While we may not know it at that precise moment in time, we all end up making bad financial decisions in life. Sometimes we receive immediate feedback on a botched financial decision. Other times it can take months or years to fully realize the error of our ways. These poor financial decisions can wreak havoc on our minds. When we take time to reflect on what went wrong, the type of financial decision we made will have an impact on our evaluation.
Types of Financial Decisions
While financial decisions can run the gamut from slightly consequential to extremely impactful, there are essentially two main types:
- A “dumb” financial decision that was careless, impulsive, lazy, or made in haste.
- A “smart” financial decision that was originally well researched, fully analyzed, and thoroughly contemplated with detailed pros and cons.
The Dilemma: What’s Worse?
Here’s the interesting question I’d like to pose:
What is worse? A bad outcome from a “dumb“ financial decision or a bad outcome from a “smart“ decision? In other words, would you rather have a messy fallout from being careless or pay the price after what you thought was a pretty savvy financial decision?
I’ve made my share of both types of financial decisions that ultimately ended up poorly. I could probably write up a huge list, but instead I’ll share a few examples to help illustrate.
A smart decision I made – one that I thought I had thoroughly vetted – was when I became a first time homeowner back in 2006. You can read about my foreclosure nightmare, but suffice it to say I did my due diligence and still ended up with a “lemon” house. The price I paid (monetarily and emotionally) for that financial decision was pretty steep.
Another smart financial decision that ended for the worse was more recently when I invested in a municipal bond fund a few months before interest rates started to unexpectedly climb. I discuss that situation in How to Emotionally Deal with an Investment Loss. I thought I was making a wise investment, but it only took several months and the loss of $745 to realize otherwise.
On the flip side, a dumb financial decision I made was when I bought my first car after college. I was working with a limited budget and didn’t exactly know what I wanted. Accompanied by my dad, I spent a couple days searching and test driving. It was in the middle of summer during a blazing heat wave and after those first few days of searching I was frustrated. I essentially just settled and bought a 2002 used Pontiac Sunfire to get the process over. The next day my girlfriend notified me that the same exact year and model (even the same color!) with less mileage was for sell at Carmax. Here’s the kicker, it was for over $1,000 less! The Carmax was in the same auto mall too. Darn it!
Now, my examples aren’t necessarily equally weighted. But they do provide the gist of how the types of financial decisions are classified into smart or dumb. Getting back to that question…which type of financial decision is worse to have made when the outcome ends up being negative?
The Case for a “Dumb” Financial Decision Being Worse
When bad results happen from a careless, impulsive, lazy, or rushed decision, it’s very easy to kick yourself for being such a moron. In fact, if the magnitude of the bad result is high, then the dumb original decision can haunt you for a very long time. Knowing the outcome could have been completely different if you spent just a little more time researching or fully assessing your options is tough to overcome.
The Case for a “Smart” Financial Decision Being Worse
Talk about a mental toll when this scenario unfolds. When you’ve done your homework ahead of the original financial decision and then it still craps out, it can be quite depressing. I mean, what can you do better if you tried your best already? Sure, you can try to and should do your best to learn from the experience. That may be easier said than done though. Next time around you may incorporate everything you learned and still end up with a failed outcome. That can be a tough burden to shoulder.
So which is worse? When things go sour, would you rather have made a seemingly “good” original financial decision or a “dumb” one? What’s the easiest from which to learn? What’s the easiest to recover from? Any tips on how to cope?