Every successful journey requires some level of good fortune. Even in the midst of ‘great depression,’ pun intended, and creeping normalcy, those fortunate and disciplined enough are able to cut their losses short. Creeping normalcy or death by a thousand cuts refers to how we start to accept one thing, and then a little worse, and a little bit worse after that; and before we know it, we’re tolerating the intolerable and our concept of “normal” gets changed. In other words, we subconsciously accept major changes as normal situations if they happen slowly and in unnoticed increments. This is why tracking these changes and cutting your losses early enough could prove to be a huge win.
The key to cutting your losses short is understanding and reconciling with the idea of sunk cost. In economics and business decision-making, a sunk cost is a cost that has already been incurred and cannot be recovered so it should never be factored into your next decision. In a relationship for example, we try to hold on to a sinking ship because of all the time, money and sweat we’ve already invested. That’s a classic case of the sunk cost fallacy! Or, let’s say you buy tickets to a basketball game. On the day of the game, you break your ankle. Even though you’re injured, you decide to fight the pain and go to the game because otherwise “you would have wasted your money”. Boom! You just fell for the sunk cost fallacy again! Yes, you’ve spent the money but you can’t get it back regardless of any action you take…if you’re main purpose isn’t to have an excellent time at the game, then you’re simply just making your life worse by going. I couldn’t have explained it better than Elizabeth Grace Saunders of 99u who also echoes the sentiment of sunk cost while indicating when you should quit:
Does this sound familiar? “If I had known how long this would take, I never would have started.” When you encounter these sorts of scenarios, the emotional response is to feel that you must continue because of how much you’ve already put into the project. (In the financial world, they call this “sunk costs.”)
However the rational way to approach this scenario is to consider whether to quit in this way: “I have invested quite a bit of time and effort in this project. But now that it’s taking much longer than expected, is the value of completing this project worth the amount of the additional time needed to finish it?”
Here are a few more indications to help you understand sunk cost and cut your losses short:
- Lending Money to a Friend – A wise man once said that whenever you lend money to a friend, you must choose between the money and the friendship…In most cases, if you push too hard, you lose both. So when you lend money to someone especially family or friend, go ahead and cut your loss and treat as sunk cost (if it comes back, then excellent.) If you’re smart enough, always make sure you have quick document drafted on paper for them to sign (date, amount, repayment terms.) Trust me, it can come in handy.
- Relationships – Relationships are not just about finding love and emotional connections; there’s also the financial and time investments. From Don’t Fall in Love, we concluded that relationships could easily cost you $100k even before marriage so cutting your losses short with relationships could prove to be very cost-effective. To keep it short, the person you choose to date needs to be exactly what you want before you meet them. If you find yourself right for them but not vise versa or you find yourself trying to fix them or change something about them, it’s time to cut your losses! I’m not advocating divorce so if there’s already a wedding ring involved, I beg you to try and work things out unless of course your marital vows has been broken.
- Vehicle – Yes, I understand that money is tight and you’ve invested so much money in your car…but remember sunk cost? Yep! Those investments are never coming back. So once your car isn’t safe anymore, repairs and maintenance costs are higher than your car’s market value, your monthly repairs equal or exceed the monthly payment on a new car, it’s time to cut your loss and get another car. Note that I said “another car” and not a new car. In fact, I’d recommend a used car; they’re always more cost effective than new cars especially if your down payment takes care of a bulk of the cost. But of course you’ll have to do your homework and figure out which path makes more sense for your finances. Another consideration for cutting your losses short is mileage. Once your car gets between 90k and 120k miles, it’s time to start weighing your options because that’s when the timing belt, water pump and other expensive intricacies start to disobey! Ronald Montoya of Edmonds.com cautions not to let the Clunker Make the Choice for You:
Everyone seems to have a theory on when to repair a car and when to get a new one. But you know your needs and your car’s history better than anyone else, so use our tips as a guide, not gospel. Buying a new car might seem like the easy way out of a high repair bill, but depending on your circumstances, it may not be the best financial decision. On the other hand, a car that’s teetering on the edge of oblivion can keep you awake at night.
It’s better to part with that car on your terms rather than waiting for it to break down at exactly the wrong time. If you make the decision while the car still has some value, you can sell it or trade it in, turning the cash into a down payment on your next car. If you also can take advantage of the incentives and rebates being offered on new cars today, you may find that a new car is within reach. And it’s hard to put a price tag on the peace of mind that a new vehicle can bring.
- Do It Yourself Projects – Besides the fact that there are some DIY projects you should never do yourself (molding installation, floor refinishing, electrical work, tiling, roofing, gutter work and all ‘permit needed’ work), you should also know when to cut your losses with your current DIY projects and hire professionals. Once it’s obvious you don’t have the required skills to pull off an excellent job or your extra effort is not bringing extra results, it’s time to cut your losses and at least get a few professionals quote you! Don’t be penny wise and pound foolish!
- Jobs – Please don’t quit your job…especially if it’s your only source of income and you’ve got raging financial obligations. For now, you’re only advised to quit your current job once you’ve found another that either pays more and/or adds more value to your life or when your ‘side hustle’ makes a lot more than your current job (with benefits that do not show up on your paycheck factored in.) The worst thing you can do is quit your boring and unfulfilling job only to sit at home with nothing to do while your bills and other financial obligations come to visit.
- Side Gig or Business Venture – This one is quite simple and maybe the most difficult loss to cut. Every day around the world, businesses are being germinated in the hundreds of thousands to compete in already crowded spaces. Unfortunately, only a tiny percentage of these businesses survive and ultimately succeed. So if you’re starting a new venture, keep in mind that probability places its bet against you succeeding. Once you get to the point where you’re dirt poor, deep in debt with life savings squandered in a venture that’s on life support, cut your losses and pull the plug! Especially when the market has rejected your idea or product. Learn from your mistakes and start working your way out of debt before looking into another venture that has a better likelihood of success. And don’t be discouraged…it’s okay to try and fail at a million things because you only need 1 of them to be successful and you’ve made it!
- Pets – This is a touchy subject since some people see their pets as their kids. But sometimes, the best thing for your kids is to put them up for adoption especially when you’re no longer fit to be a parent. You just have to separate emotion from logical and glaring reasons. Pets are expensive…especially once they start to require medical attention. If the cost of taking care of your pet, including time, goes beyond the cost of your monthly food budget, it’s time to cut it, cut it, cut it. You must do what’s best for you!
Warren Buffett said it best:
Rule #1: Don’t lose money
Rule #2: Remember Rule #1
So before you venture into anything involving money, set reasonable targets for when to cut your losses and be disciplined enough to pull the plug once those lines have been crossed. How about you? How do you know when to cut your losses?
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