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FINANCIAL FREEDOM - 7 PSYCHOLOGY HACK

Financial Freedom: 7 Psychology Hack

Portfolio : A collection of investments owned by the same individual or organization.

Will : legal declaration of how a person wish his/her possession to be disposed after their death

A set of assets which an investor holds. This may contain equities, mutual funds, insurance and other cash equivalents.

When it comes to finances, your emotions require delicate handling, wouldn’t it?

It is more like catching a butterfly on a thorny bush.

Be it anyone, their journey to financial freedom will have two different sides to it. One is the side which everyone is aware of. It is the requirement of wide and detailed knowledge about personal finance. I am calling it “The Explored Side” for convenience.

Meanwhile, the other side is often hidden and is usually overlooked. It is the emotional pleasure and pressure faced at every stage to financial freedom. I would like to name it “The Unexplored Side”.
Have you ever felt the financial pressure about the future on your shoulders? It is because of the unresolved issues of “The Unexplored Side”

The Explored Side

To reach your goal of financial freedom, there are hundreds of advisors, books and an internet full of information. They can assist you in learning about the financial freedom.

A professional financial advisor is the ultimate help you will need to reach your financial goal.

Starting from creating a customized financial plan to reaching your financial goal and building a portfolio, a financial advisor can help you in every technical aspect of your goal.

On the surface level, these are the things you need to reach your financial goal.

But who is going to help you on the other side?

One can say everyone is making use of the expertise of their financial advisor only limitedly. A certified financial planner can add more value to your financial goal than you can imagine.
 

THE UNEXPLORED SIDE

The emotional side is the major cause for people giving upon their financial goal. Today, we are going to explore the unexplored side of your journey.

A research by the Carnegie Institute of Technology shows that 85% of a person’s financial success depends on the EQ and only 15% depends of the Intelligence Quotient (i.e. the IQ).

Hence, to reach the financial goal, one needs to balance both with care.

But what is EQ?

Financial Freedom: 7 Psychology Hack 1

Emotional Quotient is the capability of a person to recognize their own emotions and those of others, and label them appropriately. Also, it is the ability to guide thinking and alter emotions to achieve one’s financial goals.

Being aware of your emotions will give you more control over them and your reactions to them.

In this article we are going to look into the 7 emotional states of financial freedom. And their causes, effects and measures to effectively tackle them.

Let us begin with the first emotional state to financial freedom.

1.Beginner's Enthusiasm

Making the decision to take care of your finances is a great feel. You are finally taking charge of your financial destination, adding purpose and more value to your financial life.

The Cause:

The cause of this enthusiasm could be anything and may vary for every individual. The most common cause of this is the outcome you are going to get through your financial goal.

Imagine a retirement life free of financial stress. Because you are not going to work forever, are you?

Imagine the financial life that you can provide to your children.

The satisfaction you can get when you are able to give a quality education to your child; when you are able to financially support your child in building their own life.

The thought that you are going to be self sufficient while fulfilling your financial responsibilities will surely motivate a person like you.

Any financial dream that provides these is worth pursuing.

The Effect:

The enthusiasm you feel is more than enough to get you started. As seen in “The Explored Side” you have started taking steps to execute your financial plan prepared by your financial planner.

However, since there are a number of factors that affects your enthusiasm, it will wear off eventually.

    Some of the common reasons for wearing off of motivation are,

  • Thinking too big
  • When you look at your financial goal and its ultimate outcome, you will also instinctively look at the effort it requires.

      – You need to revamp and review your portfolio
      – You need a huge sum for your retirement
      – You need to repay all your loans

     
    The effort your financial goal needs is often looked as a whole than as an accumulation of little tasks over a long period of time.

  • Period of inactivity
  • It is possible sometimes you might feel you have not done anything productive towards our financial goal. The other priorities in life especially because of office deadlines, executing your financial plan may take a back seat.

    When this happens, you might take it harsh on yourself that it hinders your motivation.

  • Over analyzing
  • Over analyzing your financial plan will give rise to perfectionism which in turn can wear off your motivation to progress towards it.

    When people over analyze, they ask questions such as:

      – What happens if inflation stays at 10% year after year?
      – What happens if the stock market did not do well for the next 15 years?

     
    Yes. These questions can be answered. However, you need to start saving and investing today to secure your future. Just over analyzing and questioning will make your financial plan stand still.

  • Trying to do it alone
  • Handling multiple financial and investment tasks all by yourself can exhaust you both physically and emotionally and strip you off the motivation.

    The Antidote:

    “Don’t break the chain!” Yes, that is all you need to keep you motivated. It is a motivation technique proven to be effective towards long term financial goals.

    Let me show you how to implement it to benefit your financial plan.

    • Break down the financial plan of your financial goal into small monthly objectives.
    • Write down the monthly financial and investment objectives on respective pages of your monthly calendar.
    • Set daily micro financial and investment tasks to complete in a day, from your financial plan, that contributes to the achievement of monthly financial objective.
    • Mark a ‘bright green X’ on the days on which you have completed the financial task towards your financial goal. It can be any simple small financial task.
    • Form a chain with the daily financial tasks, one after another.
    • See the chain as the accumulation of your hard work.
    • Try not to break the chain; else your hard work will be wasted.

    Even after you find a solution to fix your motivation, it does not end there. There is another emotion you are going to feel in the beginning stages of your financial plan. It is the fear of missing out.

    Usually called as FOMO, the fear of missing out is rather much darker than you think. Though sometimes FOMO comes as a secondary emotion to wearing off of beginner’s enthusiasm, it can also occur for its own specific reasons.

    Let us see what are those specific reasons and measures to counter them below.

2. Fear of Missing Out (FOMO)

As a man with a financial goal and having spent your energy and time to it, you are likely to have modified your lifestyle.

You were a frequent movie goer before, but now you have limited them to support your financial plan.

Those long drives and theme park visits every weekend have become a quarterly event.

You used to go on an evening shopping spree at a mall and that was your stress buster. But now, you no longer do it because you are more serious about your financial plan.

Extravagant parties for your child’s birthdays for the sole purpose of maintaining your imaginary social status means nothing and you have realized it.

All these changes are the effects of your effective financial budget plan.

The Cause and Its Effect:

This change in lifestyle can have a direct impact on your social life. Your preferences have changed from the usual of your social group.

    “Your life is boring!”
    “You only live once!”

Could possibly be the comment of your every other friend and colleague.

People of your age and financial status are having a good time. Some of them are having the best time of their lives and you are left out.

In the meantime, when you look at their lifestyle, you will remember how easy your life was before and start to yearn for it.

This fear of missing out will test your determination on your financial goal to its core.

Financial Freedom: 7 Psychology Hack 2

The Antidote:

Whenever this fear of missing out arises, you need to take a look at the outcome of your financial plan.

Also, look at what it is going to provide in your financial future and how this is different from that of others’ future.

The famous American professional boxer Mike Tyson once said and I quote,

    “No one wants to get up at 4 AM and run when its pitch dark, but it has to be done and the only reason why I do it so early is because I believe that the other guy isn’t doing it and it and it gives me a little edge.”

This quote explains the success of Mike Tyson in a nutshell. With a success rate of 86%, Mike Tyson won 44 of his 50 wins by knock out.

If he had compromised on his training, he could not have become the World Heavyweight Champion he became. So, before you think about compromising your financial goal for ‘little’ comfort, think about getting knocked out by Mike Tyson.

I guess it is more than easy for a person having fear of missing out to relate to this quote.

Basically, you are securing your retirement life with financial freedom. And I can assure you: anything that helps you secure your financial freedom is worth doing it.

But who doesn’t make mistakes?

It is possible for you to get too immersed in your emotions before you can see things as they are. A stumble at this stage can take you to the next emotional state. Make one mistake you are going to start doubting yourself.

The self-doubt could be the lowest point one’s emotion can take them to. Read below to know the causes, the adversity and the measures to overcome them to become financially independent.

3. Self Doubt

Lucky are the people who never had to face any trial of self-doubt.

Fortunately, there are no lucky people among financially independent people.

The Cause:

– As seen before, the moment you make a mistake just once, it is going to push you into the pit of self-doubt.

The one time you stumbled and put a dent on your otherwise perfect execution of your financial plan. But not just this, there are some other factors that could provoke self-doubt.

– Imagine this scenario: the stock market is not always going to be in the upward trajectory. In fact it is going to see some serious dips and at the rarest of the rare occasions it could crash.

– Perfectionism could be the root of this outcome. It is because perfectionism takes you to the top. Who doesn’t like to be at the top?

The Effect:

A series of questions that will take you away from your financial goal will be its effect.

    Will the market recover?”

    Will my portfolio deliver the assumed rate of return?”

    “How am I going to buy a new house for my family?”

    “How am I going to provide quality education to my children?”

    “Can financial freedom be a reality for me?”

Self-doubting questions like these can limit your potential and slow down the progress you are making.

The questions which we saw above are the kind of questions that induce fear. This fear is a secondary emotion of self-doubt. This, in turn, will pull you back down to your comfort zone.

But, you know there is no progress inside your comfort zone because you have been there before.

With self-doubt, the thought of securing your financial present will overshadow your financial future plans.

Even though you know the risks and ineffectiveness, making Savings and Fixed Deposits as your financial plan will look more promising than attaining financial freedom by investing in equities. The idea of taking calculated risks will become obsolete inside your comfort zone.

The Antidote:

The effective countermeasure to overcome this episode of self-doubt is self-reassurance backed up by the financial blueprint given by your financial advisor.

You may ask,

“How could this help to overcome self-doubt?”

Try this working technique for yourself.

If you have consulted a financial advisor for your financial goal, your financial advisor must have given you a definitive plan.

This financial plan is your financial blueprint. Your financial planner must have prepared it with a proper procedure developed for perfection over time.

If there is a lead or if the progress is going as per the plan your financial advisor had projected, then there is no need for the self-doubt to arise.

And if there is any lag, your financial advisor can help you understand the reason behind the lag in progress and bring it back on track. The contingency plan in your financial blueprint can help you do that.

The best thing about this approach is that it helps predict and prepare even for worst case scenarios. The simulation of cash flow technique allows course correction whenever and wherever necessary.

Teaming up with your financial advisor is your best shot to nullify any effects of self-doubt in reaching your financial goal.

Once you overcome your self-doubt, you will have the self-confidence to proceed further even if you stumble on the way. This overcoming also trumpets the importance of a financial advisor’s role on the emotional side of an investor’s life

4. The Opportunity Killer

As part of your investment plan, there is a need to make crucial decisions regarding your investments. This is where anxiety kicks in.

“But how is it going to affect me?” you may ask,

Here, I would like to refer the research on how anxiety affects decision making by the researchers at the University of Pittsburgh.

The research says, anxiety directly affects the Prefrontal Cortex area of brain, responsible for decision making, emotional regulation and control of behaviour.

The Cause:

Anxiety can make an investor pessimistic and creates questions in mind like,

    “What if my investments don’t generate any returns?”

    “What if the stock market crashes now?”

    “What if I miss the best opportunity to invest?”

Since your decisions directly influence the progress and the outcome of the financial plan, these kinds of questions arise in your head.

This condition coupled with the uncertainty of the stock market is the major cause of anxiety of an investor: in this case, it is you.

The Effect:

If you are an anxious person it could trigger a fight, flight or freeze response in you.

To better understand this, imagine this scenario.

There are two similar opportunities for you to invest in. But the time to choose one is running out.

An anxious investor at this point is more likely to choose one of the following 3 responses.

a) Fight response:

    Here, the investor will blindly choose one of the available financial and investment options without assessing the risks involved. This response has no rational base to reason with the choice made.

b) Flight response:

    With this response, no choice is made and it is done so voluntarily. This response is likely to happen when the anxiety reaches the peak and the investor decides to give up.

c) Freeze response:

    The freeze response happens when the investor wants to make a financial decision but is also in a dilemma. Usually this investor will run out of time before making any choice.

    The fight and flight responses are polar opposites of each other. On the other hand, the freeze response is an intermediate one which is a mixture of both the fight and flight response.

The Antidote:

As this state involves decision making, as an investor you have to rely only on the facts, numbers and experiences.
Consulting with your financial planner can help you overcome your dilemma and anxiety.

A professional financial planner will have rational answers to your questions.

A financial planner can provide you with graphs and reports on stock market dynamics and its general behavior. They will also have ample experience from several other clients to predict and assess the risks involved with the investment.

With the help of a financial planner, your blind risk will be a calculated risk. So it is not all or nothing, ever.

Pro tip:

If you are much anxious about your financial decisions, I request you to not consult it with your family or friends.

It is not that they are going to be against your financial goal. Since they are connected to you emotionally; they will try to bring you back to your comfort zone.

Whereas a financial advisor will effectively blow up your confidence to expand your comfort zone so that your financial goal is well within your reach.

A Real Life Example:

At the age of only 16, cricketing legend Sachin Tendulkar played his first international test match against Pakistan.

Pakistan: A side having the ‘lethal’ fast bowlers Wasim Akram and Imran Khan in their prime who could swing the cork at the speed of 140+kph to the head.

Regardless of being just 16 and entering the international arena for the first time, he scored two half-centuries in that series sustaining several blows.

If it wasn’t for his coach or had it been someone from his family, we would have never seen the greatest batsman of all time.

After all, which parent would want to see their child getting hurt?

Hence, look for a professional’s guidance such as your financial advisor when it comes to your personal finance.

5. The Period of Impatience

Financial Freedom: 7 Psychology Hack 3

Passing through all the above emotional states, you are almost there to attain financial freedom. Your patience here will be deciding whether you are going to reach it or not.

The Cause:

In this fast-paced world, we often forget the importance of delayed gratification. The impatience at this stage can arise from two different causes.

  • Impatience by Fear
  • You have already worked hard and put in all the effort it required. After months, maybe years, of dedication you are yet to see the financial result you want. And you might doubt “What if my investments don’t give me any returns at all?”

  • Impatience by Temptation
  • On the other hand, unlike for other investors, your investments are giving better returns than what was predicted. The pleasure of getting high returns can tempt you to cash out sooner and cause your impatience.

    The Effect:

    Both of these causes of impatience result in the same thing, drifting away from your original financial plan. Let us see their effects one after another.

  • Impatience of Fear
  • The fear of not seeing any immediate financial result can cause you to doubt your financial plan.

    As an effect, you might fall prey to quick-money-making schemes, to see immediate results. These types of schemes are prevalent and extremely risky. And people choosing this way usually end up giving all their wealth for nothing in return.

    Or you may reinvest in safe investments like fixed deposits. Fixed deposits look safe at the surface. But it has the risk of making your money lose its purchasing power by falling prey for inflation.

  • Impatience of Temptation
  • Getting more investment returns than expected is really a treat. This, for sure, will give anyone joy.

    In the meantime, it could also make you cash out your investments halfway. And as an effect, you will miss the future investment returns, and you will be off the track of your financial plan. You will be ending up as one of those people who were chasing rabbits without any financial plan.

    In both of these cases, you are making changes and going out of the original financial plan.

    The financial plan given by your financial advisor is like spring water in a pond. The water of spring come at a rate, one cannot and should not try to increase it. Or try to scoop out water before the pond is full. Because the more you try to do it, the more the water will get muddy and unclear.

    But if you want to have surplus clear water for the rest of your life, give it time to fill up to the brim and let it overflow.

    In equity mutual funds, this is called as the power of compounding.

    See the image below to understand the significance of compounding in your long-term financial plan.

    Karan Rajesh
    Invested at the age of3545
    Monthly investment Amount10002000
    Investment Period2010
    Rate of Return99
    Overall Investment Amount240000240000
    Interest Earned432896149931
    Wealth Gain672896389931

    The Antidote:

    Do you think I’m asking you to do nothing at all in the name of patience?

    Absolutely not!

    That’s because, from an investor’s perspective, which is you, time is a valuable resource.

    And as you let the power of compounding work on your investment, you are gifted with more time. And this is a key area to act wise and make your financial plan a foolproof one.

    You are in an active job and have a source of active income. Now you have the knowledge and the support of your financial planner to invest again.

    This approach of re-investment and diversified investment is highly recommended by any financial planner.

    Diversifying your investments reduces the uncertain risks in half while also boosting the progress to your financial freedom.

    But it also means you are going to manage multiple investments at once. This is like entering the adulthood of being an investor. It will take you into the haze.

    6. Clearing of Haze

    The clearing of haze should be the final hurdle in your race to financial freedom. Let us see what could this hurdle be made of and that one final leap that you have to make.

    The Cause:

    Even with all those financial struggles and investment practices, monitoring and managing multiple investments at once will be overwhelming.

    There will be too many inputs for you to process and handle. In short, I would say, this stage will feel like a revisit to all the emotional state we have seen above.

    The Effect:
    Coming back of the emotions, the doubts and the fear could be a nightmare.

    When it comes, you will start to doubt the basics. Your other friend is earning “steady” with fixed deposit, but your earnings are still only on the paper. You could lose trust in your financial plan and the basics learned.

    The Antidote:

    The only difference in this stage is that you have already overcome these doubts and fears.

    The discipline that you have to follow is stressing, but you know it is necessary.

    Sheer determination and consistency in managing your investments will be the key at this stage. And when you keep on consistency and stick to the basics of your financial plan the haze will begin dissolve.

    Eventually, building a strong portfolio will lead you to the emotional state which we are going to see below.

    7. Feel Like Home

    After years of investing and re-investing, dedicating hundreds of hours over the years, you will be on a well-set course to your financial freedom. Overcoming your impatience will give you the feel of coming back home after a long time.

    The Cause:

    The financial freedom, which you once thought impossible, is almost a reality now. The projected cash flow is going as per your financial plan. And above all that your financial advisor is suggesting the necessary course correction in your financial plan.

    This is the major reason for this sense of financial wellness.

    The Effect:

    This emotional state of financial wellness is a good sign and should be embraced.

    Although, you should not pause or take a break from what you are doing. Your financial freedom is always a moving target. However, if you stop your progress, which is highly unlikely, there is a chance that you might go in the reverse path.

    The Antidote:

    The aim of your financial freedom is to stay financially independent for the rest of your life. That is, it should not be a temporary stay.

    Since you have reviewed your financial plan and its progress with your financial advisor all along, you can rely on your financial advisor in this regard. By this point, your financial advisor will have your most accurate portfolio.

    A financial advisor can calculate and simulate the net worth, your expenses and the necessary steps you need to take to retain your financial freedom.

    Conclusion

    Financial freedom to anyone is not a walk in the park. Financial advisors with their vast experience can help you resolve your problems with absolute rationality while also empathizing with your emotions. Acknowledge your emotions, discuss about it with your financial advisor.
    Fortunately, with a sound personal finance plan, financial freedom is possible and it is proven time and again.

     
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