There is a ‘Behavioral’ component to how we are losing money these days, and we are losing it without realizing it.
These behavioral components of our own financial lives are known as ‘Behavioral Finance’. Let’s take a look at some of the behavioral mistakes that might keep you impoverished in this fast-changing world.
Reluctant to examine the facts:
Behavioral Finance refers to it as ‘avoidance’. You recognize your spouse or children are overspending but you are too polite to discuss it. For example, if you dine out too frequently and in an expensive restaurant, you must claim that ‘We can’t afford it’ to your family. Many guys choose to live with the situation rather than address the reality. Abstaining from asking your manager for a salary raise falls under this category. You’re attempting to steer clear of the feeling of discomfort. You are not avoiding discomfort; you are simply postponing it.
Comparison:
Constantly comparing yourself to others, including friends, family, neighbours, and colleagues, can negatively impact your life. Your coworker may be the son or daughter of a wealthy individual, and hence can afford more costly items such as clothing, a car, dining out, and so on. If you emphasize with comparisons, you will be significantly poorer.
Fear of investing:
Many individuals keep their money in savings. No, they are not refusing to invest; they are simply postponing. The hard truth to digest is that the amount of cash held by Indians exceeds the mutual fund industry’s assets under management. Only this year did the AUM surpass the cash. It took us 60 years for this development to occur. Investing early on and making your money work harder is the key to building wealth.
Not staying up to date:
If you did not have a comprehensive education, it is important to continue learning and improving your abilities. There are several online (free or paid) tutorials available to help you learn, ask for a salary raise, or start a side hustle.
Not allocating an hourly wage for your work:
If you earn Rs. 80,000 a month and work 25 days a month, you would earn Rs. 3,200 every day. This is almost 400 per hour. You should delegate any task that costs less than Rs. 400 per hour, such as cleaning, cooking, laundry, and housework. You could try a side gig that pays more than Rs. 500 per hour. You should be focused with boosting your hourly income rate, either by asking your manager for a salary hike or starting a side hustle.
Expensive habits:
Luxury habits include organizing last-minute trips and paying surge rates for airline tickets, staying in luxury hotels while on vacation, using private transportation for everything, and so on. We don’t bother estimating how much it costs to travel by private transport. Repeatedly eating out, purchasing branded items, and using expensive modes of transportation are all considered luxury. Travel is necessary, but ‘travel in luxury’ will keep you impoverished.
Not engaging with your family and making a financial plan:
Sit down and talk about your money with your family (at least your spouse). If you and your family identify your family goals, establish asset allocation, and begin investing for your future goals, you will be on the path to success and ahead of a majority of the population. Poor asset allocation means that the majority of the money (if any) is sitting in the bank account without being invested; either no investment is made or it is made at a far later period, which shall miss the early-bird compounding magic.
Having no clear financial goals:
If you don’t have a reason to save or invest, you’re unlikely to do so. It is critical to have objectives, whether for health, money, or career. The wealthy and those who aspire to be wealthy have certain aspirations. When you don’t have objectives (life goals), you don’t have a road-map, therefore you can’t keep track of your costs, income, assets, and obligations. This also implies that you are not accountable to yourselves. This actually keeps you impoverished. Wealthy people keep track of their assets, obligations, income, and spending. Most importantly, they track their net worth on a regular basis.
Paying yourself last:
When you make money on a regular basis (usually monthly), if you spend it first on demands and luxuries, you will never have enough money to invest. Rich people adhere to the philosophy of ‘pay yourself first’. That is, pay for all of your objectives first by saving and investing a portion of the money that you earn. Only the remaining money has to be used for your needs and wants. This is excellently explained in the book “The Richest Man in Babylon”, and I would highly recommend everyone to read this book for a better personal finance management.
Getting used to debt:
This is one of the deadliest pitfalls that middle-class individuals may fall into. Borrowing to cover unexpected expenditures such as a cracked car windshield, an increased utility bill, school fees, or hospital bills, etc. Once you’re comfortable with debt, you won’t be afraid to borrow, which is very dangerous for your financial life. When you simply see the repayments, the debt appears little. Such people purchase everything in instalments, such as EMI for a trip, smartphones, other expensive items, etc. Here, the interest paid to banks keeps you poor. This tendency might also be attributed to a lack of emergency money. As a result, when we need money, we just get a loan.
Poor knowledge of taxation:
We have to first understand that taxes are deducted from what we earn, rather than out of our own pocket. We should also be aware that capital gains are taxed at a lower rate than normal income; this is especially important for those with money in their hand to understand. Real wealthy individuals realize that taxation apply to their earned and investment income only, and they manage their investments and income accordingly.
FINAL WORDS
Not knowing fundamental personal finance goals, budgeting, monitoring, renting vs. buying, purchasing an overly large house or a fancy car are all damaging activities that keep you impoverished. The above discussed are some of the undesirable FINANCIAL HABITS that you should try to eliminate in order to break out of the middle class.
