By Alisa Bashaw, Published: 21:10 GMT, 8rd November, 2014
Every Friday ..
..like clockwork I’m sitting down with my husband watching “Shark Tank.” For those of you not familiar with the show let me summarize.
Normal people with big dreams and an idea walk into a room with 5 millionaire and billionaire businessmen and businesswomen. They proceed to pitch their idea and offer the sharks a percentage of their business for a certain amount of money. The sharks are then free to engage in a feeding frenzy of entrepreneur. Sometimes it’s painful to watch. There are five sharks who are on the show, Mark Cuban (net worth $2.6 billion), Daymond John (net worth $250 million) , Robert Herjavec (net worth $125 million), Barbara Corcoran (net worth $140 million) , Kevin O’Leary (net worth $300 million) , and Lori Greiner (net worth $50 million).
The point to all of this is this. On more than one occasion these millionaires and billionaires have mentioned that at one time or another their companies have gone bust, and they have been dirt broke. In addition, they have invested in products or companies on the show that have gone bust immediately. Take for example Toygaroo. It was essentially a Netflix for children toys. Both Mark and Kevin invested $200,000 in the company. These are the two men involved in Shark Tank with the most money and seem to be some of the smartest cookies in the bunch. However, within six weeks of investing $200,000 the company went bust. I use this example to pose this question.
Why do smart people make big money mistakes? Of course to most of us, $200,000 is a house. To the investors on shark tank it is a night out, but still too many mistakes like that will eventually ruin a company.
So the question again is why do smart people make big money mistakes?
Well, in the case of rich people or the sharks, it’s because they can. They know how diversified their portfolio is, and they know more money will pour in tomorrow. Essentially they can afford to lose the money. So I guess it begs to questions who is determining what that “big money” is? If Mark Cuban is worth 2.6 billion is a loss of 1 million dollars considered a big money mistake to him? Most of us can’t even venture to imagine.
So let’s take the millionaire and billionaires out of it and talk about the rest of society who won’t even that type of money in our entire life.
Why does the average person with above average intelligence make big money mistakes? To quote Mr. George Foreman on a lesson, he learned after going bankrupt. “Respect every dollar, respect every dollar.”
Here are a few ways and few tips on why smart people make big money mistakes,
They don’t keep their money in context
Think of all money as dollars and cents despite the context it’s being saved in. Here is a sample scenario. You decide to treat yourself to the new Sony 55″ 3D TV. You go to the store where it’s priced at $1,300. Then you find out that across town it’s priced at $899.99. Do you head on out and go get the cheaper one? Well, of course, you do! It’s $300.01 cheaper! That’s enough for a new PS4 to play on that TV or if you aren’t into gaming some really great Louboutin shoes.
A few months later you decide to finally buy a new car. So you head out to the car lot and choose a 2015 Chevrolet Camaro 2dr Coupe ZL1 for $56,350. You find out that at a car lot just across town the exact same car is $56,050 $300 less, do you go across town to buy the cheaper car?
Most people would not go through the hassle of getting in your car, driving over to the lot, finding a salesman, haggling over the price, and all that when it’s only $300 on a $56,000 car. The amount of savings is exactly the same so why is the $300 that you would save on the car less important than the $300 you were saving on the TV? The $300 is still $300. Keep money in context. $5 is $5 $100 is $100 it doesn’t matter. It all spends the same.
They don’t treat all money as earned money
Tax returns, lottery winnings, a dollar on the street, Christmas gifts, a work bonus, they all fall into the trap of being treated as free money. There is no such thing as free money.
Tax returns – You paid into that tax and they are simply returning the money to you now. That’s like overpaying for your groceries and going to the service desk to get the difference back. That’s not free money it’s just getting what’s rightfully your back.
Work Bonus – You worked hard to get this bonus. It’s not free money it is a reward for the extra hours and hard work you have put into your job. It is simply getting another paycheck
Lottery winnings, found money, Christmas gifts – These are hard to write off as free money, but I will explain why you need to put it that mindset out of your mind. Here’s a trick put it away for three months in the bank and don’t touch it. Let it rest. That way the freshness of new money has worn off.
As soon as it is handed to you it is earned money. My husband and I have this reoccurring argument. He likes to frequent the local casino. Granted he wins all the time. However, when he wins he counts the money as “free money”. As soon as that machine gives me credits that money is mine and no longer the casinos.
Consider all money as earned money and not free money. People have a tendency to hoard money they have earned more than money that was given or won. That is why credit card companies are so popular. People will hoard the money they have earned. However, they will pay for items with their credit card because the credit is “free” money, i.e., money they don’t have to front. Then they only have to pay the minimum balance, therefore saving more of their earned money. However, in the long run you are wasting more of your earned money, by using that “free” money.
For example, let’s take a credit card with 15% interest and a credit limit of $2000 which is currently maxed out. They are making payments of $100 a month. They will end up taking two years to pay it off and pay an additional $315.70 more to have access to that credit card. There is no such thing as free money. The scenario is broken down below.
15% Credit Card
$100 Monthly Payment
24 Months To Pay Off
$2,315.70 True Cost
Is, having access to that $2000 worth throwing away $315 and how many out there really have an APR of 15%? Plus how many are going to make a payment and not continue to use the card? You are paying the credit card company to loan you money.
Being A Bandwagon Jumper
Do you remember what your mom used to say?
“Well, if your friends all jumped off of a bridge would you do it too?” The same principle applies here. Most people will sell when everyone else is selling and buy when everyone else is buying. It’s the lemming effect. Only buy stocks that you believe in don’t buy stocks that are “the fad”. The only person who is going to make money from buying stocks that are the fad is the stock broker and are you in the game to make them money or yourself?
Everyone is going to make mistakes the trick is not making BIG money mistakes. Keeping them small. You work hard for your money. Make sure it works hard for you too.