What do you fear most? Is it that you’ll never get the job of your dreams? Or that you will never get the woman/man that you have a crush on? There are many types of fears and one of the types of fear we will conquer today is financial fear.
Financial fear is pretty much the fear of taking risks in your life that can have a positive impact on your financial life. This holds true for employees as well as business owners. Your financial fear can be holding you back from making more money.
Let’s dig deeper into what financial fear is and how you can overcome it.
Fear Is A Motivator
Anyway, fear is an emotion that can often motivate us to action, sometimes positive and sometimes negative. It can also leave us paralyzed in the moment, which is rarely ever good. Fear is a motivator. But we shouldn’t let it be a negative motivator, especially when it comes to our finances.
For me, financial fear rears its ugly head in several ways. For example, as I work toward financial independence, fear of things like significant periods of inflation and economic stagnation and the resulting potential losses to my investments is concerning.
Fear can also keep you from participating in investment opportunities or cause you to become irrationally invested.
Fear Can Keep You On The Sidelines
One of my biggest regrets is that I didn’t invest my money for a few years thinking a stock market crash was coming, maybe you can relate. I lived through two recessions, 2000 and 2008, which caused the stock market to plunge which put a thought in my head that another one is coming soon.
Instead of investing my money, I let fear irrationally keep me from investing in some of the best deals in a generation. If I had practiced what I preach now, doubled-down and invested heavily in that market, and dollar cost averaged my way in on the way up, I could probably already be pretty close to achieving financial independence.
Don’t let fear keep you on the sidelines.
Fear Can Tempt You to Deviate From Your Plans
Fear can also cause you to invest apart from your investment plan. When the market is way down, you might be inclined to sell, rather than to buy. Depending on your time horizon for retirement, this might make sense.
But if you’re decades away from retirement and dollar cost averaging your way to financial freedom, a falling stock market can be a great buying opportunity. Alternatively, fear of missing out (FOMO) can cause you to over-invest in appreciating market.
Long periods of run-ups in investment prices (stocks, bonds, mutual funds, real estate, you name it) can result in a type of irrational optimism called “market euphoria” where people begin to think that the market can only go up.
This results in a lack of perception of the potential risk(s) of an investment and an over-investment in the asset relative to a person’s financial goals. Don’t let fear of missing out cause you to invest apart from your investment plan.
Fear & Entrepreneurship
Another financial area I’ve seen fear play out in my own life is in the area of business ownership. It can be pretty discouraging when thinking about starting your own business to realize that around 19 out of 20 businesses fail in 10 years.
I think we need to temper the type of fear that might accompany that hard reality with both courageous and cautious optimism. Of course, we are to consider risks and count the cost before investing money and time in a business.
But, if you have an idea that could significantly improve the lives of others and maybe even your life, maybe it’s worth pursuing or at least scoping out.
Combat Fear by Mitigating Risk
Almost any action we can take has risks. When you get in your car every day, for example, there’s a risk you won’t return home. But that doesn’t keep most of us from driving. Why do you think that is?
When we take appropriate steps to mitigate risks, fear generally becomes less of a factor. For example, if I’m driving the speed limit in a mechanically sound vehicle with airbags and safety restraints in use, I feel relatively confident out there on the road.
Mitigate Investment Risks Through Diversification & Dollar Cost Averaging
So, what steps can you take to mitigate investment risks? In the investment world, there are a number of ways to mitigate the types of risks that might cause us fear. Portfolio diversification is an excellent way to reduce risk and the associated fear. Dollar-cost averaging is another great way to mitigate risks.
If a person receives a windfall of money, approximately two times out of three historically, it has been better to go ahead and invest the lump sum of the money as soon as possible. By picking some time horizon to enter the market, you’ll be buying more of the assets when prices decline and less when prices rise.
But you won’t be putting all of your money in at the highest highs (or the lowest lows).
Mitigating Business Risks With Sound Planning & Scaling
If your financial fears are related to business, like some of mine are, there are ways to mitigate those risks, too. One easy way to mitigate business risk is to develop a sound business plan.
If you can provide proof of concept that your business should be profitable, you will have both some peace of mind and a road map to potential success. Experienced business owners and organizations that support business and entrepreneurship will often help you develop and refine these plans to help you succeed.
Another practical way to mitigate business risk is to start small and scale the business up over time. That’s not feasible for every business, but it’s often possible.
The smaller your initial investment and the less of the rest of your life you give up out of the gate, the lower the stakes. The lower the stakes, the lower the risk and the resulting fear. You’d also do well to take that approach with a grain of salt, though. Low stakes often mean quitting when the going gets tough.
Fear As A Positive Motivator
Remember, fear can also be a positive motivator. For example, if you didn’t fear a large wild animal, you might not know to keep your distance. How you respond to the emotion of fear often has a whole lot more to do with the outcome than the stimulus that caused the fear itself.
For me, “keeping the wolves away” motivates me to keep working to pay the bills. Instead of fearing next month’s expenses, I use the reality that they will come as a positive motivator to keep working toward financial freedom.
Don’t let fear keep you from pursuing and achieving your financial goals. Recognize financial fear, understand it, and take practical steps to mitigate risks and overcome irrational fears.
What are some of your financial fears? What do you do to mitigate the underlying risks that accompany those fears?