Gail Vaz-Oxlade's Blog, page 84

This & That: Misconceptions & Misunderstandings Edition

S wrote:  I am dating a guy who is a single parent so I understand his financial responsibilities are greater than my own.  I also make a fair amount more than him.  My question is do I help him out as we are in a relationship or let him fend for himself as I do not really have the extra cash to help and would have to use credit.  (I don't want to hurt my own situation but feel bad I do help out with grocery shopping cooking etc as he was throwing $ away on take out.)  Also we have very different personalities when it comes to handling finances I save and can do with out but he's feast or famine and if he thinks he has some extra $ it's spent.  How do we come to a happy medium?

Gail says:  You should never,  NEVER put yourself at risk financially to "help" someone else.  It makes no sense for two people to be in a mess.  No matter how much you love a body, putting your own financial foundation at risk is not the answer.  Help in ways that you can — as you are doing — but don't "bail him out."  He's going to have to learn to put some of that feast money away for those famine days.

A wrote:  I am a hairdresser and work from home, my income is very unpredictable and it sometimes varies drastically from month to month, how do I figure out what my yearly income is to be able to fill out your budget sheet as accurately as possible.

Gail says:  You're going to have to use a tiered budget to deal with your variable income.  Make three budgets.  Budget A covers your most basic needs:  rent, food, bills you must pay every month.  Budget B is for things like clothes and entertainment — nice to have but you won't die if there's no money for it.  Budget C is for the very nice to have — more clothes, vacations, etc.  Base your A budget on the very least you'll earn in a month.  As you earn more money than you need to buy the things on your Tier A, you can buy some of the things on Tier B.  But you always have the basics covered.  Make sure you're building up a good emergency fund too.

B wrote:  I watched your show just recently and I think you're great.  You've really motivated me to get serious about our finances this year, right now and not waste another day or a minute in any sort of procrastination. I am married nearly 8 years, and we have 5 year old daughter.  Both my husband and are employed and make about $8,000/month (net) with expenses of approximately $3,700 (this includes rent, two car payments, insurance, groceries, utilities, and childcare).  However, we managed to save absolutely nothing all this time.  We frequently disagree on what are reasonable (necessary) expenditures and how we can do better.  We eat out quite a bit, and that I believe is where most of our money vanishes. Maybe we eat too much overall, b/c you see we buy groceries, but we also eat out.  The bottom line is that we need to save and we both agree on that.  We both agree we want to own a home, but I am beyond the strategic planning stages at this point, and I want to start implementing immediate action to start seeing immediate results.  We do not drink/smoke or gamble so there are no bad habits to support except I think we've somehow managed to live above and beyond our means for so long that we cannot seem to get ahead.  We owe nearly $10,000 to former landlord for rent, another $1500 for former nanny service we had.  There is some debt that we'd like to clear up so we can move forward and begin a new lease on life.  All in all our debt is not unmanageable, it would take perhaps $50,000 roughly to clear up some things and we could be debt free, but it seems more gigantic than it really is.  Does it seem reasonable that we could save somewhere between $200-400/wk so that we can save money and get ahead?  I wish I could be on your show or something.  I would absolutely do anything to get this behind us.  We want to do so many things, but we can't because of this debt.  We both want to travel abroad, or even a vacation within US is out of question at this point.  We want to do more for our daughter, and more importantly we both agree that we want to own a home.  Our credit scores are lousy and I am having frequent (daily) asthma and anxiety attacks because of this. I am desperate please help!!!

Gail says:  If, as you say, your income is $8K a month and your total expenses run to less than half that, I do not understand why you've got any debt.  Perhaps it is that you're grossly underestimating what you've been spending.  I recommend you use the tools on my website or get my book, Debt-Free Forever, and follow the steps outlined to figure out where your money has been going. Then decide how much to put towards debt every month.  You clearly have the means to have a great life.  Now it's a matter of figuring out your priorities.

Bob wrote:  We have read your book and wow.  I have been scared straight.  My wife and I now know where we stand.  $57,000 in debt.  $40,000 of that are student loans.  We have a salary of 99,000 a year with a 1400.00 mortgage.  My question is:  We think we can be out of consumer and student loan debt in 2 years if we crack down.  Do you think once this is done it is a good idea to pay off the home mortgage next….  I hear some financial experts who say not to do this and some that swear by it….  Thank you so much………..

Gail says:  It is an American thing to not pay off your mortgage because the mortgage interest is tax-deductible.  But this is the kind of delusional thinking that has got the U.S. into the mess it is in.  That being said, you should also be having a life, and as long as you're on track to have your mortgage paid off by the time you retire, you're doing fine.  Split the diff:  incorporate 1/3 of that money into your budget for a good life, save 1/3 and put 1/3 to your mortgage.

C wrote:  I LOVE your show and watch it all the time.  I have a question:   I have $15000 debt on personal LOC. 2.5 % above prime.  I have $226000 mortgage at 5.09%.  I owe $500.00 on my VISA.  I make $80000/year my husband is on disability and we have a 2 year old in daycare.  Besides paying off visa first, should I concentrate loc repayment on extra on mortgage?  My mortgage is new (2007) currently paying $773.00 every two weeks.  Any advice?

Gail says:  Even though the interest rate on your mortgage may be higher than on the line, the line should be paid off first because it is callable credit, meaning the bank can ask for it's money back at any time and you'd have to pay up.  So get rid of the credit card debt, then work on the line of credit.  Once that's gone, focus on the mortgage.  Make sure you're also setting aside a little something for emergencies and long term savings.  When the line is gone, build up your emergency fund.  Then split what you were spending to pay down your line 50/50 between repaying your mortgage and having some fun.

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Balance & Choice

Debt free feels good. Hey, I'm all for feeling good and for being debt free, but answer me this: When your roof starts to leak will you still be fine because you have set aside money for home maintenance? No. You mean you don't have a home maintenance account?

How about if your hours at work get cut back or your partner get's sick? You do have an emergency fund, right? Nope?

Or disability insurance? Not that either, eh?

No will? Well, hey, you're probably never going to die.

Being out of debt does not mean you're financially healthy. Having all your financial bases covered does. And you'd think the smart people would know that, wouldn't you? After all, if you don't have an emergency fund, if you don't have disability insurance, if you aren't saving for the long term, then it is only a matter of time until something you haven't planned for pops up and pushes you out of balance.

With no emergency fund is it your plan to use credit to see you through? All the smarty-pants who are telling you to get a line of credit and use it as an emergency fund would have you believe that this is a viable option. But when use credit because you couldn't defer your immediate gratification long enough to balance your financial plan, you're asking for trouble. Voilá, you're back in debt and scratching your head. And even if life throws you a curveball – hey, life throws plenty of curveballs — if you have to use credit to cope, will your next challenge be coping with the debt repayment. AGAIN!

The only way to find balance is to be able to hold more than one thought in your head at the same time… actually four thoughts, that's all:

Don't spend more money than you make, so no credit card or line of credit balances, and no overdraft
Save something; how much depends on how old you are and how much you've already saved (Read Never Too Late)
Get your debt paid off; consumer debt first (Read Debt-Free Forever)
Mitigate your risks with an emergency fund and enough of the right kinds of insurance.

Four simple rules. Not too much to keep in mind. Not too hard to understand. Taken individually, you can create a war with each rule fighting for territory and winning only at the detriment of the others. Taken together you can build a rock-solid financial foundation. Which would you rather?

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Mixed Messages

One thing that drives most people crazy about money is the number of mixed messages the financial world sends out. There are the companies who throw credit at you, offering you cards with the latest bells and whistles: points to fly, free travel insurance, cash back.  They waive low interest rates under your nose and promise you that you can have everything you want right now for just a small monthly minimum payment.  On the other side of this see-saw, the experts are telling you how evil credit is, how it will sap your cash flow and how stupid it is to pay interest. Who would you rather believe? The guy who tells you it's okay to go shopping, or the guy who calls you a moron for spending money you haven't yet earned? Rhetorical question, right?

Then there are the mixed messages about saving for retirement: On one side of the teeter-totter are the Joes who tell you that if you aren't making the maximum contribution to your RRSP every year, cat food will be too good for you. On the other side are the fellows who claim that you shouldn't even put money in a retirement plan because the government will give you all you need. Who would you rather believe? The guy who tells you to go ahead and spend all your money because saving is a waste or the guy who tells you it doesn't matter what you do, it won't be enough and you're a loser? Hmm.

The insurance industry has it's own playground toy: On one side sits the boys in the t-shirts that say, "Term insurance is the best." The lads on the other side are wearing t-shirts with the slogan, "Permanent insurance is the best." So which is it?

Is it any wonder that people are confused?

While people typically associate me with debt, I'm here to tell you it's not all about debt. Credit isn't the monster. Ignorance is. And it doesn't matter if you're buying a house, buying insurance, or buying an investment, if you don't have a balanced approach to your financial life, you're going to be off-kilter.

People face this dilemma when they're trying to decide whether to pay down their debt or save. When the media-focus on retirement saving heats up, the push to save can make a person question the pull to pay down debt. When interest rates are rising and those in the know propound on the benefits of being debt-free, saving is relegated to the back seat.

Doing anything whole hog and the to the detriment of the other parts of your financial life is not only shortsighted it's dumb.

Sure, debt repayment is important. But so is having some money set aside for emergencies and to grow for the future. Debt-free isn't the Holy Grail. It's simply one step along the way to finding financial balance.

Tomorrow: More on Balance & Choice

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Living Together is NOT the Same as Married

Perhaps because so much of our legislation recognizes common-law relationships as the equivalent to married, people are under the misconception that as long as you've lived together for a set period (one to three years, depending on which province you live in) or had a kid together, you're as good as hitched. Maybe in your hearts and in your minds, but not in your wallets. And the real tell is when it comes time to get un-hitched.

Married people have rights under the law that common-law couples do not. The matrimonial home, for example, is the place where two married people live together. It doesn't really matter who put what into the home, or whose name is on title, as long as you've lived in the house together and you're married, it's considered a joint asset.  Not so for common law couples.  If you don't officially tie the knot, property rights cannot be assumed. In fact, property that you bring into the relationship continues to belong to you alone, so the end of the relationship does not automatically mean a 50/50 split.

If you've contributed to the upkeep of the home, if you've had a hand financially in improving the property, or if you've made payments against the mortgage, you can try to get that money back by going to court. But it'll take a trial to settle any dispute that can't be handled amicably. That'll cost big money; perhaps even more than you're trying to recapture. And the only way you stand a snowball's chance is if you have loads of evidence of your contribution: receipts, cancelled cheques, bank statements showing auto debits to pay the mortgage, and the like.

While cohabitation agreements may seem like a cynical CYA, they're a better idea than leaving yourself exposed. Your cohabitation agreement can describe what you'll contribute and how your assets will be divided in the event the relationship doesn't cross the finish line. Cohab agreements are particularly important where there's a significant difference in what each person is bringing into the relationship and/or will be earning during the relationship. And while not everyone is keen on the idea – as many aren't on pre-nups – having the discussion is better than playing the "well, let's just see how this turns out" game.

For the cohab agreement to have any teeth you need to both enter into it willingly and with separate legal counsel.  You'd be wise to identify which property you want to have treated as separate property, and how joint property will be split? Will it be 50/50, 60/40, or some other ratio that seems fair to both? Make sure you also identify which debts will be shared. Better yet, share no credit (except for the mortgage) and keep this aspect of your money completely separate.

If there are children from a previous relationship, child support is covered under the law, but you should talk about how their ongoing support will be handled. And if one partner will stop working, even though spousal support is also covered under the law, support should be negotiated as part of the agreement so that everyone knows exactly where things stand.

To save money on the legal execution of your cohabitation agreement, do your homework upfront, have the things you need to include written out, and then see a lawyer to talk about anything you may have missed. You can initially do this together, but then each of you will have to seek independent legal advice to make sure the agreement meets the test of not being coerced or one-sided.

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Happy Is as Happy Thinks

I'm a believer in Happy. I was once accused of being "a refugee from a Disney movie" because I'm such a believer in Happy. In fact, I believe the purpose of a life is to be happy and to make as many other people as possible happy.

Like Martha Washington, I believe that, "The greater part of our happiness or misery depends on our disposition and not on our circumstances."

If you're determined to be happy, there are some things you can choose to do that'll help sing along with the Bluebird.

1. Revel in the positives. Focus on the moments when you experience strong positive emotions. Those moments are vivid and detailed. They can be work-related, home-related, love-related. It's that feeling you get when your daughter cuddles up beside you, you put the finishing touches on a perfect meal, or you accomplish something that makes you yell, "I so rock!" While negatives are always working their way into our lives to bring us down, having pictures of our positives that we can flip to in our minds can help assuage the chemical reactions that set us on a downward spiral. The next time you burn the chicken, flip to the picture of your cat playing with the string and make yourself relive the moment. Smile.

2. Accept what is. None of us is good at everything. Some of us don't like to iron (me!). Some of us don't like to dust (me!) Some of us don't like to vacuum (me!). I do love to organize, to fold laundry and to cook: savory, not sweet. I love to write. I love to help people. And while I don't love to drive, I love listening to audio books so I turn my driving into audio-book time and then I love getting into my car. If you're always focused on what you don't like or what you feel are your shortcomings as a partner, a mother, a friend, then you can't possibly be happy. Accept that you're no good at lawn-cutting and weed-pulling and either eliminate the need, or get someone else to do it. (Isn't that a great way for your kids to earn some extra money? Or maybe Annie will weed for you, if you cook up a batch of those crab-cakes she loves so much.)

3.  Say "Yes." Some people have trouble saying, "No." A mountain has been written about recognizing our limitations and not allowing other people to take advantage of us by learning to say "No." But what of the people who have so much trouble saying, "Yes." I have a number of friends who are Negative Nancy's. No matter what you say to them, they have a way to work "No" or "I can't" into their response. If you want to be happy, you need to reframe your thinking so that you move from No to Yes. "Yes, I'd love your help." "Yes, I'd really like to come out with you." "Yes, please share that with me."

Happiness is contagious… this is the "make other people happy" part. Since just smiling at people can pick up their mood, and feed back into your mood, there's simply no downside to happy.

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Are you Financially Unfaithful?

People lie. House says it, so it must be true. And one thing they lie about is how much money they are spending. But when partners are lying to each other, well, things aren't going to come out all sunshine and daisies, are they?

Over the years of shooting Til Debt Do Us Part and, now, Princess, I've seen couples rip tags off stuff, hide purchases, and straight-out lie about what they paid for something. Men lie. Women lie.

A survey commissioned by CESI Debt Solutions in the U.S. says that 80% of married couples spend money their spouse does not know about. Huh? And more than 18% of marrieds have credit cards their spouses do not know about. Wow!  That's a lotta lyin'!

When asked why they kept their spending secret, more than 60% said it was to avoid problems at home. Hey, if you have to lie about what you're spending, doesn't that send a signal that maybe you shouldn't be spending the money? Is it really worth losing your partner's trust to buy stuff you don't need and maybe won't even use? After all, after you have your first five sporty jackets, how much wear will the next one get? Or how much did you waste on the one that's going to just sit in the cupboard?

I've seen couples make deals relating to setting a purchase limit as in, "We won't buy anything for more than $150 without first talking about it." One partner gets it, and stays true to the intent. The other shops up a storm, always coming in at just under the $150 bar so they're on the right side of the rule… but not the intent of the rule.

Some people become so frustrated with their partner's inability to hold to the goal they've set together that they remove their mate's access to the money, assigning them an allowance.  So you'd rather be treated like a child than man-up and learn to stay true to the objective? Really?

If having a plan is what it'll take to raise your family, buy a home, go on vacation or have some money for retirement, and it takes two to make it work, you better start taking the commitment you've made to your mate seriously. If this sounds like you're sacrificing your independence, you are. That's because when you mated and had a family, you took yourself out of first place on the list of priorities in your life, and moved the good of the many before the good of the one.

Secret spending and hidden debt can destroy a relationship. Screwing up the plan because you can't keep your hand out of your wallet is stupid. And lying about what you're buying, how much debt you have, and what you really want is a sure way to end up in divorce court. It may take a while. But that's where you'll be. But you know that… right?

Sure you do. Folks aren't totally oblivious to the implications of their financial infidelity since 38% of those surveyed were concerned the revelation of their secret spending would result in their spouse booting their butts.

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RRR: Ways to Reuse Styrofoam

Styrofoam is a trademark of the Dow Company but the material itself is called polystyrene. Styrofoam is tough to recycle. So tough, in fact, that when municipalities try, then end up losing their shirts. So you're stuck filling up a garbage bag. Or you could get creative.

1. My number one use for Styrofoam is as the bottom layer in my large planters. You're supposed to put rocks and stones and stuff in for drainage, but Styrofoam works just as well and is way lighter so if I want to move those pots around, I don't break my back. Did I mention that it's free?

2. Large pieces are great for creating stamps for kids. Use a cookie cutter. Cut the shape out. Pour some paint in a tray and let your child stamp away. Make a set for your local kindergarten or daycare centre.

3. Use Styrofoam egg cartons as a seedling starter or to house golf balls. When the kids were small, I used to use them as paint containers. I'd buy my kids' paints in large bottles and then pour a little of each colour into the egg carton wells, leaving a few empty so the kids could mix their own colours.

4. You can also use those cartons to keep craft supplies neat and tidy.

5. Decorate and create a sewing kit for a youn'un leaving home. You can put replacement buttons, pins, needles, thread, snaps, elastic, and a rolled-up measuring tape into each of the wells.

6. Use Styrofoam veggie trays to insulate the inside of a doghouse or other outdoor structure that you want to insulate. (Don't use inside your home because they are highly flammable.)

7. If you're a boater, threading some packing peanuts onto your key chain will ensure it doesn't sink when it falls into the water.

8. Use packing peanuts or Styrofoam blocks that have been broken up to stuff an old pillowcase and you've got a pet bed for Kitty or Poochie.

9. Use as a craft supply. You can make caterpillars, ladybugs and tulips from egg cartons. You can use trays as the backdrops for pictures. (Don't reuse trays that held meat or chicken.) You can stick straight pins loaded with beads into Styrofoam shapes to make ornaments for Valentine's Day and Christmas.

Okay, your turn. What do you do with your Styrofoam?

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The A, B, Cs of Money: M

MARGIN: When you borrow money to buy a security you are said to be "buying on margin." Investment houses often offer the option of letting you use their money to increase the number of units of an investment that you can buy. This is wonderful when the value of the investment goes up since buying on margin amplifies your profits. But margin-buying comes with a downside. Should your investment fall in value, the loss will be amplified. Well, you could just hold the investment until its value goes back up, right? Maybe not. Since the investment house has the right to "call your margin" – ask for it's money back RIGHT NOW            — that could force you to sell those investments that are under water at exactly the wrong time. Oh well, you win some, you lose some.

MARGINAL TAX RATE: Canada operates under a graduated income tax system, so your tax rate goes up as your income rises. Your marginal tax rate is the rate at which your last dollar of income will be taxed. If you get a raise at work, and you watch your income taxes deducted at source rise dramatically higher, it's your Marginal Tax Rate at work. If you make an RRSP contribution, the deduction is based on your marginal tax rate. Careful though; remember as your deductions take effect, your marginal tax rate will fall which means you won't get as big a bang for your RRSP dollar in terms of tax savings. This is one reason why those big, fat RRSP catch-up loans are such a BAAAAAAAD idea.

MARKET CAPITALIZATION: This is the moolah somebody would have to pony up to buy a company. Market capitalization is calculated by multiplying the total number of a company's shares by the current price per share. So, if a company has 10 million shares, and the current price is $25 per share, then the company's market capitalization is $250 million. Typically companies are categorized into large cap, mid-cap, and small cap. While these numbers can move, large cap companies tend to be with over $1 billion in market capitalization, mid caps run between $500 million and $1 billion and small caps have less than $500 million.

MER: The Management Expense Ratio on a mutual fund is what it costs the company to operate the fund. The MER is calculated by dividing operating expenses by the average dollar value of its assets under management. Since these expenses are taken from a fund's assets, they lower the return on the fund. People like to get all knotted up over MERs. As far as I'm concerned I'll pay to get a better than average return – smart managers deserve to be compensated – but I'm not going to fork over good money to get what the index returns (I can buy the index for that) or LESS.

MORTGAGE: From MORT (death) and GAGE (promise) a mortgage is your promise to stay in debt until you die! No, not really. Although people used to aim to have their mortgages paid off before they died so they could pass their homes on to their children free and clear. That was back when generations lived in a single home. Now people are split into two distinct groups: those hell-bent on becoming mortgage free ASAP and those who are piling more and more debt into their homes to satisfy their consumer-itch. If you plan to retire with a whopping mortgage, you're a fool. If you're racking up consumer debt on a line of credit or on credit cards while you rabidly attack your mortgage, you're a fool. BTW: they guy borrowing is called the mortgagor and the guy lending is called the mortgagee.

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Denial is a Fool's Game

One of the reasons that Til Debt has such a big following is that it made the couples look at how they were dealing with their money – and it made viewers at home think about it too. If those people on TV could be in such huge denial, could people at home also not know what was going on?

Yup. I've had dozens of letters from folks who have bought Debt-Free Forever even though they weren't "in serious trouble", and in working through the exercises found they were in fact in denial about where their money was going.

Recognizing you're in denial is the first step to getting your financial life in order. As long as you maintain the illusion – or should I say "delusion" – you can't move from where you are now.

How do you know if you're in denial?

Do you think because you're keeping up that you're doing fine? Loads of people believe that a lack of disaster means they're successfully managing their money. Often it's just that they haven't had any major crap hit their fan yet. Sure those interest payments are only a small part of your monthly income. But if your income falls by even a small amount you'll watch that interest gobble up more and more of your disposable income.

Do you think YOUR situation is different? I run into this one a lot. Everyone thinks their circumstances are unique. Well, we're all unique. And you do have to find the way that will work for you. But if you're using your uniqueness to violate the basic principles of sound money management then you're in denial.

Do you believe that financial stability will come with time? Some people like to delude themselves into thinking that tomorrow will be better. They buy lottery tickets. They're always talking about how their incomes will go up. They're waiting for their expenses to go down (read, the kids to leave home). Hey, I know lots of people for whom time has not brought more money or more financial stability. If you're waiting for some magic date in the future to take control of your money and your life, have you set the date?

Do you work hard at minimizing the problem? If you quote your debt in small chunks instead of adding it all up, you're in denial. If you look at only the minimum payment instead of what it would actually cost to pay off the debt, you're in denial. If you claim to be saving, but you're planning to spend the money on a new car, a family vacation, or heading back to school, you're in denial.

Do you hide your money issues from family and friends? If you bring home shopping bags and hide them from your mate you're probably worried about what (s)he'll have to say about your shopping.  Ditto if you rip off tags, have a credit card your partner doesn't know about, or took out a loan without telling your mate. And if you haven't told your mother, brother, best friend that you're barely making your minimum payments on all your debt, you're hiding. Fess up and get busy making the problem better.

Do you think being in debt is "normal?" Well, it may seem normal given the huge number of people who are up to their eyeballs and the willy-nilly way in which credit has been handed out. But it's not. And if you haven't woken up and smell the coffee yet, you're in denial.

Do you say, "Yes, but?" Are you a master at rationalizing your spending? Even when you don't have any savings? Sure you have to live. Sure there's got to be some fun. But if you haven't taken steps to create a sound financial foundation, you're deluding yourself into thinking that bad things can't happen to good people. And you're wrong. If you feel you have to justify spending the money you spent, then you're probably in denial.

Do you get angry if you are confronted? I've run into this a few times on the show – couples or individuals who get royally pissed because they don't want to hear the truth about their money situation.  You've seen one partner blame the other, trying to shift attention away from their own negative behaviour. But can you see when you do it?

Can you see yourself in any of this? If you can, it's time to get busy facing up, 'fessing up and getting to work to make things better. Or you can continue to live in denial until the whole house of cards comes tumbling down. You decide.

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Hindsight is 20/20

Isn't it amazing how smart we are when we look backwards. Looking forwards, not so much. If you look backwards you might think, "Gosh, I wasted a lot of money." Looking forward you think, "I want it, I want it, I want it."

There's actually a name for this seeing-a-clear-picture-looking-back phenomenon. It's called "hindsight bias" and it walks hand in hand with another bias: confirmation bias.

If you believe that something that happened was totally predictable after the event actually occurred, you've got hindsight bias. In our desire to find order in the world, we want to believe with all our hearts that things are predictable. That's why you have all The Spurts coming out of the woodwork AFTER a major market event saying things like, "The signs were all there." Really? Signs. Hmmm.

Hindsight bias leads to overconfidence. That's its major downfall. After all, if you believe that you could actually have predicted the last two market run-ups and downturns, you'll also believe that you can predict the next one.  You can guess. And you might be right some of the time. But guessing is no good when it comes to money you've busted your butt for, and hindsight bias isn't your friend.

Confirmation bias is the idea that we make a decision and then look for information that supports that decision, completely ignoring information that runs counter to what we want to believe. See all the people who believe that real estate values can only go up, jump in with little down, and then watch their lives climb on a rollercoaster to hell. Prices drop, their downpayments evaporate, and they have nowhere to go but back to the beginning.

This happens all the time in the world of investing. You get a hot tip from someone on TV, in the newspaper or at a cocktail party and then set about doing your research to prove the tip is correct. You cheer for all the green lights. You barely brake for the red ones. Yup, you've been bitten by confirmation bias.

I recently worked with some folks who were suffering confirmation bias to such an extent that they actually ignored the numbers. The decision was whether they could afford to keep their home or should sell and pay off their debt. Since the house was more than they could manage – they were spending upwards of 60% of their income carrying the sucker. It wasn't just about the existing debt. It was also about the rate at which that debt would grow if they didn't do something.

The numbers clearly showed that if they sold, they'd be debt free and could then begin rebuilding a downpayment for their next home. But that's not what they saw. They believed that they'd lose money on the sale of the house, so there was no point to selling and starting over.

The solution to hindsight bias and confirmation bias is PERSPICACITY. That's the ability to see things clearly. You might have someone like this in your life: the person who looks at the situation and knows exactly where all the pieces are. They don't juggle them to make a picture: they see the picture the pieces actually present. Instead of looking for proof that a particular decision is right, these people tend to look at the downsides of all the positions and then choose the least offensive.

They end up being the person everyone goes to for advice, or the person everyone avoids because they can't stand the bad news. Find your person with perspicacity and you're well on your way to making better decisions.

You see, even if you're aware of confirmation bias, that's not enough to stop you from falling into it's sticky clutches. You need to find someone you trust to help you by being the voice of reason. Their job is to look at the facts and, because they have no vested interest in the outcome, tell you what they see. Your job is to take their advice seriously.

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