Candidate,
Here's something that caught my eye in the news:
Pinterest paid $89 million to get out of building a new headquarters building in San Francisco.
Let me repeat that — they paid 89 MILLION DOLLARS so they wouldn't have to move into their headquarters.
It seems crazy, but they were actually being rational. Building their entire headquarters would have cost $440 million, but that didn't seem as important with the recent shift to remote work during the pandemic.
So which would you pay? $89 million or $440 million?
Seems like an easy call, but most of us would benefit from thinking of our personal finances in the same, rational terms.
I get emails from people who follow me on Instagram and realize they've been paying thousands of dollars for a terrible whole life insurance policy. When they see how much they've dumped into it — and how much they've lost — that's when I get the message: "What should I do?"
The rational answer is they should stop paying, take the loss, and instead get a much simpler insurance that's not a huge scam.
Unfortunately, people HATE hearing this. And the more they've paid in, the less likely they are to switch. I see it directly in my DMs — the rationalizations of, "Well, it's not really that bad," or "I've already paid a lot into it…I think I'll just stick with it…" or "I need to figure it out."
It's the classic psychological mistake known as the "sunk-cost fallacy," a mistake that we intuitively get when we think about staying in a bad job, a bad relationship, or a bad financial product.
This is also why a third party can be helpful (for example, here are 4 signs you might need a financial advisor). It's easy to point to others and dispassionately tell them what to do. But when it comes to our own money, our natural ego protection causes us to poorly evaluate our options.
At IWT, we don't blame ourselves for this. We accept human psychology: the sunk-cost fallacy is real and natural, not a moral failing. I know this stuff and I'm just as guilty of it as anyone!
Instead, we use systems to make up for our natural weaknesses.
Examples of systems I built to prevent bad decision making:
- When I hire an assistant, I create a 21-day plan telling them exactly what they should be doing by the end of the 21 days (booking my travel, handling my scheduling, etc — it's all documented). If they're doing it, great. If not, we're not a good fit. (If you're wondering about my systems for hiring an assistant, I cover them in my Delegate and Done program.)
- I automatically invest and don't try to time the market. My amounts are pre-planned, my asset allocation is pre-planned, even the contributions are automatic. I do nothing, and by default, my money is invested. Financial system in the IWT book. (Check your local Amazon site if you're outside the U.S.)
- I set up the right environment for productivity (more about my productivity system & psychology here).
