At some point, everyone has been haunted by their financial decisions. It could be something small like overspending by Ksh2,000 on a night out or something significant like following the herd and investing money in a Ponzi scheme because you didn't do any research.
Nonetheless, financial regrets can cost you now and in the future, depending on their magnitude. They’re different for each person, and undoing them often requires making even more complex decisions. Regrets are uncomfortable and, to some extent, inevitable. The best you can do is learn how to overcome them.
This article will explore the four causes of financial regrets, how they manifest themselves, and what steps you can take to overcome them.
Buyer’s remorse refers to the lingering feeling of regret, dissatisfaction, and guilt you can sometimes get after making a purchase. It occurs when there is a mismatch between your beliefs or values and any financial action you have taken.
You are likely to experience buyer’s remorse when you spend money on a product or service only to figure out later that it doesn’t meet your expectation, you don’t need it, you discover better alternatives, or you get a perception that you overspent. When any of this happens, you might start second-guessing your decision and feeling a sense of regret.
With that in mind, how can you overcome buyer’s remorse?
Opportunity cost is the regret or dissatisfaction resulting from a financial decision not made or an alternative decision made. It encompasses missed opportunities and unrealized gains that could have been attained through a different choice or action.
Opportunity cost is the value of the best alternative you miss out on due to making a different decision.
For example, if you choose to invest in a certain way, your opportunity cost is the money you could have made by investing in a different venture. In this case, regret stems from realising that the alternative venture could have yielded higher returns as it was the best option.
Opportunity cost also plays a role in everyday life. Every purchase comes with an opportunity cost, which is the value of the next best alternative you could have chosen. For instance, if you spend money on eating out frequently, you may miss out on the opportunity to save for a vacation.
It represents the feeling of regret arising from recognizing the potential benefits or advantages that were foregone due to a different course of action or inaction. Understanding opportunity cost helps in making better choices. Not considering the alternatives can result in missed opportunities.
To overcome opportunity cost, you should:
The sunk cost fallacy refers to the tendency to continue investing in a project or decision solely because of the resources (time, money, effort) already invested, even when it is clear that the decision is no longer financially viable or beneficial.
The sunk cost fallacy is typically preceded by sunk cost dilemma when you might have to decide if you should continue or discontinue a project, provided you have invested your resources but still have not achieved the desired outcome.
At this stage, you might be overcome by disappointment over your decisions. This regret often stems from the realization that additional investments will not be able to recoup the initial losses and can lead to further financial setbacks.
Consider this example: You've invested substantially in repairing your car, but halfway through, you question its value. Sunk costs come into play when you cannot undo the services or recover the money you've spent. Now you're torn between continuing the repairs and hoping for a satisfactory outcome or accepting the sunk costs and considering alternative repairs.
The sunken cost fallacy happens when you continue the repairs and hope for a satisfactory outcome because you don't want to accept the irrecoverable expenses/losses you've incurred.
To overcome the regret associated with sunk cost fallacy, you should:
As individuals, it is natural for us to compare ourselves with others. However, the people with whom you choose to compare yourself and how often you make these connections can significantly impact how you feel about your finances.
When you make upward comparisons, i.e., compare yourself negatively with people doing better than you financially, it can affect your financial well-being, causing you unnecessary stress and regret when you notice that the person you're comparing yourself to is better off because they made different decisions from yours. This phenomenon is known as social comparison.
The theory of social comparison was introduced by Psychologist Leon Festinger in 1954. He suggests that humans have an inherent motivation to assess and evaluate themselves by drawing comparisons to others.
Social comparison results from comparing your financial situation or decision to that of others and feeling a sense of disappointment or dissatisfaction with your condition or choices. This type of regret can stem from perceiving that others have made better or more successful financial decisions, leading to a sense of inadequacy or a feeling that you made the wrong choice in comparison.
To overcome social comparison, you should:
Read Also: 7 Ways to Stop Stressing Over Money
Regret is a common emotion, but it is also avoidable. Regret can have many negative effects, including causing anxiety, depression, and poor self-esteem. All this can lead to people making decisions not in their best interests.
The best way to avoid regret is to make well-thought-out plans, assess risk, and consider getting expert help. When you make a decision, take the time to consider all of your options and the potential consequences of each option. If you are unsure about what to do, consider talking to someone you trust who can help you weigh the pros and cons. This can be friends, your mentor, or a licenced financial advisor.