Behavior, Not Knowledge, is Essential to Financial Success
Which would you rather get – P3,000 in three days, or P5,000 in three months?
Think about it for a while.
If you answered the P3,000, this usually means you are financially impulsive, since you’d be turning down an interest rate that is much better than what banks and most investments offer.
In a study conducted by researchers from the University College of London, nearly half of their respondents preferred the lower (but sooner) sum – and that these people also showed impulsiveness in other areas of their life. From the article (emphasis mine):
“…researchers suggest money savings or financial behaviors are linked to a set of other personal behaviors, rather than personal knowledge and experience with money.
…[they] discovered impulsive behaviors such as overeating, smoking and infidelity are associated with financial gullibility.”
This means that even if you know a lot about money, investing, and business, it doesn’t guarantee that you’ll be financially secure. What guarantees your financial success is your behavior. If you are consciously planning for the future and spend time evaluating your impulsive desires, then you have better chances of being financially successful – even better chances than someone who had formal training in finances, but doesn’t exhibit those behaviors. Perhaps this is why even the smartest people we know make stupid decisions regarding their money.
How do we use this information to our advantage?
- Acknowledge that you don’t have to know everything to start fixing your finances. One of the obstacles that most people face when it comes to fixing their finances is inaction. They think “Oh I have to read more about saving before I can actually save” or “I need to know more tips before I can start”. Being good with money is not always about facts – it’s also about behavior. While we need to study some things – especially when investing – we don’t need to know much to get started.
- Realize that managing money well is a habit. It’s something you have to cultivate and practice regularly. There is no one-off solution, magical budgeting program, or miracle investment that will save you. It takes regular, continuous work.
- Know that changing impulsive financial behavior may mean changing other aspects of your life as well. My mother was such an impulsive spender, but her impulsive behavior wasn’t limited to money. She was that way about almost everything. From her business endeavors to her anger. For those who are truly impulsive, it may be a more difficult journey to get your finances together – but it doesn’t mean you shouldn’t try.
If impulsive spending and investing was one of your problems, take a look at your past behavior and see how you’ve changed since then. How have these changes affected your finances? How do you feel about the research I quoted above?
Image by cobrasoft from sxc.hu
Read MoreDay#17: Know the things you don't care to spend on.
This is Day #17 of “25 Days to Healthier Finances”, a series of blog posts where Frugal Pinoy readers and myself work on 1 task a day to make our financial lives better. Please stay tuned for the next installment of this series, which will be up tomorrow. Here’s today’s installment:
When it comes to time and money, we usually focus on the things we have to do. Paying the bills, finishing up that report, cleaning the house. While these things are important, we should be equally mindful of the things we shouldn’t do.
Today’s Task: Know the things that you don’t care to spend on.
It’s simple. Just jot down the expenses that really don’t matter to you. Here’s a short list of some things that don’t matter to me:
- Dining out
- Watching most films in the cinema
- Clothes and accessories (as a side effect of rarely going out)
- Cable TV
Things that matter to me:
- Books
- Good quality of food
- Maintaining a solid but beautiful house
- Hobbies such as woodworking and gardening
What does this mean? By making the list of the things that don’t matter to you, you’ll know what expense traps to avoid. For example, why would I spend P500 to try out a new restaurant when I can use that money to buy high-quality ingredients for a home cooked meal? Or, why would I spend P200 to watch a movie in a mall dahil wala lang akong magawa, when I can usually buy 5 books with that at my favorite used books store? It’s like building a list of “not-priorities”.
You can also do this exercise for a major purchase so that you won’t be distracted. When buying a new car, this may be your list of not-priorities:
- Color
- Exterior design
- Quality of speakers
By making this list before you look at cars to buy, you won’t be distracted by the bells and whistles that don’t matter to you. You won’t go “Shit, panget pala gas mileage nito, nadistract ako sa sleek, chromed-up design.” Conversely, if the exterior design matters to you the most, you won’t be distracted by sales pitches about payment terms or storage space.
When we have limited resources, we need to know the things we can “sacrifice”, and the things we don’t care about should be the first to go. That way, we know that we’re left with the things that matter.
Read MoreHow much happiness can money buy?
People say that money can’t buy happiness. Is this the truth or just a meaningless saying? When I think about this more, I realize not having enough money for your needs can be a source of stress. If you just 
got laid off, for example, how can you be happy if you spend sleepless nights worrying about where to get your kids’ tuition? Isn’t the lack of money a typical reason why some couples fight? Or if you work at a job you hate just for the paycheck, won’t you be more miserable compared to someone who has enough money to invest in a business they are passionate about? True, you can borrow the cash you need from friends and relatives, but that tends to put a strain on your relationships.
I suppose money can buy some amount of happiness in the sense that you won’t have to feel stressed or worried about the basics. Here’s what some psychologists found out about the matter:
People with more money tend to be happier than those with less – but only up to a point. That is the conclusion of psychologists Ed Diener at the University of Illinois at Urbana-Champaign, and Martin Seligman of the University of Pennsylvania, Philadelphia, who have reviewed numerous studies looking at the psychological effects of wealth. They report that money’s impact on happiness suffers from diminishing returns: once you have enough for food and shelter, more cash doesn’t bring much extra joy.
Source: “Why money messes with your mind” NewScientist.com
While money can’t buy happiness, it can give you the security and opportunities you need for pursuing the things, relationships, and experiences that make you happy.
In my experience, this is true because having enough money for your necessities allows you to spend your time and energy on the other things that do make you happy. But once you have enough for food, rent, and the bills, acquiring more money doesn’t necessarily mean you’ll be happier. After you’ve made yourself financially secure, true happiness and joy is something that you have to create for yourself, after all.
So if I were to rewrite the saying for accuracy, it’d be: Money can buy security, but more money can’t buy happiness.
Here’s another interesting fact from the study: if you have some extra money to spend on fun things, paying for experiences rather than material things can bring more pleasure.
The researchers found that people reported “experiential purchases”, such as trips to the theatre or travel, as bringing them more happiness than material purchases such as clothes. A concrete purchase may have cost more and lasted longer but a good experience brought more pleasure.
Source: “Why money messes with your mind” NewScientist.com
I guess this means that if you do end up with some extra money that you can spend for personal rewards, you can maximize the happiness it gives you by spending it on a trip rather than an expensive watch.
What can you say about the study? Do you think it reflects your personal experience with money and happiness?
Read More6 Signs That You're Living Beyond Your Means
“Live within your means” is one of the first rules of personal finance. If you think about it, this is common sense. Still, most people forget this and spend more than what they earn, getting themselves into financial trouble.
Not sure if you’re living beyond your means? Then read on to find out if you have any of the following 6 symptoms:
You don’t know how much you spend each month. If you can’t answer the question “How much are your monthly expenses?” then now’s the best time to compute it and find out. Guessing isn’t allowed. You need to know the ballpark figure for sure.
Why is this important? So you can compare it with your income and know for sure that you’re spending less than what you earn.
You’re dependent on your credit card. Whenever money’s tight, you find yourself using your credit card and just paying for those expenses after your next paycheck arrives. Usually, your credit card bill is more expensive than you thought, too. Because of that, it’s possible that you’re also afraid of opening your bill each month.
You regularly dip into your savings, if you have savings at all.Your income isn’t enough so you have to pay for some purchases with your savings.
This used to be one of my mistakes. I had “savings” but I didn’t know what they were for, I was just saving up money to be spent later. This means that whenever extra expenses came around, I would spend my savings on them whether they were needs or wants.
Your savings need to have a purpose. Are they for your emergency fund? Retirement? A new house? Without that purpose, you’ll be taking money from your savings indiscriminately.
Speaking of savings, you’re saving up less than 5% of your income on retirement or emergencies. Saving more is especially important if you want to maintain your lifestyle during times when your income is lower, you’ve lost a job, or you’re ready for retirement.
You live from paycheck to paycheck. There was a time when I would eagerly await my next paycheck – because I’d already run out of money before it arrived. This is a very stressful way to live.
You need to be confident enough about your spending habits to know that you can wait a bit longer for that next paycheck. You can only feel this way if you know for sure that you’re spending much less than what you earn.
You use new loans to pay off existing loans. It may be common for people to borrow money to pay off other loans, but it’s a clear symptom of living beyond your means. Think about it for a second – getting into more debt to pay for other debts. Not really a sign of financial health.
Have you ever experienced any of these symptoms? What have you done about them?
Image by Steve Woods
Read MoreMy Biggest Money Mistakes
I’m proud to say that I made only a few money mistakes ever since I started earning. It was my mother who made all the money mistakes in our family, and I mostly learned what not to do by just watching her. She hasn’t saved enough for her retirement, she incurred so much debt that it’s impossible to repay, and she lived beyond her means even when she had no job. Her mistakes were a financial nightmare for the entire family.
I guess you could say that I became smart with money because I was so afraid of ending up like her. This fear made me educate myself about saving and earning so that I would not have to repeat her mistakes and make my children pay for them.
But this doesn’t mean that I’m free from mistakes. I am perfectly human. I’ve made some money and business mistakes that I wish I never made. Here they are:
Lending money to others. Sometimes, even when it comes to relatives, lending money actually means giving it without expecting anything in return. For years I said “yes” to lending money to family members, and I rarely saw a centavo of my money back. This led to tense family relations, which weren’t worth the money I “gave away”.
The bottom line? Involving money in your family relationships tends to be messy and destructive. Learning from my mistake, I’ll be avoiding this situation again.
Doing everything myself. When I started my online business, I did everything myself. It’s perfectly normal to start a business as a one-woman show. The problem was that it stayed that way for 3 years.
One of the most important things about running a business is that you should work on it, not in it. I got this idea from a book called The E-Myth Revisited. You should get others to work with you, whether it’s a business partner, a contractor, or in-house employees. This allows you to focus on the more important aspects of the business as well as the tasks you enjoy.
What does this have to do with money? Well, if you do everything yourself, your time will be consumed by tasks that anyone else can do. You won’t have the time or energy to do other tasks that will bring in more money such as expanding your business, doing guerrilla marketing, and creating other means to diversify your income.
Undercharging for my services. I used to be afraid to charge higher for my writing services, thinking that clients would hire some $1 writer from other countries. I used to charge $5 to $20/article. It took a very generous client before I realized that I could charge much more than that. Now I get paid around $30 to $100 for most of my work. This means that I get paid more per hour and can actually relax about work a bit, rather than spending every single waking moment writing articles. I may love my work, but there are other things I want to do as well.
Also, getting paid more made me become more serious about improving the quality of my work. I guess both my clients and I won in the end 
Not applying the 80/20 principle. One of my biggest business mistakes was giving all my clients and projects equal time and effort. Why is this a mistake? Because some ventures, clients, and projects will be worth more than others. What should you spend more time on, the difficult and demanding client who pays you at a low rate, or the low-maintenance client who pays well? It took me a few years to learn to focus on the latter.
This is where the 80/20 principle comes in. A short definition of this principle is that 80% of your output/income, should come from 20% of your input/effort. Of course, you don’t follow this idea literally, counting every percentage. The point is that you should focus on the things that give you the best results with the smallest amount of effort.
These are only the top 4 mistakes I can remember off the top of my head. How about you? What financial mistakes have you made in the past? What could you have done to avoid them?
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