made some sort of mis-step, and they both feel guilty about it.

What should they both do – and what should anyone who makes a financial mistake like that (myself included) do?

First, don’t beat yourself up over the past. It’s water under the bridge now. You can’t undo what is done, no matter how much you’d like. Instead, you need to always look at how you can improve your situation from where you’re at now.

Thus, the next step is to figure out what’s going on.

In Jenny’s case, I think she and her husband need to spend some time deciding for themselves whether they have the risk tolerance for the stock market. Obviously, we all want those tremendous “up” periods where a bull market causes stocks to jump through the roof. But to have those bulls, we have to have some bears as well, and your past shows you to be jittery about bears.

In Mal’s case, he needs to spend some time asking himself why he buys those books. For me, at least, such splurges have little to do with a love of reading. I usually do such things as an emotional response to things going on in my life – stress and so forth. Spend some time really looking at what’s going on in your life.

Once you’ve identified the problem, it’s onward to the solution.

For Jenny, the solution probably involves bumping up her family’s retirement savings a bit, regardless of the big gains in the stock market. In fact, if I were in Jenny’s shoes, I probably would not return to the stock market at all. The risk involved – and the risk of making a poorly-timed move on top of that – makes stock investing a less-than-optimal choice.

For Mal, the solution involves serious soul searching and identification of the problem, then a similar search for a solution. It might be a painful relationship. It could be something else entirely. If you can’t figure out what it is, you might want to consider seeking some professional help to help you figure out what it is. Purge-and-splurge behavior is usually emotionally based, and figuring out what’s behind those emotions and putting them to rest will help you with your whole life.

It’s a simple three step solution for any financial mistake.

First, don’t beat yourself up over it. It’s water under the bridge. Don’t dwell on it and look down upon yourself for a mis-step. Instead, look at your situation now and try to figure out where the best place to go from here is.

Second, identify the problem. Spend time reflecting on exactly why you made that choice.

Third, identify and implement a solution. Once you know what the problem is, take action so that the problem doesn’t repeat itself.

Good luck.

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