Personal Finance Essentials
Compartmentalizing Bias
The Psychology of Investing > Compartmentalizing Bias
Personal finance is complex, and it’s easier to tackle one issue at a time. Unfortunately, two seemingly good decisions can produce one bad outcome. Some examples:
You’re carrying a credit card balance while also saving money for your child’s college tuition.
You agree with the need to diversify your portfolio, but most of your money is invested in the stock of the company where you work.
You’re making extra principal payments to pay off your mortgage while lamenting that you aren’t saving enough for retirement.
You open a brokerage account but don’t consider how the account should be registered for estate planning purposes.
Farming vs. Foresting
Financial success requires seeing your entire financial picture at once – like a forest ranger surveying the whole landscape – rather than addressing one piece at a time like a farmer tending individual crops. In each of the scenarios above, the two decisions contradict each other, effectively reducing – and sometimes preventing – your ability to accumulate wealth. Only by viewing your complete financial situation simultaneously can you make decisions that truly move you forward.