Part 2: The Financial Mistakes You Must Stop Altogether this New Year

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Filipino Accountants in Dubai

Filipino accountants in Dubai always deal with financial statements that they need to analyze and check for any mistakes. They also develop budgets and must determine which expenses needs to be cut or make the cut. They must be driven by logic and adept in mathematics. There is no room for second guessing or doubt because once an erroneous financial report is released—even if it is only a misplaced decimal point—the future of a company is always at stake.

Filipino accountants in Dubai are not driven by behavioral finance while at work. However, as humans, and the moment they are outside work, they might make faulty financial decisions with regards their personal lives. What is behavioral finance? As a recap, this is the irrational decisions people make on how they spend, borrow, or save money.

On the previous post, we have discussed the first batch of these fallacies. We have learned that we should not compromise our savings even though an item is just “worth a two-month salary”. Money is fungible and no matter how good you are in budget allocation, once you’ve taken other expenses for granted such as loan or debt, your budgeting skills will be useless. You should also weigh the pros and cons of a product before buying it. And expect the unexpected regarding the erratic changes of bargain sale schedules in malls or supermarkets.

Let us continue dissecting other behavioral financial mistakes that we must end this 2016:

Gambler’s Fallacy

Based on the definition in Investopedia.com, it is “when an individual erroneously believes that the onset of a certain random event is less likely to happen following an event or a series of events.” Have you ever put your faith on the outcome of a certain event in luck, fate, by crossing your fingers, or how the stars are aligned? This is the mindset of these individuals.

The examples of these are joining in promos, betting on horse racing and playing the lottery. What is their mantra? “The more entries you send, the more chances of winning.” Well, it should be “May the odds be in your favor.”

Herd Behavior

Just how many times have you followed a certain trend or bought an item because it is the hottest on the market right now? When buying online, do you hit the “most popular” or the “top sellers” filter button to aggregate your search results? In case you haven’t noticed, you’re not really buying the best item on stock but you’re just following what the majority chose. This is the “herd behavior.”

Overconfidence

Human beings tend to overestimate their abilities or skills just because they’ve been in that situation a couple of times. An example of this is having high hopes to win in a contest even when you have to compete with hundreds of contestants. Financial examples of this is investing in stock market and gambling. To avoid being in this kind of situation, always treat every financial endeavor as a new humbling experience and carefully analyze your every move.

Regret Theory

This is the flipside of overconfidence. This is the manner of making financial decisions under the veils of uncertainty. People with this kind of behavior expect the worst out of a situation. They are not, in general, negative thinkers but it is easier for them to accept the outcome of their financial decisions if they already anticipate that something bad will happen.

It is either an individual may avoid making a decision for the fear of losing or they will do it for the fear of missing out a great opportunity.

Which one of these behaviors do you want to change? Just make sure it is not included in your New Year’s Resolution list because that is another behavioral fallacy we need to discuss.

If you missed the first part of the article, you can click this link: Part 1: The Financial Mistakes You Must Stop Altogether this New Year

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

image-url: tweakyourbiz.com 

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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