Fear of missing out? 4 ways it can take a toll on your personal finances

FOMO or the Fear of Missing Out is not just a cool acronym used by the youth of today. No, FOMO is something that triggers a lot of the decisions we make in our daily lives, especially when it comes to money.

Here is an anecdote for that: when Avantika learnt about her friends buying clothes and gadgets at dirt cheap prices in an online sale, she couldn’t resist herself. As soon as her salary got credited into her account, she wasted little time and spent almost half of it on purchasing dresses and accessories. She felt if she didn’t make the purchases, she would miss out on the great deals. The catalyst that drove Avantika’s behaviour is what we know as FOMO.

FOMO is an apprehension which leads to the belief that others might have rewarding experiences from which one may be missing out on. While it has existed in the past, thanks to social media, we feel it more today. Recently, I was reading an article where it is mentioned that 56 percent of social media users suffer from FOMO and this can have a negative impact on behaviour, most importantly, on our finances.

So, two questions that come to mind are – 1) how this apprehension can take a toll on your financial well-being; 2) how do we overcome the FOMO phenomenon?

To tackle the first question, let us understand these 4 points:

1. Lead to wrong investment choices

An investment approach factoring in liquidity, risk-appetite and time frame, often turns out to be rewarding in the long run. However, FOMO often leads to poor investment choices that can have long-term ramifications.

For instance, in the past, one of the major reasons for people to invest in Ponzi schemes was the lure of bumper returns they promised in the short term. However, those who invested huge chunks of their savings into these schemes ended up with massive losses.

Also, there have been cases of investors chasing stocks or new fund offers (NFOs) that have been performing well, without checking their fundamentals, only to see their hard-earned money getting wiped out when the markets nosedived.

2. Making investments that don’t align with your financial goals

Goal-based investment ensures that you have the required funds when the need arises. However, FOMO, apart from leading to erroneous choices, often forces you to invest in financial instruments that don’t resonate with your life goals.

For instance, during the heydays between 2001 and 2008, majority of investors pumped in a significant portion of their savings into real estate, hoping to cash in later and use the proceeds for addressing goals such as higher education of children or their marriage and even retirement.

In their fear of losing out on the opportunity, they ignored the fact that the real estate is a highly illiquid asset, i.e., it can’t be easily converted into cash. Once the returns muted and the number of unsold inventories went up, it became increasingly difficult to sell a property as the goal neared. This led to borrowings at a high rate of interest, resulting in EMIs affecting regular household budgets.

3. Make unwanted expenses

FOMO often triggers anxiety and worries, which forces one to keep up with the Joneses and lead a lifestyle, competing with our peers. This leads to unwanted expenses that can strain your finances. For example, when Avantika spent almost half her salary on buying dresses and accessories, she found it difficult to pay for essentials such as rent, utility bills, transport and grocery.

While Avantika might have had a backup for her shortfall, the case might be different for you. Unwanted expenses can derail the budget of your household and force you to liquidate your savings, thereby impinging on essential life goals. At the same time, this can lead to frictions within the family, leading to a loss of harmony and peace.

4. Go for unnecessary borrowings

Unwanted expenses coupled with the anxiety to lead a different lifestyle, often leads to unnecessary borrowings. In the digital age, borrowing from financial institutions is easy. There are many firms that offer short-term loans within minutes of applying. While these loans are easy to avail, what matters is their high rate of interest, primarily because they are unsecured in nature.

It means that they don’t need any collateral to be availed. Also, often these loans are bundled with products and offerings that you don’t require. High EMIs of these loans can not only put you in a financially tight spot, but also lead you towards a debt trap, which can derail your finances within no time.

How do we overcome FOMO?

By identifying the sources leading to FOMO and practising mindfulness, you can overcome the FOMO phobia. It also pays to talk about finances with your family members and seek their opinion before investing. If nothing works, seek professional help.

Avail services of a certified financial planner who will help you sort out your finances and help you make rational decisions based on your goals, investment horizon and risk appetite.

(The author is Head, Personal Wealth Advisory, Edelweiss.)