Part 1: The Financial Mistakes You Must Stop Altogether this New Year

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Accounting Firms in Dubai

We should learn the skills accounting firms in Dubai or any accountant in the planet has. As a refresher, an accountant performs financial functions related to the collection, accuracy, recording, analysis and presentation of a business, organization of a company’s financial operations, according to smallbusiness.chron.com. Without them, businesses wouldn’t know if they’re gaining profit or already swimming in debt or on the brink of bankruptcy. Accounting is not only used in business. Did you know that we are inadvertently applying accounting in our daily lives?

Anyone can be an accountant in their own right. You can hire accounting services in Dubai to get your finances straight or get basic knowledge in accounting to help yourself handle your finances wisely and efficiently.

Yet we still have a hard time saving or budgeting our hard-earned money. Sometimes we fall under the wrong perception of, as long as we have cash, we could survive. Yet we fail to track where our money goes or we simply don’t care how we spend it. The next paycheck will come anyway. The looming question is: for how long?

If only we possess the meticulousness of accountants, our financial burdens may end. Unfortunately, we are only human and we are sometimes “pushed” by certain circumstances, especially once our emotions come to play. It is not just a matter of binge eating when we are depressed or while watching a drama series till morning. Anything that involves money such as buying basic necessities, paying utility bills, or purchasing a movie ticket; accounting is in the works. However, applying basic accounting principles would be useless if it is disrupted by the effects of behavioral finance.

Belsky and Gilovich (1999) defines behavioral finance or behavioral economics as something that “combines the twin disciplines of psychology and economics to explain why and how people make seemingly irrational or illogical decisions when they spend, invest, save, and borrow money.” What are these common behavioral financial mistakes we need to be aware of and avoid?

Anchoring

An example scenario of this is buying a designer’s bag which is worth the three-month salary of an average worker. The statement “worth three-month salary” is the anchor or the reference point of the buyer to be able to purchase the bag. However, sometimes we forget that we have important expenses we need to attend to rather than buying an expensive bag just because it is just worth our “three-month salary.”

Mental Accounting

Practical individuals tend to divide or allocate their earnings once they received their pay check. They have funds intended for utility, grocery, and other miscellaneous expenses. This may be a good practice at first but if we keep on sticking to the same pattern and disregarding other financial obligations such as debts or loans, then budgeting seems futile. It just keeps piling up until we are swimming in debt. Remember that money is fungible or interchangeable; this means regardless of where it came from, it is just all the same.

Confirmation and Hindsight Bias

We tend to be irrational if we want something. An example of confirmation bias is we believe this brand of whitening cream works and we search only for information that supports our claim than weighing the pros and cons. On the other hand, hindsight bias is when “a person believes (after the fact) that the onset of some past event was predictable and completely obvious…,” investopedia.com explains. A typical example of this is like when you know that a mall has a sale every February but reject the idea that it may change in the future.

This is only the half of our behavioral financial fallacies. Watch out for our next installment.

Have a prosperous New Year everyone!

This article is brought to you by: Embassy Financial Solutions

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