Why People Do Stupid Things With Their Money
In my Rich Habits Study, I had the fortunate opportunity to peer into the lives of 128 individuals who struggled financially in life.
My goal was to figure out the underlying causes of their financial struggles.
I learned many things.
For instance, I learned that those who struggled financially had habits that, in many instances, were the polar opposite of the habits of the self-made millionaires in this same Study.
Certain habits I uncovered related to money.
Those who struggle financially, I found, are just not very good with their money.
There are numerous reasons for this, but I believe it boils down to 12 specific things:
- Ego – Ego-driven money decisions prevent you from managing whatever money you do have in a prudent manner. Some of the specific examples of this from my Study included:
- Buy Expensive Things – Ego-driven purchases intended to create the perception they were doing better financially than they actually were.
- Invincible – This was one of the reasons they did not purchase adequate life insurance
- Smarter Than They Actually Were – This was one of the reasons why they did not hire experts, seek feedback from experts or why they took Uneducated Risks (taking risks without doing your homework).
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Emotions – Spending decisions that are based on spur-of-the-moment emotions. - Bias – Making money decisions that are not fact-based but, instead, ideologically based.
- Ignorance – Not doing your homework. Taking uneducated risks could be Ego-based or Ignorance-based.
- Overthinking – Simple solutions are usually the correct solutions. Seeking more complicated solutions leads to chaos.
- Fear – Never make money decisions out of fear. An example would be liquidating investments during a downturn in the stock market.
- Stress – Studies have shown that stress reduces your IQ by 13%. Never make money decisions when you are under stress.
- Poor Decision-Making Habit – Making frequent poor decisions is a habit. There are a number of reasons why you make bad decisions: Ego, Emotions, Bias, Ignorance, Fear, Stress, Tired or Hungry (suffering from Decision Fatigue) and Impairment (drugs/alcohol).
- Desperate Decisions – These are decisions that you make from a position of weakness. They are typically the result of prior bad decisions and are always forced upon you by some third party, such as a lender, government agency, credit card company, employer, spouse, family, or friends.
- Impulse – Making spur-of-the-moment purchases. Related to emotion-based spending mistakes but could also be caused by Decision Fatigue.
- Externalities – Keeping up with the Joneses’ spending decisions is an example. Other reasons for making bad money decisions can be due to pressure from a spouse, family, friends, work colleagues, etc.
- Impatience – Making poor money decisions, such as liquidating investments during a downturn in the market can be fear-based or driven by a lack of patience. Making any major purchase without wanting to spend the time doing your homework, is another example.
As you can see, there are many reasons why we can make mistakes with our money.
Being aware of these common pitfalls can help prevent you from making poor money decisions.
