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Why is personal finance dependent upon your behavior? (110 Best Information)

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Why is personal finance dependent upon your behavior?

Personal finance : Your behavior affects your personal finances by being able to control your buying from impulse to what is needed and to save a portion of all income. Then, to invest wisely. That means studying your retirement to see how much you need and having a financial plan.

Our behaviour is often at the heart of many of our problems. Do you shop when you’re hungry? Studies suggest you’re likely to spend more if you do and that you are also more likely to buy snacks to quell your hunger (which are often expensive and not healthy.)

Our behaviour, if unexamined, can cost us financially, physically, and emotionally. There are many books on this. I suggest doing a search on behavioural finance and habits.

BJ Fogg does research on this. James Clear has written a book about habits. Ramit Sethi and Mr Money Mustache also focus on habits and financial success.

I also recommend you read “Your Money or Your Life” by Vicki Robin.

Spend a day or a week noting every cent you spend and you might uncover some habitual spending that isn’t necessary.

Why is personal finance dependent upon your behavior?
Why is personal finance dependent upon your behavior?

What is personal finance? Why are Americans obsessed with personal finances?

Personal finance refers to the management of an individual’s or a household’s financial resources, including income, expenses, savings, investments, and debt. It encompasses various aspects such as budgeting, saving for retirement, managing debt, investing, and making financial decisions to achieve specific goals.

As for why Americans are often perceived as being obsessed with personal finances, there are several factors that contribute to this:

  1. Individual Responsibility: In the United States, there is a strong cultural emphasis on individualism and personal responsibility. People are often encouraged to take charge of their own financial well-being, which includes being proactive about managing their money effectively.
  2. Economic Insecurity: Americans often face economic uncertainty due to factors like job instability, healthcare costs, and social safety net limitations. As a result, many individuals feel the need to be diligent in managing their personal finances to ensure financial stability and protect themselves from unexpected financial hardships.
  3. Consumer Culture: The United States has a consumer-driven economy, and there is a prevalent culture of consumption and materialism. As a result, individuals may feel pressured to achieve a certain lifestyle or accumulate wealth, leading to a heightened focus on personal finances.
  4. Rising Costs and Debt: The increasing costs of education, housing, healthcare, and other essential expenses have placed a significant burden on many Americans. This has prompted greater awareness of the need to manage finances effectively and make informed decisions to address debt and financial obligations.
  5. Financial Education Gaps: Personal finance is not always adequately covered in traditional education systems. As a result, many individuals feel the need to educate themselves independently to navigate the complexities of personal finance effectively. This can contribute to a sense of obsession as people seek to fill knowledge gaps and make informed financial decisions.
  6. Media Influence: Media platforms often highlight stories of financial success, investment strategies, and wealth accumulation, creating an environment where personal finance becomes a topic of fascination and aspiration.

What is behavioral finance? Will it help us in personal finance?

Behavioral finance, a sub-field of behavioral economics, proposes psychology-based theories to explain stock market anomalies, such as severe rises or falls in stock price. The purpose is to identify and understand why people make certain financial choices. Within behavioral finance, it is assumed the information structure and the characteristics of market participants systematically influence individuals’ investment decisions as well as market outcomes.

The reality is that every individual is a confluence of biases, emotions, influences and experiences – and all of those factors impact how we view the world and manage our own money. That’s why some people are risk-takers while others are ultra conservative. So it’s not enough to understand financial markets and products, you must also understand your own emotional processes, mental mistakes and individual personality traits as well as how they affect your decisions.

Definitely. Behavior finance seeks to explain why people make the decisions that they do – it is essentially personal finance at the macro economic level. Recent examples include the run up of Tesla stock for no business reasons. So why do people keep buying? I don’t know buy behavior finance seeks these answers.

If you understand that markets are irrational, and so are people, then you can try to avoid the same pitfalls and be more comfortable with your personal finances. A good example of this is dollar cost averaging instead of trying to time the market because you don’t know when irrational behavior like Tesla stock buying will change the markets so you don’t try to time them and you don’t worry about it.

Why do people take personal finance?

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I was saving money for something snce 2015. Then after some time my target of amount was the deposit amount in my savings account.

However, during all these years thing which I was planning to purchase became expensive price were doubled.

So I took personal loan just to see what can I do if I get money in advance.

Now with few installments left. I know I enjoyed alot with that money. However, I also understood my spending habits are carnal they are not good of anyone else. On the contrary my soending habits may make me bankrupt.

However, I know exactly how inflation is going to ruin our tomorrow.

If your long term goals achievement is associates with something which is getting expensive everyday.

Take money on loan and specifically spend it on a purpose. Any leftover amount let it stay in your account.

Your behavior must remain humble even if you have lot of money in account.

How to Save your Money for Children ?

  1. Save like a maniac—at least 15% of your gross pay. Save more than 15% as your income increases.
  2. Avoid debt like the plague. Aside from a fixed-rate, 15-year mortgage costing no more than 25% of your take-home pay, adopt the following philosophy: If I can’t pay cash for something, I can’t afford it. Consistent with that, pay your credit card off in full every month—no amount of frequent-flier points, or cash back, is worth paying 18–20+% interest. If you can’t discipline yourself to do that, cancel your card, cut it up and only use a debit card/cash.
  3. Invest sensibly in low-cost, well-diversified equity index mutual funds. You can learn all about doing so on Vanguard’s website.
  4. Understand the difference between needs and wants. Buy your needs, and only the wants you can afford. (See #2 above.)

Simple rules, really. Now all you have to do is follow them. Good luck!

Why is personal finance a hard habit to pratice?

In 2001, if you had bought a Royal Enfield bike at 55000 INR, it would today be just an old, used bike. But if you had invested the same amount in shares of Eicher Motor (Manufacturers of Enfield) at 17.5 INR per share, you’d have 3142 shares which are worth INR 9,19,03,500 precisely (9 crore) at 29,250 INR per share, as on 5/1/2018. The best part? The entire gain is tax free.

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The most important thing to know about personal finance?

The Power of Equity.

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Cheers!

What personal finance tips do you have?

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Imagine you’re in the middle of the desert.

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Imagine that when you work, you get paid in water.

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The first problem you will bump into will be how to store your water.

Solution?

Use a glass instead of your hands.

(Image credit google)

Second problem?

The water will evaporate with time, correct?

To solve this you need a canteen with a cap to prevent evaporation.

Great!

(Image credit google)

The next challenge will be to resolve long term reserves.

This seems like a simple solution; you get multiple canteens and build up your store.

(Image credit google)

Amazing!

Next problem…

When you lose your strength to work, you will need to start consuming those canteens. Your life expectancy in the desert will be determined by the number of canteens you were able to accumulate during your work life.

Some people in the desert may have accumulated enough to drink during their elder years, some won’t.

Ideal solution?

Own a water well in the desert.

(Image credit google)


Interpretation of the analogy:

  • Water = Money (cash)
  • Water in a glass that evaporates = Cash in a bank.
  • Water in a canteen = Assets that appreciate with inflation. They maintain their value over time. Some examples are commodities like oil, gold and silver.
  • Accumulated water in canteens = Savings in assets.
  • Losing strength to work = Retirement.
  • Water well = Cash flowing assets.

Lesson of the analogy:

  1. Money is only a mechanism of exchange that holds a temporary storage of value.
  2. If you save cash, time will ‘evaporate’ its current value.
  3. Some assets protect us from monetary volatility. This is specially important in third world countries like my Mexico.
  4. Accumulating assets may not be enough to guarantee your retirement because you will need to liquidate them to pay for your needs.
  5. The water well represents cash flowing assets. These assets produce passive income, meaning they produce cash even while you sleep.

To answer your question, how can you improve your personal finances?

One of the best ways to improve your personal finances is by investing intentionally in cash-flowing assets.

The most common are real estate rentals, businesses and royalties.

Your first step is to protect your savings from the external influence of monetary policies that will “evaporate” the value of your hard work.

  1. Make more money. You have to be able to make more money than you did last year. If you do this every year you work, you’ll end up ok.
  2. Invest 10% of your paycheck before anything else. Use a company 401(k) or automatic investment into an IRA to automatically invest 10% of what you make for your future. Retirement will be the biggest purchase you will ever make, be sure to prepare accordingly.
  3. Prepare for the worst. Don’t skip out on insurance and be sure to have an emergency fund. You should have disability, life, car, health, and home insurance. You also need to have at least 3-months worth of expenses in cash in a savings account as your emergency fund.
  4. Track your money. Use one of the million free money tracking apps to find out what you are spending money on. You’ll find out really fast if you are spending money on bullshit or on things you actually value.
  5. Be patient. Money does grow on trees, but trees take a long time to grow. Just keep watering that little hole in the ground and you’ll be good one day.
  6. Don’t borrow money to buy anything that won’t make you money. Don’t buy a car with a loan, because cars go down in value. Don’t buy clothes with a credit card, because clothes go down in value. Unless you are purchasing real estate or a business, you probably shouldn’t borrow money.
  7. Spend money. Life is meant to be lived. Spend money on what you care about. Travel the world, buy a nice pair of shoes, and go have a fancy dinner. Just be sure to pay cash.

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