The author explains the crucial differences between financial freedom and financial overconfidence
Every person has a different definition for financial freedom, but considering the text book definition, ‘Financial freedom is having enough savings, investments and cash in hand to support the lifestyle that you desire for yourself and your family.’
Financial freedom also means having the liberty to retire and pursue any career that you want without having the pressure to earn a particular amount each year. Some people also say that when your passive income exceeds your fixed and variable expenses, or when you can buy what you want without thinking about money, then you are financially free.
When investors or financially smart people start experiencing only the positive side of investing and debt, they believe that they are wise to take every financial decision as well. Confidence to take these decisions is good but overconfidence is not. Overconfidence creates a risk of investing errors, resulting in the loss of capital.
Another huge trap is the concept of FOMO (Fear Of Missing Out). Many people make wrong decisions when investing in the stock market or cryptocurrency, because they keep seeing people around them who have succeeded. They don’t want to be left behind, so they put their money in these markets without doing their research and with the hope that they would also succeed, Of course, things don’t work out as planned. A survey has showed that overconfidence is higher among men than women and increases with investment experience and education.
Overconfidence and Financial Advice
One of the major reasons to seek advice from professionals is to improve accuracy and avoid mistakes. People with different income levels require different advice; some may require loan advice, while others may require estate planning or retirement planning. One advice does not fit all because each individual has different goals. Seeking a financial advisor is directly linked to you financial behaviour and well-being. With overconfidence, people may not be able to portray optimal financial behaviours such as seeking financial advice since they overestimate their abilities and knowledge. Moreover, overconfident people tend to spend recklessly today and may fail to save accurately for retirement and other emergencies.
One Wrong Financial Decision
Life is all about choices, especially financial ones. If we make bad financial choices, these choices will be reflected in our daily lives. Most times, the impact of financial decisions is much higher than you can anticipate. Sometimes bad things happen to good people. Sometimes good people make bad decisions, as fear and greed are the major factors that determine these decisions. Financial mistakes can have long-lasting detrimental effects that not only affect individuals but also affects the whole family. Statistics show that majority of people attribute their ‘bad financial decision’ in having excessive faith in debt and wrong partnership in business.
One must be cautious when it comes to taking loans and new loans to repay old loans. These days, banks and other financial institutions have made it relatively easy to obtain loans which has caused problems for business owners. Therefore, consulting a professional for debt management is recommended.
Many people who make financial blunders are mainly concerned with the short-term consequences, which are frequently expressed as an instant loss of funds. However, individuals who are well-versed in finance understand that the real pain associated with poor decisions is associated with long-term losses. Strive to achieve financial freedom in a right way.
Be confident while taking decisions and always seek guidance from a professional every time you need an opinion or advice with your decisions.