Do you know what financially smart people are doing to keep themselves above the rest?
They master Financial Decision making.
In this article, you will learn how to take better financial decisions in the order of,
1. Have a Money Mindset
2. You vs. Family
3. Debt vs. Debt Free
4. Minimalistic vs. Luxurious Lifestyle
5. Rich vs. Famous
6. Liquid Assets vs. Illiquid
For amateur investors, it is quite common to take wrong money decisions.
The reason for this is the lack of clarity and financial awareness—since financial decision-making situations often present themselves with contradicting choices. Only if you, as an investor, are prepared to face these challenges, you can take conscious rational decision consistently.
But how can you prepare? Especially when every decision is unique in its own?
Use these 6 points to align your financial decision making with your financial goals in life.
1. Have a Money Mindset
“A money minded person.”
From a social perspective; it is a not-so-attractive trait.
But what matters is—what kind of impact they make.
Having a money mindset does not necessarily mean to place money above everything else. It means to see—value for money—in everything.
For example: Let’s say you are on a road trip and its summer. Half-way through the trip, you are thirsty and feel the urge to quench your thirst.
So you halt and buy a cold beverage. Everything is normal and completely justified until you realise. Until you realise that you just spent twice the price as you bought a carbonated drink instead of water.
This example may sound like a ridiculous comparison, yet I would like to introduce the “Broken Window Theory” to you.
It is a criminology theory which states that: small issues or problems, no matter how small, if not taken care and solved will pave way for happening of bigger and serious problems.
What does that mean?
Spending some extra money on a drink is not a crime of course, but it will reflect your attitude towards money and your spending habit. You can say, in terms of personal finance, it will lead to a bigger crime for sure.
Because be it a good thing or a bad thing—big things start small.
What does a money mindset look like?
These are some of the most common traits that people with money mindset share.
You have an eye for value in everything you buy.
- You think long term.
- You believe you deserve to be rich.
- You always look for opportunities to leverage your skills.
- You try to find ways to minimize tax liability.
- You will never reason excuses for losing.
- You will try to find a solution already, the moment you recognize a problem.
Can you relate to these traits? Good, you might already have the “money mindset”. Even if you don’t—practice them. These are easy to master than you think.
Having a money mindset or having the desire to get rich is not something that you, or anyone, should despise. As long as you value your work and hard earned money, you deserve to get rich.
Get accustomed to the money mindset. You will have better perspectives towards the other financial decision-making factors we are about to see below.
2. You vs. Family
You may have begun investing to attain financial freedom. Meanwhile your son wishes to do a PG degree in a reputed university, which is not in your financial plan.
You vs. Family—what would be your choice?
It is a nightmare to even imagine putting yourself against your family. You may have never thought this way before.
Here’s a tip: Have a holistic perspective.
Viewing things as a whole and in the long term can show you things you usually miss to identify otherwise.
In this example: It is smart to focus on your financial freedom and suggest your son take an educational loan. Your son can repay the education loan when he starts earning. This is a Win-Win solution out of nowhere.
Even though it is a simple and common strategy, it is the holistic perspective that did the job here.
If you are given 10 such instances to choose between you and family, who will you choose the most?
The majority is your choice by default. You or family, whoever your priority is—stay firm with your decision.
3. Debt vs. Debt Free
Debts are double-edged swords. They have the potential to hurt you, as much as they help you.
Almost all the investors who underestimated debts are stuck in debt traps and/or trying to come out of it.
However, debts are sometimes handy.
For example: Let’s say you are earning well and living a comfortable life. You have a plan to buy your first own house in 5 years and you have just started to save for it.
Meanwhile, the real estate prices are falling and you do the math and conclude it is the right time to buy your first house.
In such a case, a loan wouldn’t hurt. In fact, a loan in this scenario will favour you—especially if the real estate prices are expected to rise in the subsequent years.
What you must avoid?
One must avoid debts that are small and regular—like credit cards and personal loans for an emergency.
These are like finance parasites that accumulate slow but steady over a long period of time. And they could pose a big threat to your personal finance before you even identify it as a problem.
What is your preference for the debt factor?
4. Minimalistic vs. Luxurious
You want to be the master of your personal finance.
Is it because everyone else does it?
Or is it because you want to be better than everyone else? Perhaps some other reason, maybe?
Whatever the reason is, we all know one thing: that is money is to spend. We only differ on how we spend it.
- One wants a premium smartphone while the other wants a mobile phone that works.
- One hires a personal trainer while the other is regular in the early morning walk.
- One buys a luxury sedan that warms the seats while the other owns one that just runs anytime needed.
- One wants a second house by the beach to spend the summer while the other wants a home in the midst of peace.
You may not always be minimalistic and may have a taste for luxury in particular things. And that could make your decision-making process even more difficult.
For example, you want to be a minimalistic person in every aspect but the house and its furnishing. In fact, it is quite common in India.
What can you do?
Find the areas or aspects where you would need luxury. It is vital to be conscious of where you want luxury and where you want to be minimalistic.
Make the one that is majority your default choice, minimalistic or luxurious. Make sure it is only your will.
5. Rich Vs. Famous
You can be rich or famous and in some special cases, be both.
However, most of the time being rich is often associated with being famous. This is because being rich is known to bring the tendencies to become famous.
Even though not everyone does it voluntarily, as a human being, our innate compulsion to conform to the society paves way for it.
Sometimes we tend to be better than others and stand out from the crowd. Commercial advertisers are known to exploit this human behaviour for their advantage.
For example, It is common among people in workplaces to show off one is better than the other. Starting from the dress and perfume they’re wearing to the cars they drive.
If one buys a brand new version of a car, it becomes a compulsion for the rest to have one better than it. They do it to be the focus of the group, ergo the fame.
The fine line: If you are already famous or being famous and relevant is a part of your profession, it should not be an issue.
An entrepreneur would be a good example. To grow the business, an entrepreneur must blend in and engage with the targeted community. Being famous in the community with these prospective clients can bring in exposure and growth to the business. It can also provide opportunities to synergy with other entrepreneurs.
On the other hand, trying to be famous and relevant in this fast-paced world is a major task in itself. It will result in the failure of attaining the primary goal of getting rich.
What can you do?
If you want to be sure that you are not making the same mistake and your focus on getting rich is not compromised, find the source of your financial decision.
If you are buying a new car when you already have one, is it because it is necessary or because someone in your social circle claimed it will be cool to own one.
Your financial decisions will help you get rich when they originate from within than from others. The key is to not lose focus on being rich.
6. Liquid Vs. Illiquid Assets
At the fundamental level, assets are either liquid or illiquid.
Illiquid assets are ones that cannot be converted into money instantly—like property, Gold, Bonds, etc.
On the other hand, Liquid assets are money or assets that can be easily sold to convert into money. For example Cash, Stocks, Mutual Funds etc.
Cash is the most liquid an asset can get.
Illiquid assets are less flexible. Most of the illiquid assets lose value over time. However, illiquid physical assets (like gold and real estate) give a sense of “secure” investment to the investors.
For example, Most of the times, rich people to “secure” their wealth invest a major part of their wealth in, if not all, illiquid assets.
They might have 3 houses, multiple cars and net worth in crores but all of them as illiquid assets.
This is why—in spite of being rich— they take personal loans when there’s an emergency. It is because all their wealth is locked somewhere in the form of Illiquid asset.
To be on the safer side, wise investors choose to have a mix of both.
What you can do?
A traditional yet powerful technique is to choose Liquid Asset investments for short term financial goals. For the long term financial goals, you can choose to allocate a part of your investment to Illiquid Assets.
Make sure your choices are aligned with your financial goals so that you can take better financial decisions.
Putting your preferences into perspectives will help you take clear and consistent decisions.
The next time you make a financial decision you only have to make sure your decision satisfies your pre-made choices. When you take a financial decision, run it through these choices of yours and when they satisfy go for it.
Remember, the key is to be consistent. You too can master financial decision making.