6 steps to building your financial confidence

Posted by Cindy Wilson
When I bought my first condo, I used a portion of my Roth IRA for a down payment. Looking back, I wish I’d taken advantage of the IRA exemption—which lets first-time homebuyers withdraw $10,000, penalty-free—before converting it to a Roth. It was a mistake, but not the end of the world.
It’s easy to regret past decisions. What people tend to regret the most, though, are the choices they didn’t make. And what inhibits so many of my clients from making choices isn’t their lack of knowledge or time—but rather, the fact that they second guess their decisions. Often, they rationalize it as a personality thing. As one explained: “Financial stuff is so abstract and analytical. I’m just not that kind of person.”
If this sounds familiar, try reframing your financial decisions as “future lifestyle” decisions. The choices you make (or don’t make) now will directly impact where you get to live, and how, in 10 or 20 years. It’s about taking control of your destiny—seeing yourself as a decisive creator of wealth and well-being. Although I didn’t do it perfectly all those years ago, I made decisions that would improve the lifestyle I get to enjoy today: Building equity in real estate and diversifying my portfolio to include both after-tax and pretax money.
If you’ve been second guessing your own judgment—avoiding investment options, allowing yourself to be overwhelmed by multiple choices, neglecting opportunities—here are six steps to help springboard you into action—and start positively shaping your future:
1. Set goals.
It’s easier to make a decision when you clearly define your goals—your long-term hopes and dreams. Having a beach house, working for yourself, saving a million in your 403(b).
 
At the very least, start with these five basics: 1) Put enough into your retirement plan to get the employer match, 2) Aim to put in the maximum allowed in your employer plan and IRA, 3) Pay down high-interest debt, 4) Increase your emergency fund to 3-6 months of living expenses, 5) If you’ve maxed out your employer plan and IRA, look into HSA contributions.   
 
2. Don’t overthink it.
Reading as much as you can about the virtues of a Roth IRA, a target-date fund, or a charitable organization you’re considering donating to, is crucial. However, it’s possible to overthink such things: You spend so long pondering that the chance for action passes you by. Overly analytical and research-oriented people can suffer paralysis by analysis. Too detail-focused and indecisive, they miss out on things like tax advantages and annual limits where time is of the essence.
 
So, make a decision either way. Remembering that even successful investors occasionally make bad choices—ultimately using them to improve and course-correct, learning from the feedback those failures provide.
 
3. Beware of overconfidence.
So, you’ve got your financial targets in view, and you’ve decided to invest more boldly. Armed with a little knowledge, the danger is that you’ll go too far the other way, and become too emboldened.
 
Social science reveals that people tend to be overconfident in their predictions—for instance, how well their chosen investment funds will perform. We expend a lot of brainpower to justify our favored option rather than investigate which option we should select. Though we have a wealth of investment options to choose from, we limit ourselves to considering a tiny few. We are overconfident about how long our money will last in retirement, underestimating life expectancy, not to mention what Social Security and Medicare actually cover. To tackle this, try to take a more realistic approach to saving and investing, using tools such as this Retirement Advisor. With their conservative assumptions, they can help better ground you in reality.  
 
4. Look beyond the short term.
Another bug in the brain’s operating system: Our focus on short-term consequences. The impulse to avoid immediate discomfort can have far-reaching impacts. For example, people who are anxiously intolerant of risk sometimes avoid investments that are vulnerable to shockingly sharp declines. When the S&P 500, an index of the stock market, dropped 9.18% last December, many clients called me up in a state of panic. I reminded them to look at the bigger picture, namely the strong performance of U.S. stocks over the long term (along with the caveat that past performance is no guarantee of future results).
 
Short-sightedness can harm you in other ways: Currently, you may disdain the goal of having a cool million in your 403(b); you value meaningful experiences, traveling abroad, and eating a balanced diet more than having a big account balance. That’s fair enough. But even assuming you don’t grow into someone who places more value on material comfort, most likely, you will eventually incur expenses that you don’t have to worry about right now, notably healthcare expenses that will make a million not seem like much at all.
 
5. Revisit your decisions after six months.
In his book “Farsighted: How We Make the Decisions that Matter the Most,” Steven Johnson offers some concrete suggestions1 on how we might make decisions in a way that is less biased, better thought out and less focused on the short term. These include spending more time revisiting your decisions: “The two things we will almost always benefit from are time and a fresh perspective.”
 
Before deciding which investments best suit your needs, seek out more than one perspective and collect additional information—remembering that you aren’t immune from the human weakness that causes us to overestimate our accuracy and depth of knowledge about a situation.
 
Meet your financial advisor at least annually, reviewing together key choices such as your asset allocation and contribution rate, making adjustments where needed.
 
6. Don’t get hung up on past “mistakes”.
What you valued one year ago may seem less important to you today—the thing about dreams is that you may one day wake up from them and realize that your former goals just don’t feel right. Abandoning once-cherished goals is a sign that you’ve grown, acquired new knowledge, or simply have a passion for something new.
 
What matters right now is making a decision that is right for who you are today (knowing that in a few years it might not look so right any more).
 
If you weren’t saving enough last year, or throughout your entire twenties, don’t beat yourself up for your “wrong” decisions, nor spend too much time on regret: Your decisions were based on what you knew at the time. As C.S. Lewis put it, “You can’t go back and change the beginning, but you can start where you are and change the ending.”
1 “Don’t Overthink It,” Boston Review, January 2019, http://bostonreview.net/philosophy-religion/agnes-callard-dont-overthink-it
Teachers Insurance and Annuity Association of America has sponsored Ask the Expert posts for informational purposes only. Many of the experts are unaffiliated with Teachers Insurance and Annuity Association of America, College Retirement Equities Fund, and their affiliates and subsidiaries (collectively TIAA), and TIAA makes no representations regarding the accuracy or completeness of any information on the posts or otherwise made available by the experts. Statements of external featured experts are solely their own and are not endorsed or recommended by TIAA.
Responses from experts to questions posed by Woman2Woman community members are intentionally general in nature and are not intended to give personal, financial, or specific advice. Some strategies are complex, and more information is often needed to determine the personal needs of a community member. We strongly recommend that you consult with a financial advisor before taking any action based on an expertʼs opinion or other information you obtain from the Woman2Woman:Financial Living site so that all of your personal circumstances can be taken into consideration. Participation in the site does not render the member a client of the expert or of TIAA.
This site is not designed to accept or respond to requests or complaints regarding specific TIAA accounts, products or services. If you wish to discuss an issue of that nature, please contact TIAA at 800 842-2252. TIAA is not responsible for any opinions provided by members of this site. TIAA is not responsible for the content or privacy policies of third-party sites to which you may link.
The TIAA group of companies does not offer tax or legal advice. You should consult an independent tax or legal advisor for advice based on your own particular circumstances.
The material and responses are for informational or educational purposes only and do not constitute a recommendation or investment advice in connection with a distribution, transfer or rollover, a purchase or sale of securities or other investment property, or the management of securities or other investments, including the development of an investment strategy or retention of an investment manager or advisor. The material and responses do not take into account any specific objectives or circumstances of any particular individual, or suggest any specific course of action. Investment decisions should be made in consultation with an investorʼs personal advisor based on the investorʼs own objectives and circumstances.
Experts may not have medical or scientific training. Any information related to physical or emotional health is not intended to be used in place of a consultation with a physician.
TIAA is not responsible for the statements of community members. We may link to posts made by community members only to direct you to topics that may be of interest to you. This does not mean that we agree with the opinions of these community members. Their statements are solely their own and are not endorsed or recommended by TIAA.
April 15, 2019
791265