The idea was that we all want to manage money and learn Money Management in our lives, and the only way to do that is to create the right set of habits early on in life. So if you’re a teenager, you’ll find this relevant as we explore money through the lengths of psychology and also how habits can play a major role in helping us manage our money as we grow older.
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In this video, we are trying to help you develop good habits toward money and investment. Handling money is a soft skill where how you behave is more important than what you know. Sounds strange, but let’s go through the rest of the argument. It essentially means that if you know perhaps the exact trade price of stock beforehand, or you even know the winning lottery ticket while buying it, and even if you earn a windfall sum of money, you will ultimately return to your old financial situations if you don’t know how to behave right when you have earned that money.
But behavior is tough to teach and hear. The magic of Atomic Habits comes into play. So what is right? Behavior and perspective with money? Let’s look at five factors, one by one.
1. Man in The Car Paradox:
Imagine you see a person riding a luxury car. We turn our heads and look and we are impressed, but we don’t think, that person is so great. That person is my role model. Instead, what we think is, imagine if I was in that car and how society will respect and admire me if I ride that car.
The fact is, we admire the car, not the person. This applies to every show-off item you want to purchase. So the desire to buy all the glitter to get admiration and respect from others is quite a paradox. Morgan Hausel calls this a man in the Car paradox. So the first habit that we need to build to break this paradox in our head is the habit of asking, Why?
Example: why do I want to buy that expensive jacket when I already have two jackets? Or Why do I want to buy that branded bag when a regular bag will do the job? Ask yourself, Why do I need to buy this thing? Is it a necessity or does it satisfy my ego? In the book Atomic Habits, James Clear explains that one small change in habit can compound into phenomenal results. This small habit of asking, Why? Before any purchase will substantially cut your expenses.
2. The Relationship of Money and Time:
Why should I even bother to earn so much money if I don’t need to buy all the luxury items and fancy cars and houses? If this question is buzzing in your head, I would say that’s a very valid question. And the answer is for a very expensive commodity called time. Morgan Hausel calls it control over time. A stable wealth gives you complete control over your time. This should be your biggest goal of earning money or creating wealth so that one day you don’t have to work for money.
You can spend your time doing things that matter to you, things that add value to your life. This can only be possible when you have a stable wealth that can cover all your financial responsibilities. So what atomic habits should be built for that? The habit of savings, even a small addition to your savings will eventually become a treasure. So save as you did in the piggy bank.
Start with about 10% of your monthly income. Maybe your pocket money and gradually keep increasing the amount. At this point overthinking where you’re going to invest it. And whether you can double that money is not that important. The core is the habit of saving. And after that, let the compounding effect take over.
3. Stop the GoalPost:
Morgan Houses share a story with this perspective of money. Let’s say a party host was a hedge fund manager. That day he had earned more money than the entire historical earning of the wildly popular book Catch 22. But the author of the book, who was also there, responded on a lighter note,
“yes, but I have something he will never have…enough”
The hardest financial skill is getting the goalpost to stop moving. Last year you calculated that 50000, let’s say, was the minimum wealth. You thought that was enough for you. And maybe you thought, I don’t have to work for money now, but this year it’s become a million and next year it’ll become 10 million. It’s a never-ending race, and even after years of effort, you’ll feel unfulfilled and worthless. So what atomic habits should be built to stop running on a financial treadmill?
The habit of maybe a (SIP) systematic investment plan or compounding assets. This ensures that you’re not focused on the goalpost, but on the right path. Choose the right compounding asset, like maybe a mutual fund that’s indexed. Or maybe you want to set an undeteriorating long-term habit of a SIP. Increase it by 20% to 30% every year and your wealth will ultimately blossom in the coming years.
4. Reasonable Wins Over Rational:
Money is not some number game that you will play on excel sheets and a formula that will give you your returns. At least this is not the case with personal finance. When the financial advisor of Morgan Hausel asked him to take out a loan for his house, the loan rates were absurdly low at the time and his advisor suggested he take advantage of the cheap money and invest in plans with high returns. It made complete sense on paper. Why not? Who doesn’t want to get good returns? But Morgan Hausel rejected the advice.
Was he crazy? Not really. He was just psychologically reasonable. He said the thought that I don’t have to pay anything for my house in the coming months gave me an immense sense of independence. I don’t want to take on the burden of a loan. So don’t fall into the trap of making financial decisions based on cold, rational numbers but in a state of reasonable awareness.
Now the atomic habits that we should build to enhance our reasonable perception of money are called the (SDP) Systematic Donation plan. A habit of donating a certain percentage of money to different projects every month Will sharpen your perceptions. To see the right use of your money and what that money means to different people.
5. Money Management is Luck Factor:
Luck is a very important factor in the success of our investment. The author gives a number of examples of how luck played major roles in the financial success of the most successful people like Bill Gates and Warren Buffett. But why is it so important for you to know that luck is a very important factor in your investments? Just to break our illusion that we control every aspect of our money, we think that only our decisions are responsible for the returns we get. This arrogance forces us to take some risky decisions and ultimately drags our wealth to the worst.
There is a very good standard to measure your financial decision it’s called the Sleep Test. Ask yourself a question yourself in every financial decision “Does this helps me sleep at night” no investment is worth your sleep and definitely not when you know everything about your money is not under your control. so what atomic habit should be built for this? the habit of reading and listening to financial news. It increases our chances to get lucky as we get the right knowledge to diversify our financial investment into the right assets and hence reduces our risks.
