Over the past 20 years, the US share market has risen 5-fold, the Australian share market 5.4-fold and Australian property 4.2-fold. That means if you invested half a million dollars 20 years ago, in either shares or property, it should be worth between $2 and $2.5 million today. You’d have even more money if you added some
gearing.
This observation raises an interesting question. That is, why aren’t more people independently wealthy? I suspect the answer lies in their actions, or more correctly their inaction.
We make emotional decisions not logical ones
It is a widely accepted fact that we make decisions based on our emotions (how we feel) and then rationalise these decisions with logic. Often, we do this unconsciously.
We’d like to believe that we are logical and rational animals. But the truth is that we are not. Our decisions, particularly about money, are shaped by our beliefs, upbringing, our peer group, past experiences and culture. We tell ourselves stories about money. And then we use
confirmation bias to validate those stories.
Self-awareness and reflection are probably the greatest gifts as they help you recognise how you think, so you can stop allowing emotions influence your financial decisions.
Building wealth requires a logical, pragmatic and rational approach. Emotions are not only unhelpful but can be dangerous.
Common fear # 1: Paying attention will be painful
Sometimes it feels easier to stick our head in the sand and ignore a (potential) problem. For example, most people know that it’s not financially prudent to spend all income on lifestyle expenses. They probably realise that they should be investing/saving some of their income. But to do that, they will have to admit to themselves (and maybe others) that they have been doing the wrong thing in the past. It feels less painful to ignore the issue and “get to it one day”.
The problem with ignoring financial misbehaviours is that they magically don’t disappear. They compound. Just like
good financial decisions compound, so do bad ones. The longer you ignore it, the worse the consequences will be. And those consequences will be forced upon you at some point in life. For example, you will have to stop working at some point in your life and it’s that point that you will rely on your savings/investments or lack thereof.
Often, people in this situation will not do anything until the perceived pain (consequences) from not changing becomes greater than the pain of changing. This often occurs when they are 5-10 years from retirement. They start to think that they’d better start investing before it becomes too late.
The solution is to educate yourself about the cost of procrastination. Spending all your income for a couple of years is not a big deal. But doing it for 20-30 years may cost you dearly.
Common fear # 2: Investing is too risky. I could lose my money
We work hard to accumulate savings. We make sacrifices. And having savings in the bank helps us feel financially secure. Of course, we don’t want to lose that money.
When you invest, you do so with the intention of generating future returns. Of course, investment returns are not certain. Investment returns can vary from initial expectations. This is called investment risk - i.e. the risk that you don’t achieve your targeted investment returns.
This perceived risk can paralyse some investors into doing nothing.
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IMPORTANT: This podcast provides general information about finance, taxes, and credit. This means that the content does not consider your specific objectives, financial situation, or needs. It is crucial for you to assess whether the information is suitable for your circumstances before taking any actions based on it. If you find yourself uncertain about the relevance or your specific needs, it is advisable to seek advice from a licensed and trustworthy professional.
