Money is a balancing act of priorities and preferences with our implicit bias making subconscious decisions. Understanding the mechanism of the monetary system is a lifelong journey as the variables of our personal change and environmental change will impact our decisions.
Our learning about money is the best solution but avoiding mistakes by learning from others. I have made many mistakes about financial planning but have learnt many great concepts but I am not a financial expert. I have read a few books and learnt few ideas about the subject which has had a positive impact in my life . You could say I am a working progress. If we had this life skill when we were children I’m sure we would of made many better choices. The good news is that it is never too late or too little to make a difference. Money choices are Like a hidden Jellyfish fish that sting until it’s too late. It is a painful reminder that we have made a choice by swimming in the sea of money matters at times.. They may look colourful and beautiful the Jellyfish but they will let you know that they are there if you get too close. This month we will be exploring Week one :The Surprises about money. Week two: Strategies of money Week Three: Psychology of money Week Four: Intelligent Finance . Finally as a challenge try not to spend any money on non essentials. We are doing this as a family, see what feelings and actions happen
Debt is probably one life biggest stress. The commercial world thrives on consumers on the notion that individuals needs come at an expense. The simplest foundation to debt is to pay off the highest interest first. Not the amount counts will debt repayment but obviously if you can afford to pay more. The secret is pay regular amounts so the debt is not compounded. The less you owe the more you have. Best option is avoid debt for unnecessary items. Of course debt is an asset if it makes you revenue. In future weeks we see why we have debt and how we increase unneeded debt.
Money flow is an expression used in the stock markets. Basically it is a calculated data of the day’s activity. We live in world were most of us use money to survive and to purchase the necessities of life. Because we deal in units calculations are intrinsic for this system to work . The life today is far more complicated so it is more difficult to understand the mechanics of the monetary system. To understand all the products and various transactions and implications of how money works is definitely a skill. Basically imagine a river flowing at end of your garden each day it flows by and you have water , fish etc so you can survive. If that river stops or reduces it will impact your life. Simple terms need we some income to provide for our needs.Another method is that if you have a large lake with plenty of fish near by which keeps expanding.
Likewise we need revenue or assets to give us our money flow. I like the expression money flow rather than income because it helps me to understand the need of money to keep sustaining our life basic needs.
Investing or old fashion word saving for a rainy day. Albert Einstein said that compound interest was the 8 wonder of the world. What did he mean? Simply put by regularly adding one unit to another unit it will grow in two ways. The initial unit will expand by adding more units then in turn added unit with interest it will grow faster. The secret of saving is not the amount but by regular deposits being added to the investment and leaving the money there for the long term. Example you could put 10 every month for a total of 10 years at a rate of interest of only 1% every month then you will receive 273.60 extra on top of 1200 you saved. If did that for 50 years you will receive extra 1803.50. Many different ideas on how much to save or invest for tomorrow. Some experts say between 10 and 20% of your income as a guide. Important reason to save for tomorrow as it reduces stress of unexpected expenses. I Read a book a couple of years ago on money which suggested that I have at least 3 months money saved to pay for 3 months expenses and this will reduce stress if you can’t work for some reason. Another option is there are various insurances that can provide income for the unexpected. The biggest life saver for me personally was when my wife died unexpectedly with cancer we had life insurance to pay the house off. If we didn’t have that insurance I would of had to sell the house and imagine the stress added to me and the kids. Finally the best investment is yourself, so never forget your own personal needs for today and tomorrow.
Assets are income to your personal wealth. This would include a business, a skill you have , cash available, stocks and shares and items of value that have no liability. A lot of people think that their home is an asset but if you still have outstanding liabilities for example a mortgage it is costing you money. The greatest asset is yourself because we can add value to ourselves by what we bring to the market place. For example Leonardo Was commissioned to paint because of his skill and paid accordingly. Obviously the more assets you have , more likely you will become financially independent. When you own a profitable asset often you can work less because the asset gives you revenue. For example when your home is paid , your expenditure for a year will significantly reduce by thousands of pounds.
Management is one of today’s hardest skills to learn and maintain. There is so much fundamental advice which is not accurate which leads to future problems. One of greatest pieces of advice I read on this topic “ take control of your OWN finances”. This is obvious but banks, friends and others give us the wrong information. I like the illustration of an autopilot who constantly checks his cockpit to arrive safely at his destination. The same is with our resources, manage it constantly so you can reach your objectives. Finally another great idea one author said about money “ if it’s not in the budget , we can’t do it” Finally a mantra I learnt “ learn to earn” make sure you are in control.
Motivation is a very complex mechanism and there is often debate on a person motivation or incentive why a person is focused on money and those who ignore it. Next week we will look deeper into the psychology of money in detail. Successful in this life skill is important to have the right motivation. Research shows that a person performance is greater when it is intrinsic that means from within rather than extrinsic that’s external factors. For example a family man or woman will do any job and work tirelessly because from within they want to look after their family needs. A reward of performance in money reduces that drive because of extrinsic value according to one resource of Harvard studies . When you are struggling with money motivation try to reframe your mindset or a reasons why your are doing this work. Money management is related to this topic because it is not just related to our income in life but how we use the money. For example if you have intrinsic value of not wasting your revenue because your value in life is time, then that will effect your motivation of using your resources wisely.
Priorities are important because you can get lost in the financial world of decisions. Time is an asset and is so valuable when time is wasted if there is no focus on your own particular needs and wants. Disadvantage on not having priorities can effect yourself and family either today , tomorrow or in the future. Very easy to blame circumstances or individuals why we didn’t do a particular necessary objective in planning. Simply put: work out what you need first to do for your needs example pay the bills . What is important to you , time , luxury’s, etc this will help you focus on your priorities then we will feel good about our decisions and money be a friend not a foe. Here is example of Priorities 1: Pay off all debt 2: Protect your income 3: Prevention Fund 4: Invest . Work out a strategy for your family, finally when this is in place easier make right decisions.
Lifestyle is one major factor regards the impact money has on ones life. There is a worldwide difference in lifestyle from income of $41 a month income in Congo Africa to $15,507 a month in Monaco Europe. The question what we often forget that our lives have been conditioned ( more in Psychology next week). If you were born a Prince the lifestyle your accustomed to is different if you were born in a shantytown. The interesting fact I observed it is not the amount you have but what you do in your life has effect on your typical lifestyle. Researchers have researched that the maximum happiness a person can achieve by money is £70000 a year in the UK. Question to reflect on , what lifestyle do I want for myself and family. Researchers have shown happiness comes from having good friends , spending time outdoors with nature and a healthy lifestyle. This fact really made me think, you can’t take stuff with you when you’re dead. My dear late wife loved a nice home , when I looked at her with no life in her body I thought she can’t enjoy her lovely home anymore. Finally researchers have established that happiness is from experiences in our life. Can you remember what clothes you wore 20 years ago but I’m sure you can remember that great day out.
Revenues is a business expression which literally means sale or use of services where money is exchanged. In layman terms it is often called Income but revenues gives the idea of several incomes or streams of money. There are many advantages of having more than one revenue. If a family depends on just one salary and the person losses their job it’s a emergency situation. Where there are several revenues when one collapses there is still some money to pay into the budget to pay for the food for example. The best revenues are passive incomes where there is not much attention or effort needed for this resource. For Example interest on money saved , stocks and bonds. A great quote I read recently “ keep every pound a prisoner “ and I would add to that phrase make them pay. There are many ways to increase revenues. Here are few ideas : 1 Change providers for services ;example ,shop for food cheaper store 2: Sell your old possessions; example clothes and gadgets. 3 Turn a passion or hobbies into a business start part time 4: Rent a room out 5: Teach a subject online. Use your imagination and you will be surprised what other revenues you can source. Teach your children from a young age these important life skills and you will never need to worry about their financial future.
Our Mental state is important factor on how we use our resources. I love the illustration of a finished puzzle when we see the complete picture it brings a feeling of wellbeing and accomplishment . The similar idea in life , imagine your brain has to deal with body’s demands that have has not been resolved ,our focus and our incomplete picture will impact us in a negative way. For example the saying half empty or half full has impact on a person mental actions. There is an expression called “flow”where the whole body resources are in flow. That means a person optimal performance will reach its goals because of flow. A positive mental state will bring positive results. Naturally according to science we are programmed towards negative state so working on our mental state is hard work. The poor stay poor and the rich stay rich is often linked to a person mindset. Even some lottery winners lose all their money because of their mindset. Mantra help change our perspective is to be positive about money. Just a simple affirmation of paying a debt off by reframing the experience positively will progressively change your mindset.
Emotions are a very strong indication of a person financial intelligence because emotions drive us to actions. Our emotional state has a powerful influence on our money habits. All powerful memories are charged with emotions stored in the hippocampus part of the brain which is regulated by the amygdala which amplifies the important action. For example when we are sad we may want to remember happy times associated with a happy memory. Food is good example so we decided to treat ourselves to have another happy experience associated with that previous memory so we take action and have that experience again to elevate our emotional state. Big problem we have in today world is the memory we associated with happiness could be purchasing expensive experiences. They call it retail therapy but this cycle will escalate to drive you into more debt as you subconsciously repeat the cycle of accumulating things just to be happy. Now the emotional response will become hate and sadness because of stress it causes and that can lead to our shame. Advertising industry uses our senses and emotions to drive us to purchase items. The other extreme of fear and Shame is not using money at all ,they call this in Psychology the scarcity effect. Many reasons why people believe that money with lead to harm is often related to negative experiences in the person life about financial events. Good question we could ask :why am I using this money and how does it make me feel. Bad experiences related to debt can be relearned so our emotional actions don’t continue the negative cycle. Being self aware of our emotions will help us to make the right decisions about financial matters.
Social cognition is an important factor in our wellbeing. We are wired in the brain to connect with other humans, if you’re interested it is called the“ Insula” the part of the brain that processes this vital aspect of our existence. Simply put the body needs to regulate our states which includes, emotional, mental, physical etc. When one aspect of our brain is not being optimised the brain automatically regulates it for us. For example when there is a lack of connection to other brains subconsciously and sometimes consciously it is soothing the body by plan b. Very often plan b is spending money which actually is a chemical reaction in the brain because the brain doesn’t know difference between physical and emotional pain so it has to regulate the effect on its resources. Actually this is a loss of effect , not a gain because of prolonged isolation. Finally I read an excellent article on being alone and we need to be alone time at times for many good reasons( That be another post). Key is to understand our cognitive state :why am I spending money? If you want to feel good about spending money the research says to enjoy more by spending it on someone else. So as the saying goes kill two birds with one stone and love your brain “ take a friend out for a coffee rather than buying that expensive item for yourself”.