Over the past several weeks, we have discussed the fundamentals of financial planning and wealth creation. All those principles would be ineffective if we have self-sabotaging habits that would limit their efficacy in our experience. So, what then are these factors limiting our finances? What habits are tripping us in our wealth creation journey?
Not paying yourself anything – you work for 30 days, collect the salary from your employer and straightaway disburse the money to others, also known as the post office mentality. You share your salary out amongst the petrol station, supermarket, fast foods restaurant, hairdresser etc. but you keep nothing for yourself. This habit must be broken. Pay yourself something monthly by putting something in your investment account. Pay yourself first. Do not save what is left after spending. Spend what is left after saving.
Spending money you are yet to earn – buying on credit, debiting the future. By the time the income is earned, it comes in as insufficient. Business loans and mortgages make financial sense, but consumer items like clothes, telephones and jewelry or dining out should not be paid for with credit. In some societies, there is a need to create a credit history using credit cards, such purchases should be paid up in full at the end of the cycle. Avoid paying “minimum due” only. Anyway, alternative credit scoring methods have been developed, people no longer have to create consumer debt before their ability to manage mortgages can be accurately assessed. Alternative credit scoring uses data from post-paid mobile phone accounts, utility companies and other financial transactions, and can accurately evaluate a person’s credit management competencies. Except in cases where we have no choice, for instance when shopping in some online stores, no one should be buying small items on credit anymore. So, use credit cards only as a digital wallet, for convenience, and pay off the whole outstanding balance every month.
Poor debt management – not complying with the provisions of justifiable loans. Never miss a payment, avoid compound interest (interest on interest)default fees and fines. These extra payments are the things that make loans potentially devastating.
Impulse buying – seeing something you like and buying it immediately, though you have no need for it, neither did you plan to buy it before seeing it. So,there is no provision for the expense in your budget and its purchase money would be seized from other budgeted items. One solution for impulse buying is delayed gratification – sleep over the decision to buy. If you can still justify your “need” for the item the next day, go ahead and buy it. But experience has shown that over 90% of people do not make the purchase anymore.
Retail therapy – spending, especially impulse buying, as a means of getting temporary emotional relief. Such purchases are usually extra-budgetary and derail our financial goals. Since the emotional relief we get from retail therapy is temporary and the financial damage is more lasting, we need to find better solutions to emotional stress. Time out with friends, counselling, and visiting the less privileged bring more lasting emotional relief without any devastating financial side effects.
Competition – buying to impress or outshine others – usually, the competition is with perishable consumer goods, and it creates avoidable debt. I once heard a definition of madness that fits in well here – buying what you do not need, with money you do not have, to impress people you do not like. We need to get out of the rat race, because even if you win the race, you are still a rat. If you must compete (and I am not suggesting that you should), compete with eagles in more durable assets like size of money market investments or number of shares in blue chip companies. At least you get lasting benefits from the competition.
Breakthrough mentality –some people refuse to commit to systematic wealth growing because they are expecting a breakthrough that would bring them instant riches. But a person who does not have good financial management skills would not know how to manage a windfall and ultimately lose the breakthrough wealth. Before wealth management plans became compulsory for lottery winners, 99% of them were broke within three years of winning tens of millions of dollars. We must realise that to manage great wealth, we need financial skills that we have practised and perfected on smaller portfolios. So, get practising now.
Habits form from repeated patterns of decisions and actions, and therefore have the potential of becoming our character, and determining our destinies. Let us put a stop to the habits that limit wealth creation. Happy investing.
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