I’ve seen it hundreds of times in business: someone has started a new venture and thrown every dime he can scrape up into it. But it’s not successful. So the entrepreneur goes looking for more money, more cash that he can use to make the business work.
In some cases, that approach can work out. Occasionally, a business needs just a little more money to get from the point where it’s just an idea to the point where it’s actually bringing in cash. More often than not, though, it’s just throwing good money after bad. The number of ideas that will kick over and start working just by adding more investments isn’t all that high.
It’s not a situation limited to businesses, either. Putting more money into a car that’s already on its last legs, getting more plumbing books to help repair a problem created by trying to repair an entirely different problem, and all sorts of situations can turn into money sinks.
Identifying the Bad Money
The problem, for many of us, is that it’s hard to tell when a deal is bad. It’s simply not always clear if a little more money will really fix the problem. After all, it might in fact work out! Our instinct is to believe that if we’ve already put money into a problem, we’re doing the right thing by not giving up. On a deep level, no one wants to work from the assumption that she’s wrong, making it harder to look at a situation critically. It’s a very natural thing to work from the basis that we were right to put money into something in the first place, following it up with more money.
That makes it necessary to bring a more critical eye to situations than we might be used to. When we spend money on a project or item that we’ve already sunk some cash into, there has to be a point when we take a step back and re-evaluate the situation: What are the chances that this new expense will help? Why are we spending more on this situation?
It’s tough to truly analyze every situation that we spend money on, where we need to see patterns and think beyond assumptions. And for small expenses, it doesn’t really seem worth the effort. But on big stuff, though, it’s worth working on your ability to see more than the surface of why you’re choosing to spend money, especially in a situation where you’ve already put in a fair amount of cash.
Getting Beyond Sunk Costs
It’s hard to walk away from money you’ve already spent. Such money is referred to as a ‘sunk cost’ — money that has been spent and that you can’t recover without the help of a time machine. No matter what, you can’t get back money that you’ve already spent. If you bought a new part for a car that got totaled a few weeks later, there’s no chance of recovering the money you spent on that part. Trying to repair that totally destroyed car will require a lot more money, with no guarantee of success or a chance to sell the car afterwards. That’s a sunk cost.
Whether you call something you’ve already spent a sunk cost or bad money though, it can be hard to let go of it. But there are some options, painful as they might seem.
- Run the real numbers. Sometimes, all you need are some cold, hard numbers to look at to make it easier to let go. If you can tell what the total cost to recover that sunk cost (such as rebuilding a destroyed car) and compare it to what you can get back out of the situation (such as the sale price of said car), you’ll want to let go of that money as fast as possible.
- Take a look at where else that money could go. We all have plenty of places that we can spend money on, from the good, like putting it in to a retirement account, to the less saintly, like spending it on a wild weekend. Take a look at those options and see how they stack up to trying to go after money that’s already gone.
- Get some outside input. If you’re struggling with a decision, it makes sense to talk to someone with a little more knowledge about the situation or an unbiased perspective. The same holds true if you’re struggling with walking away from a situation where you’ll be losing some money. Even just needing to describe the situation to someone else can help you get clarity, though picking someone who can give you some insights on the specifics of the situation also helps.
David’s Note: We’ve all thrown money away in an attempt to fix a mistake, and that’s okay. Just try not to do it too often! 🙂
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