Humans are hardwired for hope and the belief that the future will be better than the past. This is an endearing trait of the human race, and a trait that—at a glance—doesn’t seem that bad really. What’s wrong with a little optimism to lift up your day and make everything seem a little less futile?
Well, the issue is, this is a bit of a cognitive malfunction really. It’s programmed into us for survival, but in modern society it can cause some oversights in how we plan and prepare for our futures. Especially our financial futures.
Let’s take a closer look.
What is the Optimism Bias?
The Optimism Bias is the belief that negative events are less likely to happen to ourselves than to others. It’s our ingrained tendency to underestimate the likelihood we will personally experience adverse events. And as a result, we are prone to often disregarding precautions that might limit or mitigate those risks.
How Does it Effect Your Wealth?
This bias is a powerful force in the human mind, and it can play a major role in the reason people underestimate their wealth building challenges.
Undue optimism about your financial health is a slippery slope without the facts. Do you know how much money you have in each account (short-term and long term savings, IRAs, 401(k), and safety net fund)? Now, do you know how much money each of those accounts will make over the next 5 to 50 years?
Many of us can’t imagine financial setbacks, like an unexpected job loss or medical emergency. We haven’t factored those into the plan. With this predisposition toward dismissing negative events, it falls to the surrounding culture, habits, and behaviors to overcome the bias. In current mainstream culture—and especially in minority communities—one of the missing links is a culture of wealth building. With the income and wage gap shrinking every year for lower and middle income Americans, we need to begin building and supporting a community that places a value on investing as a way for long-term financial security.
For most of us, we have a vague idea that we are “on-track” and that we won’t find any hurdles along the way. There’s a better way though to know for sure that you have your financial situation under control.
Mitigate the Bias with the Facts
All of this isn’t to say we are all in dire straights, quite the contrary actually. The bias is just a tendency, and knowing that means you can work around it.
You can study the information.
You can clearly understand your specific financial situation.
You can plot out your potential savings for various investments.
In short, you can dig into the facts and make sure you are accurately predicting your ability to save for: a home, retirement, college for your children, a new business. The first step is plotting your current savings trajectory.
We recommend using our free wealth calculator to see if your financial future matches up to your optimistic expectations. If not, you still have plenty of time to take action and make some changes.