A few weeks ago, I shared that we’re all financial optimists, and it’s hurting our bottom line. Like many, I’m guilty of thinking that my experience is common of most people. Because I’m a financial optimist, I assume many people are, too.
How Financial Optimism Affects Our Finances
We’re digging our way out of some serious debt, and part of why we have that debt is because of financial optimism.
Four years ago, we took out student loan debt so my husband could finish his Ph.D. We knew once he finished the long haul of finishing the degree and then completing a two to three year post-doc that finally he would begin to make a good salary. That’s still true today, but we’re slowly trudging that long path. Two more years until the post doc is over.
What we didn’t anticipate in our financial optimism is how long the road would be and how painful these years of low income and high student loan payments would be.
But I digress.
Financial Pessimism Isn’t Much Better
Clearly I shouldn’t have stated “we’re ALL” financial optimists because the comments on the post made me start thinking about the flip side–financial pessimism, which is nearly as bad as financial optimism. Financial optimists make their decisions based on a bright future that may or may not come. (That’s how we justified taking out $30,000 in student loans.)
Financial pessimists often make their decisions based on fear and assumptions of what might go wrong in the future. Though this seems like a much better place to be than a financial optimist because the pessimist is protecting what they already have, it’s not really. Pessimism can stagnate your growth.
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My friend’s dad (I’ll call him Tom) inherited $100,000 when his uncle died. (His uncle had never married and didn’t have children of his own.) Tom had never seen that much money at once, and the idea of putting it in the stock market scared him. He was afraid he would lose it. Instead, he promptly put it all in a 10 year CD and earned a measly amount of interest. Plus, that money was locked up for years!
His fear and pessimism cost him money. Yes, he kept the money safe, but it was unavailable for 10 years, and he only made enough to cover the cost of inflation. He didn’t let the money work for him and grow because he was driven by fear.
Financial pessimism can also cause you career stagnation. Elizabeth has been at her job for 20 years now. She finds the job exhausting; over the last few years, more and more people were cut from the staff, but those positions were never filled. Elizabeth is now doing the work of several people; she often doesn’t get to go home early enough to see her young children before they go to bed. She wants a change, but she’s afraid that she won’t find a job that pays as well or has such good benefits. Her fear leaves her stuck in a position she doesn’t like, working too many hours, counting down to retirement that is another two decades away.
Financial optimism can hurt your bottom line by giving you confidence to spend money you assume you’ll make in the future. Financial pessimism can hurt you because you’re often fueled by fear which can cause stagnation and limit your financial growth.
What do you think is the best strategy to remedy financial optimism or pessimism?