Throwing Good Money after Bad

This post is by Gary Foreman, who I recently met at a conference. He’s the founder of The Dollar Stretcher, which as the name implies, is a site all about stretching your dollars and getting more for them. It’s been around since 1996 so he really knows his stuff! As a former financial planner, he has some great advice…

There’s a law of physics that says that once an object is in motion it will continue in that direction until something stops it or changes it’s direction. The same thing is true for our finances. At least the way that we think about our finances. Once we begin moving in a direction, it will take a new input to change that direction. Let’s examine some of the ways that we get stuck moving in the wrong financial direction.

Bad Investments

No one likes to be wrong. Especially when our money is involved. So a bad investment is very hard to admit. And, that’s the problem. Choosing to make a new, different decision on an investment feels like we’re admitting that the original purchase decision was a bad choice.

The trick is to separate past decisions from the one that you’ll be making today. Your past decision is just that – past. It’s over. And the ramifications of that decision are already in play. Making a good decision today is important. Carrying past baggage around makes it harder to get to that good decision.

The cost of staying with a bad investment is twofold. First, the current value of the old investment could decrease. In most cases, there’s a reason that an investment didn’t work. Unless that reason has been corrected, you should expect the downward price trend to continue.

Second, by staying with the bad investment you keep your money tied up. The question that you’re really trying to answer today is whether that investment is the best place for your money to grow beginning today. When you stay with a bad investment it’s as if you’ve chosen it all over again today.

Bad Choices

We’ve all made bad choices. How quickly we recognize the bad ones and reverse course could make a big difference in our finances.

For instance, it’s not uncommon for people to choose not to participate in their employer supported retirement plan (often a 401k). But for most people they’re an excellent retirement savings vehicle. Especially if the employer contributes. Even in today’s shaky stock market, it’s almost impossible to lose money when an employer contribution is involved.

So not participating is often a bad decision. The sooner that you change direction, the sooner that you’ll be moving towards a comfortable retirement.

Another choice that can come back to bite you is to run an ever increasing balance on your credit cards. You may think that you don’t have a choice. But, if you’re spending money on anything that’s not needed for survival, then a rising credit card balance is in fact a choice.

Each month that balance will require a larger minimum payment. And, if it gets too high you may find that new charge incur a higher interest rate. Not to mention that your credit score will slowly decline.

It will take a conscious decision, followed by action to reverse direction.

Bad Decisions

Every decision we make seems right at the time that we make it. It’s only later that we find out that we made a mistake. Some are relatively painless. But others can have long-term consequences.

Take the family that stretched to buy a barely affordable house in 2006. Time and events have showed that to be a bad decision. Nationwide housing prices have declined by more than 30%.

That family faces a choice. They can stay trapped in the home until the mortgage is less than the value of the home. That’s likely to take many years, if not a decade or more. Or they can change their mind and begin the process of a short-sale or foreclosure. That will hurt their credit rating for years, but at least ten years from now they’ll be whole again.

If you look at your life you’ll probably find some financial patterns. Some are good, but others are not. All of them are likely to continue unless you step in and stop them or change their direction.

Gary Foreman is a former financial planner. He currently edits The Dollar Stretcher. For more suggestions on how to save money visit. Follow Gary on Twitter.

 
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