Abandon Sunk Costs and Improve Your Future

(MoneyWatch)  The decline of General Motors is a good example of how the inability to accept sunk costs can be a barrier to a better future. As the saying goes, if you find yourself in a hole, stop digging.

If a financial decision isn't working, you need to have the mental toughness to move on, even if it means accepting a loss. Yet we tend to get attached to the time and money we've invested in the venture, and those sunk costs become a barrier to change.

In my experience, confronting the cold, hard numbers is the best way to deal with the situation. If the numbers don't add up under reasonable assumptions, it's time to try something different. For GM, the writing was on the wall for a long time. They just refused to acknowledge it. You can't afford to make the same mistakes.

Here are a couple of areas where I see people struggling with sunk costs:

• Housing. Is your mortgage payment devouring 30 percent to 40 percent of your monthly income? If so, you probably can't save for retirement or even build an adequate emergency fund. In that case, your house is a barrier to your retirement plans, and it may be time to downsize, even if it means taking a loss.
• Cars. When you make your car payment each month, do you feel a little pain? If so, you're probably driving something you can't afford. Consider dumping it, taking the loss and saving on future transportation costs.
• Career. Have you gone 10 years without any meaningful advancement in compensation or responsibility? Have you consistently projected raises and promotions that never materialized? If so, it may be time to consider new opportunities. Otherwise, you may be perpetually frustrated in a job that doesn't allow you to build financial independence.
• Investments. Do you own things that have caused considerable damage to your personal finances? Maybe the purchase was the result of an impulsive decision or a little too much risk taking. If so, it may be better to take what capital you have left and invest in something more prudent.

It's hard to recognize when it's time to move on, and it's basically a judgment call. But the psychological drain that comes from being anchored to sunk costs is a real barrier to your ability to make progress. Sometimes you just have to start over.

Sadly, most people don't have the will to change. They often wait until external forces make them change, such as GM and its bankruptcy. By that time, it's usually too late to save yourself.

Bottom line. Not every financial decision you make will be successful. Recognize when it isn't working, stop the bleeding and move on to something that improves your financial future.

As with all financial matters, consult your individual advisor prior to making any financial decisions.
Photo from Flickr, courtesy of coljay72, CC 2.0