In the past articles, we have been privileged to share insights into investing your money to grow your wealth. We have covered principles of investing and habits of successful investors. In this instalment, we would like to cover a prologue to the content shared over the past months and try to delve into the subject of financial well-being.
The concept of financial well-being is not defined in a neat small box as it could mean different things to different people. These definitions are drawn from our unique life experiences, socio-economic circumstances, age, gender, level of education, and social expectations, to mention a few.
One universal foundational concept for financial well-being is spending within your means and saving to build financial security for when you can no longer work. This can be neatly coupled with being able to meet all your financial obligations and needs comfortably even when one of your primary sources of income fails. The key measure which facilitates financial well-being in both cases here is ‘surplus’.
There are two ways to create a surplus that can lead to financial well-being. There are bottom-up and top-down approaches. In the bottom-up approach, you gradually peel away the excesses and create room within your current earning potential to build future financial security. The top-down approach involves building additional streams of income. These income streams could be passive or active depending on the level of involvement or management time it requires from you.
Principle 1: Avoid making impulsive financial decisions
In one study, researchers offered several groups of people the choice of some money now or a larger sum in a few weeks. The choices were illustrated with pictures. The only group that failed to make the wiser choice of a future payment were men shown pictures of extremely attractive women alongside the option of an immediate payment. This choice was driven by an emotional reaction leading to an impulsive decision. Being highly stressed can also lead to impulsive or irrational financial decisions.
Principle 2: Remain steadfast
In this same column, we have advocated the habits of successful investors a few times. At least three of these habits have to do with being consistent/staying the course/remaining calm, especially when every indication tells you to make an emotional decision about an uncertain future.
A study was done a few years ago by a fund manager to determine which of their thousands of clients usually achieved the best performance returns after adjusting for risk. It was found that the best returns were often from clients who had either forgotten about their accounts or had passed away. So avoid looking at your investment portfolio frequently. Many of us with long-term pension accounts can relate to this principle.
Principle 3: You can always say no.
Anything that would cause you to spend more than is necessary will not help your pursuit of surplus in the long run. Whether this speaks to that extra night out every month, that additional feature on the car no one but you and three other people in your life would notice, or it is to the additional channels on the premium bouquet you would probably only watch once. Anything that would cause you to spend more than is necessary will not help your pursuit of surplus in the long run.
Principle 4: All pulas are equal
Research in behavioural psychology shows that we tend to treat money differently, depending on where it came from. So, for example, we are more likely to spend a discount or cash gift from a significant other differently from how we spend a bonus. Adopt the habit of treating all your inflows – salary, pension increases, cash gifts and bonuses – the same as core income. Learn to direct any money you acquire to the same spending priorities, including saving or reducing debt.
Principle 5: Do not get drawn in by those faking it to make it
Too much exposure to reality TV, selective reality, and lifestyle social media have been found to increase people’s sense of inadequacy and insecurity. Have a solid grounding in your priorities and goals so you do not get swayed by the carefully curated life portrayed in the media.
Principle 6: Replace a bad habit with a good one
To achieve this you, first read the last or revisit the 5 habits of Successful Investors.
There are good habits you should aim to replace any bad habits you currently have. Your current money habits are affecting your financial well-being. You alone hold the key to changing these habits and the power to create ‘surplus’.