The Psychology Of Good And Bad Financial Choices.

As much as i hate to admit it, most of the choices we make are not based on logic.

The truth, according to research, is that most of the choices we make are based on emotion.

Now, if that’s the case, how do we protect ourselves from making bad choices?

I am not immune to making bad choices. When I look back o the poor choices I’ve made, the one thing I would learn how to do if I were able to do things over again is remove the emotion.

Sounds very easy.

But in real life, it can be pretty difficult to do.

In my opinion, one of the reasons it’s so hard to implement is that bad choices tend to feel good, while the best choice is usually boring and makes you feel like you’re depriving yourself.

For example, if you experience a financial windfall…buying a new car or taking a vacation may be at the top of what makes you feel the best.

However…the wise choice would be to pay off credit card debt, add money to your rainy day fund, and invest the rest.

Now to me, that sounds absolutely exhilarating. The idea of building my net worth tends to make me feel that way.

Here’s another example. If I have money to invest, my initial inclination is to buy shares in a shiny new company I don’t already own.

That may be the sexy choice.

But it’s not the best choice.

The best thing to do in that case is to add to anything I already own that’s a winner.

One of the most powerful investment tactics you can use is to add to your winners.

Investing is hard on your emotions, as well as your psyche.

However, the best decisions we can make are those that eliminate the emotion by simply doing what is the smartest.

 

My book, The Stock Market is For Everyone, is a short guide for the beginning, inexperienced investor that is easy to understand and can be put into action immediately.

Click the image of the book at left to be taken to its Amazon page.  (Disclosure: As a participant in the Amazon Services LLC Associates Program, I earn a small commission on each sale generated through these links.)

 

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Keeping Up with The Joneses Will Keep You Broke!

Many people are unaware of this (I was before researching for this post), but the term “keeping up with the Joneses” dates back to a 1913 comic strip by the same name.

The comic strip is about a middle class suburban family that experiences “adult peer pressure” when a family by the name of Jones moves in next door. The Joneses are a very accomplished, worldly family who become the envy of their neighbors.

Whenever the Joneses do something or buy something, their neighbors feel pressure to follow them. If the Joneses take a vacation to an exotic destination, the neighbors will take one as well. If the Joneses buy a new car, the neighbors feel compelled to buy one.

“Keeping up with the Joneses” is one of the biggest financial mistakes that people make.

One of the traits of the wealthy is that they tend not to care what others think of them. Sam Walton, the founder of Walmart, for instance, drove a beat-up pickup truck until he died – and he was one of the richest men in America!

The inspiration for this post comes from a conversation I had with my brother the other day. He told me that someone we both know had recently purchased a new BMW.

The reason this guy made the purchase is classic “keeping up with the Joneses”.

He holds an upper management position within his organization. Every so often, he has to attend meetings with other executives within the company. The car he’d been driving to these meetings was a modest Toyota Camry that was more than a few years old.

He began to notice that the other executives would arrive in much fancier cars. He started to feel very self-conscious.

He was so bothered by the thought of what his peers might think of him that he financed a new BMW – even though he is still paying off the Camry.

The combined monthly payment for the two cars is $1400 a month. This doesn’t include insurance, gas, maintenance or repairs.

This gentleman is leasing a vehicle that he doesn’t need for $7200 annually over a three year period – shelling out over $21,000 in the process.

A much better and wiser use of this capital would be to invest the $21,000 in the stock market – and give his grandchildren a head start in life! $21,000, invested over a three year period and allowed to compound over the next 20 years of the grandkids’ lives, could grow to a substantial amount of money.

My book, The Stock Market is For Everyone, is a short guide for the beginning, inexperienced investor that is easy to understand and can be put into action immediately.

Click the image of the book at left to be taken to its Amazon page.  (Disclosure: As a participant in the Amazon Services LLC Associates Program, I earn a small commission on each sale generated through these links.)