Why we make money mistakes, and how to avoid them

The trajectory of one’s life is closely linked to the quality of one’s financial decisions. More often than not, our circumstances mirror the decisions we’ve made, both good and bad. And yet, making sound financial choices is not always as simple as it seems. With this in mind, let’s unpack some of the underlying factors that drive us towards poor financial decisions.

The role of emotions: When it comes to behavioural finance, fear and greed are often singled out as the main culprits of bad money decisions, but they are by no means the only ones. Anger, such as that experienced during a bitter divorce, can drive spouses to make short-sighted choices that jeopardise their long-term stability.

Feelings of sadness or emptiness often manifest in so-called ‘retail therapy,’ where unnecessary spending serves as a temporary emotional balm. Envy, too, plays its part, prompting people to overspend in an effort to keep up with others. Further, depression has been strongly linked to debt, with many feeling trapped, helpless, and unable to take decisive action. In our experience, emotions influence wealth creation far more than most people realise, and as such, recognising and managing our emotional biases should be a priority.

Financial fatigue: Studies have shown that financial fatigue is a very real barrier to making good decisions, particularly for those under constant financial strain. The daily grind of managing limited resources takes its toll on psychological reserves, leaving people with less resilience and clarity. Those burdened by debt may feel their situation is hopeless and, as such, are prone to irrational decisions—like spending on lottery tickets instead of repaying debt. Tired of constantly juggling expenses, people living with financial fatigue are often more susceptible to poor choices, further perpetuating their financial difficulties.

Lack of self-control: The ability to delay gratification is arguably more important for wealth creation than intelligence. Exercising self-control means looking beyond immediate pleasures and weighing them against long-term benefits. Impulse spending is on the rise, spurred on by our culture of instant consumption and the ease with which online shopping takes place. That being said, the ability to plan, consider opportunity costs, and resist the urge to spend now in favour of greater stability later is one of the most reliable predictors of financial success.

Poor financial literacy: Basic money management skills, such as budgeting, forecasting, and understanding compound interest, are seldom taught in schools or even at home. This knowledge gap often leaves people trapped in debt or locked into low-return investments that fail to outpace inflation. As such, improving financial literacy is essential, as it provides the foundation for building and protecting wealth. A clear understanding of investment risks and rewards can help investors avoid the trap of overly conservative or poorly structured portfolios that erode value over time.

Behavioural and cognitive biases: Biases can distort the way we think, feel, and act, leading to irrational decisions. While cognitive biases affect our thinking, behavioural biases shape the way we behave and react. For instance, confirmation bias may lead an investor to seek only information that supports their belief in a particular asset, such as cryptocurrency, while ignoring contrary evidence. Herding bias is another common pitfall, where investors follow the crowd out of fear of missing out, assuming incorrectly that “everyone can’t be wrong.” In our experience, relying on independent, objective advice is the best antidote to these biases.

Not seeking professional advice: Overconfidence bias often convinces people that they can manage their own financial planning despite the complexities involved. This misplaced confidence can manifest in investors attempting to time the markets, despite overwhelming evidence that very few succeed at this strategy. Whether driven by overconfidence, mistrust, or procrastination, research shows that avoiding professional advice can lead to costly errors. With this in mind, we believe that seeking independent, fee-based advice provides an important safeguard against poor decision-making.

Information overload: The sheer volume of financial information available, combined with misinformation, can paralyse decision-making. Investors often feel overwhelmed by the sheer number of products, strategies, and opinions, resulting in analysis paralysis. The danger here is that indecision becomes a decision in itself, one that often worsens financial outcomes. Effective financial planning requires cutting through the noise and focusing on strategies aligned with your personal goals and risk tolerance.

Poor financial decisions rarely occur in isolation. They are often the product of emotional biases, financial fatigue, lack of knowledge, or simple human behaviour. But by recognising the forces that influence decision-making, individuals can place themselves in a stronger position to make deliberate, informed, and ultimately wealth-building choices.

* Tapfuma is a Certified Financial Planner professional at Crue Invest. 

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