Would you believe it if I told you that 80% of financial success is understanding psychology and 20% is financial mechanics?
The wealthiest 5% of the population understands that psychology either makes you or breaks you, so it’s imperative to have a robust system that enables you to stay on target. Motivating ourselves to take the steps we need to make to get in control of our money becomes possible only when we see that it is indeed possible for us to be financially successful.
How we think about money determines what we do about money. We are what we are today because of the choices we made yesterday. Our choices all grow out of our inner beliefs and thought processes. This is as true with money as it is with any other aspect of life.
Each of us had a story about how we’d done dumb things with money. In every instance, these dumb things were the product of some psychological or emotional impulse. Too many people make investment decisions based on psychological reactions to the economy and the stock market. It’s these emotional reactions that often cause people to buy high and sell low.
We can never completely remove the emotional and psychological aspects of money management. However, I do think it’s important for us to reduce the negative emotional financial decisions as much as possible. Better yet, we can learn from our mistakes (and the mistakes of others) and try to not repeat them.
Since the game of life is a long journey, it pays to have small victories along the way. While we are certain to stumble at times, it feels good to win a short-term battle. Feeling good equals positive psychology. Feeling better about money is over half of the battle to achieving long-term financial success.
For example, most experts agree that it’s better to pay down debt by starting with the obligation that has the highest interest rate. However, paying off an account with the lowest balance first often makes more sense. It allows a quick win, which provides positive reinforcement and motivation to continue.
Hardly any personal finance gurus talk about the psychology of money. Unfortunately, financial advisors work in a system that’s beyond their control—a system that has tremendously powerful financial incentives to focus on maximizing profits above all else. This is a system that richly rewards employees who put their employer’s interests first, their own interests second, and their clients’ interests a distant third. In other words, financial advisors get paid to sell financial products to customers in return for a fee or commission, not to make sure all your assets are coordinated to work efficiently. They also don’t get paid to help you get your mind right.
One way to keep these greedy salespeople away is to measure your results by how much your overall net worth increases each year. If they don’t want to address your aggregate position, hire someone who will! Remember, the purpose of the money dictates where you should put it, not what some slick salesperson is shoving down your throat.
The truth is that people can become prosperous in America today (and in most other places in the world), even on a modest income. Nonetheless, money success only comes once we learn how to think correctly about our potential for becoming successful with money.
The basics of money management aren’t complicated, and we are all capable of mastering them, no matter who we are, or our level of wealth. When we learn from our financial experiences, challenge our distorted money beliefs, and practice healthy financial behaviors, we don’t just become materially richer-we become emotionally wealthier as well.