Have you ever been on a long-standing committee?
If so, then you’ve probably encountered an exchange where someone comes up with a new idea that seems logical, then someone else wonders why we need to go through all the effort to change.
“We’ve always done it this way,” they say.
They become immovable.
As we go through life, it’s easy to think this way. We get stuck in doing things the way they’ve always been done and accumulate what can be thought of as anchors.
Despite the sound, these anchors aren’t inherently bad.
Consistency in life gives us certainty, which is especially helpful when it provides safety, security, or happiness. This explains why we’re innately driven to create a harmonious home, pursue financial freedom, or in the case of work — grab that next rung on the career ladder.
However, if we’re not careful, those same anchors that we rely on for stability can inhibit our ability to move forward when necessary.
Case in point: a boat needs anchors to keep from floating away.
If the tide rises or falls, the boat may go up or down, but it doesn’t float out to sea. In that way, the anchor is doing its job — ensuring that the boat stays in one place.
But what would happen if the boat captain tried to escape an impending storm while the anchor was still down?
Absolutely nothing…because it would be stuck!
The challenge is separating the anchors that provide stability from those that keep us locked into place. When we become immovable, we don’t go backwards, and we don’t move forward either.
We’re just stuck!
When it comes to our finances, anchors can serve to keep us tied to past decisions and become reluctant to make the changes necessary to move our lives forward. Here’s a great description of anchoring:
When required to estimate the value with unknown magnitude, people generally begin by envisioning some initial, default number – an ‘anchor’ – which they then adjust up or down to reflect subsequent information and analysis. The anchor…matures into a final estimate. (Behavioral Finance and Wealth Management, Michael M. Pompian, CFA, CFP)
Here’s a common scenario where anchoring affects our investment judgment. Suppose Bob invests $5000 in mutual fund A. The market goes up and his mutual fund doubles to a value of $10,000. After some time, the fund declines to $7000. Bob wants to sell the fund, but he feels like he lost $3000, when in fact, he is ahead by $2000. He has anchored the value of the fund at the $10K level, and even an analysis of the fund might not help him decide when to sell.
How else does anchoring affect us on a daily basis? Take, for instance, something as simple as how much we pay for cable tv.
Let’s say we’ve spent $100 on cable tv for the last 6+ months, our anchor bias would lead us to believe that that’s the norm and we should budget for that amount every month going forward.
It’s the same with our grocery costs.
If we’ve been spending an average of $500 every month on groceries, we will typically factor that amount in future budgets without thinking twice.
These are just two examples of the financial anchors that can be problematic to budgeting — and TRUST ME there are many more.
The good news is, despite how ‘fixed’ any of your expenses may seem, every single one is variable — meaning they can all be changed.
And the change is quite simple to make — just resolve to spend less. That’s it!
However, remember that simple and easy are two different concepts.
Going back to the cable tv example, decide that “this month I will spend only $X on cable TV” and call your cable provider and switch to a plan that fits within those parameters.
Doing this with all of your expenses will help you overcome those anchoring biases and begin looking at your budget differently.
Want to know the best part? The opportunities are endless. Let’s see how you can save some big bucks.
Is your car payment too high? Sell it and buy a cheaper one. Heck, if you’re really looking to shake things up (and you live in a pedestrian-friendly city) explore the possibility of forgoing a car altogether and utilizing public transit as a means of transportation.
It’s the same with your house. We often unknowingly try to “keep up with the Jones’” and by doing so, we anchor ourselves into believing that we need a house that costs a certain amount. If your house payment is too much, you can get out and still be happy.
If you are tired of covering a high mortgage payment month after month, sell the house and move to a less expensive neighborhood.
When it comes to anchors, I’m reminded of a popular quote that reads: “There’s a reason why the rearview mirror is so small and the windshield is so large, because where you’re headed is more important than where you’ve been.”
Put a different way: let go of your anchors and explore the possibilities that are in front of you.
Budgets are forward-looking. So instead of being stuck in the past and letting prior decisions determine the course of your future spending, look forward — determine what you can change and start working toward accomplishing your goals today.
Pathfinder Planning LLC provides personal financial planning advice and asset management for a simple fee to young adults and working families in North and South Carolina through group classes, one-on-one planning, and ongoing advice.
Your Financial Mom blog posts are not meant to be legal, accounting or other professional service advice. Content represents the opinion of the author only. Pathfinder Planning LLC is not responsible for the accuracy or validity of content contained in third-party comments.