If selling a sinking home or recouping a bad investment is on your to-do list for 2012, it may be time for a reality check.
Our brains do a real number on us when it comes to money. When we buy something, the price we pay becomes a permanent reference point. Psychologists call this "anchoring"—and it can sink you financially. For example, if you invest $1,000 in a stock, and its value drops to $500, you tell yourself, "I'll sell once it's back to $1,000, so I break even." But that doesn't make sense. Your portfolio decisions should be based on an investment's potential going forward. To judge if you're falling victim to an anchoring trap: Look at the stock in your portfolio and ask yourself if you would buy it today. If you answer no, you should consider selling, even at a loss.
Be especially wary of holding on to a house you can't afford because you hope its price rebounds. If you must lose your home to foreclosure or through short sale, doing so in 2012 might save you a ton in taxes. A quirk of our tax law is that any amount of your mortgage that a lender forgives may be taxable income. So if you had $200,000 left on a mortgage and the foreclosure value is $150,000, the $50,000 difference could be considered income and thus taxable. But through the end of 2012, a special law suspends this tax. Letting go of a house is a difficult decision, but sometimes moving out is the best way to move forward.
Your Financial To-Do List