Overthinking your finances is common, but it can be just as damaging as not thinking about them at all. It can lead to analysis paralysis, where you become so overwhelmed with options and details that you can’t make a decision. This can stop you from taking action and achieving your financial goals.
The good news is that there are simple things you can do to stop overthinking and start investing. In this article, we’ll explore the common investing overthinking traps and how to avoid them. We’ll also cover five simple steps to start investing — all you need to know in the beginning.
Common investing overthinking traps
One of the biggest challenges of investing is overcoming your own mind. It’s easy to get caught up in overthinking your decisions, which can lead to missed opportunities and financial regrets. In this section, we’ll explore some of the most common investing overthinking traps.
Information overload
The internet and social media have made it easier than ever to access information about investing. But with so much information or different investment providers available, it can be easy to become overwhelmed. With so much information around, you might feel that you need to learn everything about investing before you can start.
Analysis paralysis
Analysis paralysis is a state of overthinking where you become so overwhelmed with different options that you are unable to make a decision. It can be caused by several factors, including a fear of making the wrong decision, a lack of confidence in your judgment, or simply being presented with too many options.
In the context of investing, analysis paralysis can lead you to delay or even avoid making investment decisions altogether. In fact, neglecting to start investing is one of the most common investing mistakes. It can have a negative impact on your financial future, as you miss out on potential gains and opportunities.
Fear of investing
Many people are afraid to invest because they don’t want to lose money. This is a perfectly normal fear, but it can be harmful if it prevents you from investing at all.
It’s important to remember that investing comes with its risks. However, over the long term, the stock market has historically trended upwards. This means that if you invest for the long term, you are more likely to make money than lose money.
Lack of financial goals
I’ve recently spoken to people who haven’t started investing because they simply don’t know what they want to achieve with their money. If you’re in the same boat, I understand. It can be difficult to know where to start if you don’t have any financial goals.
Once you know what you’re working towards, you can start to develop an investment plan to help you achieve your goals.
5 simple steps to stop overthinking and start investing
Here are five tips to help you overcome the overthinking traps and get started with investing. Remember that you don’t need to try to learn everything about investing before you start. Focus on learning the basics, and then learn more as you go. The following tips are the minimum you should know before starting.
1. Understand your goals
Understanding your financial goals is a good start before investing your money. It gives you structure and helps you make informed decisions. However, this doesn’t mean you need to have it all figured out before you start investing. Your goals can change over time, and that’s okay. The most important thing is to start somewhere and to be flexible.
Here are some tips for understanding your investment goals:
- Think about your future. What do you want to achieve with your money? Do you want to retire early? Buy a house? Travel the world? Start a business? Once you have a general idea of what you want to achieve, you can start to develop specific goals.
- Set SMART goals. Ideally, your goals should be Specific, Measurable, Achievable, Relevant, and Time-bound. For example, instead of just saying “I want to be rich”, define what rich means to you and instead, say something like “I want to have £1 million by the time I turn 50”. Alternatively, write down your dreams and work backwards to figure out how much and when you need to make them a reality.
2. Understand risks and how to mitigate them
All investments carry some degree of risk. It’s important to understand the risks involved before you invest and to take steps to mitigate them.
Here are some ways to mitigate risk when investing:
- Have an emergency fund. This is a savings account that you can use in case of an unexpected expense, such as a job loss or an emergency car or home repair. Having an emergency fund will help you avoid having to sell your investments for a loss if you need extra money urgently.
- Start small. It’s a common financial misbelief, that you would need a lot of money to start investing. But that’s simply not true: You don’t need to invest a lot to get started. Start small and invest regularly over time.
- Diversify your portfolio. This means investing in a variety of different industries and assets, such as stocks, bonds, and cash. One way to diversify your portfolio is to invest in funds instead of individual stocks. Funds are a collection of different stocks or bonds. By investing in a fund, you are essentially investing in a basket of different assets rather than putting all your eggs in one basket.
- Invest for the long term. The stock market can be volatile in the short term, but it has historically trended upwards over the long term. This means that if you invest for the long term, you are more likely to make money than lose money.
3. Use a tax-efficient investment account
Tax-efficient investment accounts are accounts that allow you to invest your money with reduced tax liability. This means that you will keep more of your earnings, which can help you grow your wealth faster.
There are a number of tax-efficient investment accounts available in the UK, including:
- Stocks and Shares ISA (S&S ISA): This is a type of ISA that allows you to invest in stocks, shares, funds, and other investments. You can contribute up to £20,000 per tax year to a Stocks and Shares ISA. Any investment growth is tax-free, and you can withdraw your money at any time. If you are not planning to use your money to buy your first home, this is likely the best type of investment account for you.
- Lifetime ISA (LISA): This is a type of ISA that is designed to help you save for your first home or retirement. It allows you to contribute up to £4,000 per tax year. The government will bonus your contributions by 25%, up to a maximum of £1,000 per tax year. You can withdraw your money from a Lifetime ISA tax-free if you are using it to buy your first home or retire after the age of 60. However, if you withdraw your money for any other reason, you will have to pay a 25% government withdrawal charge. It’s also worth noting that if you are looking to withdraw the money within 5 years, it’s often advisable to keep the money in the account in cash instead of investing it.
You can even pay into two ISAs in the same tax year provided they are different types of ISA. It would be fine to pay into both a Lifetime ISA and a Stocks & Shares ISA in one tax year as long as you’re below the £20,000 limit.
Tax-efficient investment accounts can be a great way to save money on capital gains tax and grow your wealth faster. However, it is important to choose the right account for your individual needs and circumstances.
4. Invest on autopilot
One way to overcome analysis paralysis is to take the decision out of your own hands and invest on autopilot. What I mean by this is to try and simplify your investments as much as possible so you don’t need to think about them constantly. Here are two helpful ways to do that:
1. Automate your investments. Setting up a regular investment plan is a great way to automate your investments. A regular plan can be a standing order that instructs your bank or investment provider to transfer a certain amount of money from your current account into your investment account on a regular basis, such as monthly. This type of automation has a number of advantages, including:
- It is convenient and easy to set up.
- It helps you to avoid having to make an investment decision every month.
- It encourages you to invest regularly, even if you don’t have a lot of money to spare.
- It can help you to benefit from compounding returns.
2. Invest in funds. We discussed previously how investing in funds can be a great way to diversify your portfolio and therefore decrease the level of risk. What’s more, investing in these baskets of multiple assets can minimise regular decision-making in your investing. Sure, you will still need to choose at least one fund to invest in. But if you choose something greatly varied such as S&P 500 or FTSE Global All Cap, you can often just set it all up and leave it doing its magic with automated payments to the fund.
5. Focus on the big picture
If you’re spending all your time trying to find the perfect stock to buy at the perfect price, you are missing the bigger picture. The most important decision is whether or not to invest at all.
For example, let’s say that you have been researching the stock market for months, but you are still not sure what to invest in. As a result, you have not yet invested any money. The opportunity cost of your inaction is the potential investment returns that you are missing out on. For example, if the stock market goes up by 10% in a year, you have missed out on a 10% return on your investment. The longer you wait to invest, the greater the opportunity cost.
That said, when you are starting your investment journey, remember that perfection is the enemy of making good decisions. It is impossible to make perfect investment decisions. So don’t be afraid to make decisions even if they’re not perfect. When making investment decisions, it is important to do some research and weigh the pros and cons of each option carefully. However, it is also important to be decisive and to act even if you do not have all the answers.
Conclusion: Stop overthinking and start investing
In the world of money, it’s important to strike a balance between thinking and overthinking. Overthinking your finances can freeze you up, stopping you from taking action and reaching your goals. But the five simple tips covered in this article will help you focus on the essentials, stop overthinking and start investing as a beginner. Remember, you don’t need to be an expert to get started. The cost of doing nothing can be much higher than making a few imperfect decisions. So, take the plunge, start investing today, and watch your money grow over time.
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Great tips! I’m a chronic overthinker who wants to invest more but it overwhelms me so much. Looking forward to using some of these strategies to try and get started.