a. an object of irrational reverence or obsessive devotion
b. a strong and unusual need or desire for something
In today's modern society (modern western society at least) we seem to fetishize consistency. We call politicians who change their minds on issues or change their views "flip-floppers." Who among us hasn't defended an opinion we no longer held simply because we held it before and discussed it with others? Both externally and internally in our own minds, we seem to have this unusual and intense desire to remain consistent with our past thoughts, beliefs, actions, words, and desires - we seem to have an irrational and unfounded fear of admitting that we've changed our minds on something or that we've grown up a bit and now see the parts of the picture that we didn't see before.
It's not clear where this fetishism of consistency comes from. It could arise from without (an external influence on us by the media or the education system) or it could arise organically from within (many individuals valuing consistency and see it as a vital trait). Regardless of where it comes from, today's intense devotion to consistency has likely gone too far - some consistency is important, BUT putting consistency above all else (including growth, education, and flexibility) is a foolish thing for a person to do and a foolish thing for a society to exalt.
If you believed X in the past but now believe Y, you must not be afraid to admit either to yourself or to others that your position has moved. Of course, if you consistently change positions or can never make up your mind on issues, that's a problem of its own, but when you move from X to Y because of personal growth, because of education on the topic, or because of an increased internal flexibility, you are acting in a very human and correct way.
In short, it's ok to change your mind when
But, your mind really hasn't changed if
If you cannot save money, the seeds of greatness are not in you.
To become an excellent saver over the long term you must get some sort of mental reward from saving - if saving is a difficult process (like resisting eating food when dieting), you might be able to do it for a little while but over time you'll fail because we all only have limited amounts of willpower and energy. The real secret to being an amazing saver is to love saving - the secret is to have saving be a very enjoyable thing.
For some people saving money is very easy - they were either born with a mind or a disposition that rewards them when saving or they developed such a mind or disposition over time. Rarely will you see a really excellent saver who has to consistently battle himself or herself to put money away for the future or to resist spending in order to save - it's just too hard to do over the long term.
Other people, however, just can't seem to save. They spend all of their incomes (and sometimes even more) and they don't seem to feel any reward by putting money away - it feels like a chore to resist spending all of their money or putting some money aside. They won't become wealthy unless they strike it rich through luck or unless they have extremely high incomes. For most people who can't seem to enjoy saving money, they will need to change their mind a bit in order to be able to become truly excellent savers capable of building real lasting wealth overthe long term.
How can you change your mind? That's the hard part. You'll need to force or will yourself to start saving at first despite any internal resistance you have to it. When you do save some money, take the time to sit down and think about what you just did:
Reward yourself with a nice dinner, a nice movie on Netflix, or anything else you enjoy. Let the pleasure sink in and try to associate the pleasure with the act of saving money. Do this consistently and over time saving will seem more pleasurable and easier.
5 tips and tricks to get you on the path toward saving immediately
Here are some other tips to help you become an excellent saving:
Now, it's possible that not everyone can be an excellent saver - as much as we want it to be true, it seems like some people either don't have the personality or the internal energy to become excellent savers. That's a sad proposition. However, if you're reading this post, you're very likely not one of those people - you've already shown excellent initiative and you're already ahead of the game in your search for high-quality information. Go out and practice the tips above with vigor and intensity until you saving feels amazing for you also.
Although we try to live life as wisely as possible, financial emergencies do arise simply because of the unpredictability of life. We might plan, but the best we can really do to protect ourselves from life’s financial emergencies is to have an emergency fund in place.
Read this comprehensive article to learn how to quickly build up your emergency fund
Once you've dealt with a financial emergency, you'll need to rebuild your rainy day fund - read this comprehensive article on how to quickly rebuild your rainy day fund
So, what do we do when we are facing a financial emergency?
The financial media speaks constantly about the importance of having an emergency fund and on how to build one up, but we rarely come across articles or videos or pieces on how to actually deal with those inevitable financial emergencies. This is unfortunate because, although a rainy day fund is crucial to your financial stability and your ability to build wealth over time, the ability to handle financial emergencies with a bit of savvy is also an incredibly useful financial skill that will pay dividends over time - handling financial emergencies well will allow you to use less of your emergency fund and get back on your feet more quickly so you can start earning and investing again.
Long-term vs. Short-term Financial Emergencies
It’s obviously impossible for us to know your exact financial emergency within the context of this piece, so you should take what’s written here with a grain of salt and filter it so that it makes sense for your and your situation. However, there’s one point we do want to bring up regarding your potential financial emergency: your emergency will either be short-term or long-term.
Here are a few examples of short-term financial emergencies:
Here are a few examples of long-term financial emergencies:
Whether you’re facing a short-term or long-term financial emergency, this article is for you. However, if you’re facing a long-term emergency, you will have to follow the steps for a longer period of time as you traverse the emergency - whether it be looking for a job or healing from an injury, you’ll have to follow the advice (which might prove difficult at times) while getting your life back in order so you can go out there and win again (and again).
Cut Expenses Fast and Hard
In a financial emergency, the first (and possibly the most crucial step) is to cut expenses down deeply to bare necessities while you are recovering.
Remember, your "monthly living expenses" as we defined them do not equal your income or your average monthly spending during normal times - your monthly living expenses for calculating the size of your rainy day fund are just those expenses that are required to pay for the basics. So, you'll have to cut down so you can stay within those monthly living expenses. That means that while you’re dealing with the financial emergency there are no fancy dinners out, no new clothes that aren’t absolutely necessary, no trips, no gifts, no luxury purchases, and no other luxuries.
Read this article for an in-depth piece on what we include in your monthly living expenses when calculating the size of your emergency fund
This is hard to write about in such a general article, but it’s important to note. You must strive to recover from your financial emergency quickly. This might seem obvious, but it’s a little more nuanced than it might seem at first glance. What we mean by recover quickly is that you should be willing to exert energy and spend money from your rainy day fund (within reasonable bounds that you have to put in place for yourself) to get things back to normal.
For example, if your washing machine breaks and your family can’t wash clothes anymore, it’s wiser to get things taken care of by repairing or replacing the washing machine than by delaying in some sort of attempt to save money.
In another example, if you are injured in some way, it is wiser to quickly recover at home and use some of your rainy day fund to get by instead of attempting to work while recovering and thereby delaying your recovery while underperforming at work due to your injury. You'll recover faster, you'll be back on your feet sooner, and you'll have a better quality of life throughout the recovery.
Recovering quickly from a financial emergency means being willing to use some of your rainy day fund in order to get things back to normal so that you can continue earning money, building wealth, and enjoying life. Your emergency fund is there exactly for this - for financial emergencies.
Maintain a Positive Outlook
Above all else, do your best to not get discouraged by a financial emergency. Many people feel discouraged when one of life's financial storms wreaks havoc on the financial house you were trying to build. Rest assured, however, that you'll recover from this and move far beyond your current state and station if you consistently apply the principles of prudent investing and frugality to your life.
How to Save More Money - 3 key tips that will have immediate impact on how you approach money and saving
Living below your means is absolutely required if you are to build wealth, gain financial independence, and live a life of dignity. However, too many people fail to live below their means even though they intuitively know that they should do so. Are you one of them? Below are 3 powerful tips that will help you live below your means and set you up on the path to financial prosperity and wealth.
1. Make Saving and Investing Automatic
One of the most effective ways to live below your means and save more money is to put your savings and investments on autopilot - have your saving program and investing program draw money from your transactional account (usually your checking account) before you can get to the money.
So, for a typical example, let’s take a look at an hourly or salaried employee who obtains all of his or her income from his or her job. Let’s say they get their pay via direct deposit into their checking account every 2 weeks (this is the most typical payment timeframe). They should set up a system so that it automatically withdraws money from their checking account either every two weeks or once a month. Such a system is very easy to set up on most online savings accounts and online brokerages - once your accounts are open, it usually will take you less than 20 minutes to set something like this up.
Automatic withdrawals into a savings or a checking account almost always beat manual withdrawals into those accounts because of issues presented in the field behavioral finance. Humans are prone to procrastination, forgetting, getting lazy, or getting distracted - the algorithm or computer program that will be in charge of executing your automatic withdrawals will not be prone to such things (although it could be prone to computer bugs). You might think you’ll be able to consistently save and invest every month, but if you look at what people really do in the world, you’ll see that too many people fail themselves and their financial plans at some point in time. Usually, it doesn’t take very long for them to fail and not make the monthly or weekly transfer or stock purchase they committed to making. With an automatic investing and savings plan, however, you’ll turn your human faults into advantages - the same procrastination and laziness which would prevent you from saving and investing money will also help to prevent you from going into your online savings account or online brokerage to change or remove your automatic savings and investment plans.
2. Understand that Many Significant Expenses Don’t Occur Monthly
We’ve written about this a bit already on Pennies and Pounds, but it is worth restating often. Only a portion of all of your expenses are monthly expenses - other expenses occur once a year, once every few years, once every five years, once every decade, or once in a lifetime. These expenses are not financial emergencies because we can predict them (eg. you know you’ll have to pay your child’s college tuition or you know you’ll have to pay for a wedding).
Click here for more on non-monthly expenses and an extremely in-depth explanation on why you must save a lot of money and build up a pile of cash!
Since we know that many expenses (especially the big and important ones) occur very rarely (but predictably), we must save for them if we are to be prudent adults. Anyone who is serious about building wealth and attaining financial independence cannot ignore this important fact about our current financial reality - that not all of our expenses are monthly. Ignoring this fact will cause you unnecessary stress and anxiety down the road and might cause you to have to either dip into your emergency fund or your investments for something that you should have (and could have) planned for.
Realizing the above should motivate you to live below your means in order to save. We must all realize that our monthly expenses are just an illusion (they don’t represent the full reality of our expenses over long stretches of time) and we must live below our monthly means in order to save for future expenses. It’s pretty interesting that before even taking investing and wealth building into account, we still must live below our monthly means in order to just break even over the long term - if you spend your entire monthly (or biweekly) income you are actually overspending. For example, multiplying your monthly expenses by 120 would severely underestimate how much you’ll need to spend over 10 years because you won’t be taking account those big expenses that occur once every year, once every five years, or once every decade. If you’re spending your entire monthly income you are doing the equivalent of going into debt except you are borrowing from your future self who will have to struggle and strain to make up for your lack of forethought and planning today.
3. Imagine and Connect With Your Future Self
At Pennies and Pounds, we value research but we also value common sense, good stories, and tradition - we're not religious about research like many people are in today’s modern world because we are aware of the games that can be played with research and the various biases and agendas that can influence studies. We also know about the games that can be played with statistics. Have you heard the following saying?: “There are lies, damn lies, and statistics." We won’t go into it deeper than this in this article, but we wanted to let you know our views on research before we proceeded with the following point.
New research is showing that when people are better able to “connect” with their future selves, they will make better long-term decisions including financial decisions. A piece by the Harvard Business Review on the study can be found below. We encourage you to read HBR’s piece and look at the actual research study if you are so inclined. In very general terms, the research implies that people generally have a disconnect with their future selves - people don’t really understand that their future selves are themselves. This might sound funny, but it’s true in a way. The research showed that people are more willing to commit to things in the future and are also more willing to commit other people’s time. It’s almost as if they view their future selves as a different person.
It’s astonishing in a way, but the disconnect described in the research between your current self and your future self sort of makes sense. Have you ever committed to something in the future only to realize how foolish you were to do so when the time to actually execute on that commitment comes around? Have you ever set an alarm to wake up extra early the following morning only to hit the snooze button and wake up at your normal time (or wake up late) when the time comes around? Have you ever promised yourself to save more money or spend less money only to not follow through when it’s time to actually have the discipline to follow through? The research suggests that this occurs because it’s as if you’re committing another person to something when you’re making a future commitment - it’s easy to commit your future self to a project if it’s a year from now because it is as if you’re not really committing yourself but are instead committing another person. If you had to execute on things immediately, you would be far more cautious about what you promise to other people and to yourself and you would feel the weight of your actions (or inactions) much more.
All of this is to say that if you can better connect with your future self, you are more likely to make better financial decisions - you’re more likely to save money today and live below your means today because you’ll have a better connection with the future you who will one day benefit from your smart decisions today.
In the study, researchers used MRI and sophisticated aging techniques to present participants with photos of their aged selves. This is very expensive and difficult for us to do, but there are other techniques that can help. You can simply sit and imagine yourself in the future or you can write a letter from your future self to your current self. Additionally, there are apps available that can “age” your current photos. Check out one such app below. Your connecting with your future self doesn’t have to be complicated or sophisticated - it just has to help you realize that it’s not some distant other person that will benefit from your positive actions, it’s you who will benefit.
Further reading on how to save more money
We once again will stress this important point because we believe it cannot be said enough - you cannot be satisfied by living at your means, you must live below them if you are to truly build wealth and become prosperous. As is stated above and in other places on this website, you must live below your means because:
8 Things to do Before Starting College - How to set a college freshman up for a successful financial life
An undergraduate degree is a wonderful thing and college or university can be an amazing experience. You’ll learn a great deal, but almost as importantly as your educational experiences in college, you’ll expand your horizons and your mind beyond basic academic pursuits and you’ll grow personally into a more interesting, sophisticated, and happier (hopefully) person. However, to have an amazing college experience, you’ll want to make sure you to do the below 8 things - they’ll help you manage expectations and reduce both financial and personal stress so that you can focus on school. They’ll also set you up for a successful financial and professional life once you’re out of school.
1. Understand What an Undergraduate Education Really Means in the 21st Century
An undergraduate education isn’t what it used to be. Today, a college degree is more like a high school diploma than a ticket to a great job and a great salary. You must understand what an undergraduate education really means in the 21st century for your learning and for your career if you are to make the most of your college or university experience and if you are to avoid being disillusioned and disappointed in the future.
We won’t go into the history of education here, but since the end of World War II, a Bachelors degree was an almost sure fired way to get a good job and earn a good income for your entire life in the Western World. Almost regardless of what you studied, if you graduated from a decent college or university, you would very likely be able to enter the workforce and earn a good income as some sort of white collar worker (or a more technically-oriented blue collar worker). You would have a stable job with a stable financial life.
Since the turn of this new 21st century, however, things have been gradually changing. The 1990s saw a massive proliferation of high-powered, connected, and affordable technology for both consumers and enterprises. Today, that technology is reaching even the most remote and forgotten parts of the world. That technology, which was a novelty for many years, is now permeating deep into everything and is beginning to transform enterprises around the world in ways that are too numerous to describe in this article, but here are just a few:
Who would have thought ten or twenty years ago that so many smart college graduates would be working in places such as Starbucks - this would have been almost unimaginable to someone int he 1980s, for example, where a Bachelors degree from a reputable college or university meant you would almost surely find a decent career. Today, however, too many college graduates can’t get good work or are forced to go to graduate schools to pursue a Masters degree or professional degrees in order to have the same shot at a good job their parents or grandparents had just by obtaining a Bachelors degree.
Whether or not this is “right” or “wrong” or why this is occurring are are very interesting discussions, but they are beyond the scope of this article, which is intended to make sure you’re very successful in your undergraduate education and beyond. What you need to understand is that times have changed and that your college degree might just turn our to be the equivalent of a second high school diploma. Your college degree might be very useful to your personal and intellectual life, but it might not be very useful for your career unless you choose one of the handful of majors whose graduates are very in demand with only a Bachelors degree (majors such as certain types of engineering, accounting, data science, or computer programming).
Don’t take the above as anything more than it isn’t meant to be - a simple statement of what seems to be currently occurring. The above discussion is not at all meant to dissuade you from pursuing a college degree. An undergraduate education is way more than a ticket to a job - it is an opportunity to grow both personally and intellectually, it is an opportunity to become a more interesting and well-rounded person, and it is now an opportunity to see what you might really want to do with the rest of your life. Unlike past generations, graduating with your Bachelors degree will just be a starting point for most students in terms of their careers and their professional development.
Check out the very interesting (and slightly dark) video below for one take on what the future of work means and how the "rise of the machines" will affect employment:
2. Save at Least $1000 for a Small Emergency Fund
Having a $1000 emergency fund before heading off to college is a must and a bear minimum - do your best to save more. There will very likely be unexpected expenses that come up and you’ll want to have the cash available to take care of them without going into debt and without stressing out too much over them. Here are just a few examples of possible finical emergencies in college:
You might already have $1000 or more saved up from gifts you’ve received over the years or from a job or two you’ve had during high school. If you don’t have that $1000 saved up, then start saving it now. You can easily save up $1000 with a part-time job (or two) during the summer before you start your freshman year at college or university. You probably won’t want to work hard the summer before college and that’s understandable, but if you can manage to work hard anyway and do the right thing of putting a starter emergency fund in place, you’ll set yourself up for a much better college experience with a lot less financial stress and worry.
Remember, $1000 is a bare minimum - try your best to save as much as you can. A big cash cushion for when you’re in college will almost never be a bad thing. Don’t worry so much about where to keep the money - keep it in a simple and safe savings account and don’t invest it until you’re really ready.
Now, as a young college or university student, it might be tempting to spend some of your money on frivolous and unnecessary things. That’s not good, but it’s understandable - we’ve all made financial mistakes (and other types of mistakes too). However, you must have the discipline to not touch the money unless it’s an actual financial emergency or unless you’re going to purchase something that is fundamentally important for your education, career, or health. Don’t waste the money you sacrificed to have (you either sacrificed by earning it or you sacrificed by not spending it if the money was a gift) on frivolous and useless pursuits no matter - your future self will thank you.
3. Set up a Ride-sharing Profile (eg. Uber or Lyft)
Ridesharing services such as Uber and Lyft are transforming transportation around the world and have the ability to create a much safer world. If you’re heading off to college, you will be wise to make sure you have a profile properly set up on at least one ridesharing service so that you will never drive under the influence of alcohol or any other sort of mind-altering substance and so that you will have a ride in case your only other option is riding with someone who is under the influence of alcohol or some other mind-altering substance.
If you’re under 21 in the United States, you shouldn’t be drinking at all per the law, but students don’t always follow the law on most college campuses - in fact, it’s statistically very unlikely that someone will reach the age of 21 in the Unites States without having had an alcoholic beverage. So, you have to be smart and prepare beforehand.
A ridesharing profile will allow you to be able to leave your car at home if you know you’ll be drinking. Even if you didn’t plan to drink but decided to drink anyway, you can leave your car at your destination and take an Uber or a Lyft home safely if you have ridesharing profile set up - you can return the following morning to your car in a sober state. Additionally, if you happen to ride as a passenger with someone who ends up drinking, you can safely ride home using Uber or Lyft instead of having someone who is under the influence drive you home.
Read The 7 Habits of Highly Effective People by Stephen Covey. There are many great books you can read (both fiction and non-fiction) that will expand your mind and heart and make you a more effective college student, but the 7 Habits of Highly Effective People is a book that can be counted on in many different situations and for many different people - that’s why I am comfortable recommending it to pretty much every reader.
The book is slightly geared towards an older individual than an 18-year-old freshman. There’s a book written by Covey’s son titled The 7 Habits of Highly Effective Teens as well, but a person entering college is too old for that book. An entering college freshman is sort of in a limbo zone between the two books (People vs. Teens), but I would recommend reading a book that’s a bit out of your league than a book that you’re already too old for. As you grow older and mature in your personal and professional life, you’ll be able to refer to the book and reread parts of it (or all of it).
5. Make Sure Your Health Insurance Is Set up Properly
Your college or university will likely require that you have health insurance in place. You’ll either still be on your parents’ health insurance plan or you’ll have to purchase it on your own or from your school. This is basic stuff, but it is important. You have to make sure you have good and proper health insurance in place because you don’t want to get sick or injured and have to incur debt to pay for your medical bills while you're pursuing your undergraduate degree. You want your college or university experience to be safe and fun, but if it somehow ends up unsafe or unhealthy, you want to make sure your medical treatment is covered and that you won’t have to stress out too much about it. Speak to your parents about this to make sure you're on their plan but take initiative on your own - you might want to call your health insurance provider and let them know you’re going to school and see what they say if you’re planning on remaining on your parents’ health plan. If you’re going to purchase health insurance at your college or university, take the time to see what’s covered, what doctors you can go to, and what the copayments are - you’ll likely be able to find this information on the college’s or university’s website.
6. Check Your Credit Score (and Monitor It Consistently)
Your credit score is important because it roughly is used by lenders and other institutions to determine your creditworthiness - to determine how reliable you are financially and how likely you are to pay back a loan based on various metrics. A good credit score isn’t a necessity for finical success (especially if you have a lot of money and won’t be borrowing money throughout your life) but it is very useful to have a good credit score and a strong credit history.
You’ll likely have none or maybe one credit card of your own as an entering freshman and you probably shouldn’t be applying for more during college, but you still will want to know your credit score and monitor your credit score and credit history over your time as an undergraduate and beyond.
It’s a good idea to check your credit score and credit report at least once a year, but I recommend that you do it at least every six months. There are a lot of free online tools that can help you do this. Credit Karma is a popular and free tool but there might be other products and service that do a better job. Credit Karma is free, but there is advertising involved - they pitch various credit cards and other financial products to you.
Every time you check your credit score, see if your credit score dropped since the last time you checked. If it dropped, find out why. Additionally, check your credit report to see if there are any new things on it that you didn’t do (eg. new credit cards, new loans, etc.). Finally, check to see if there are any derogatory remarks (eg. late payments) on your credit report.
Your credit score is going to start out low because you don’t have much of a credit history as an entering college or university student, but you’ll want to make sure your credit score doesn’t fall and that your credit history doesn’t have derogatory remarks. If your credit score is low in the future, you might find it difficult to purchase a car, rent an apartment, get loans for graduate school or professional programs, open up new credit cards, or get a good loan for the purchase of your first home. You have your whole life ahead of you and you hopefully won’t go into debt, but you might - you might need some sort of loan. You want to make sure your credit score is top notch so that you actually can get the loan and that when you get it, you get it at a good interest rate.
7. Create a LinkedIn Profile
You probably have a Facebook profile set up already (Like us on Facebook if you do!), but there’s another profile you should create before you begin college - a LinkedIn profile.
If you don’t know what LinkedIn is, think of it as a Facebook profile for your professional life. Your LinkedIn profile is like an extensive online resume where you can list not only your work experience, education, and skills, but where you can also:
LinkedIn will become more useful as you go through college or university and then enter the workforce, but it’s a great idea to get a head start now. Here are a few things you can do on LinkedIn starting in your first semester or quarter at college or university:
If you do the above, you’ll have a solid LinkedIn profile when it’s time to look for part-time jobs, internships, and even full-time positions after graduation.
8. Sign up for Khan Academy
Khan Academy is a very useful free online learning platform that’s great for anything but especially seems useful for mathematics. You can use Khan Academy to review basic things before you start classes, but it also proves useful during actual exam preparation for many students. Khan Academy has short videos on a variety of subjects such as mathematics, life sciences, physical sciences, economics, finance, and other useful subjects. Surprisingly, Khan Academy’s videos are of decent quality and seem to provide quite accurate information in relatively easy to understand video bites.
What if you’ve already started college or university?
If you’re already in college or university (whether you’re a freshman, sophomore, or junior), you can and should still do everything on this list if you haven’t done so already. Just because you didn’t read this article before you started college (it might not have been around then) doesn’t mean that it’s too late do do the important and useful things above - it’s never too late to do the right things and it’s surely not too late for a young college student like yourself to move forward in your life and make some wise moves.
It seems that in most things in life that we try, we quit right before the big payoff. Just like a tiny plant that is about to break the surface of the Earth, our life is about to change but we seem to get frustrated and stop trying. Sometimes we look back in hindsight with regret that we didn't continue on just a bit further - we ask ourselves why we stopped watering the plant at exactly the wrong time?
This phenomenon seems to hold true with investing. Many people attempt to invest their savings in a wise way. They want to make their money grow and I’m sure they do their best to invest well and invest properly. Most of the time, however, we’re all really bad at actually accomplishing that goal. I’m not quite sure why that is, but I'll postulate.
One problem might be that we pick the wrong stocks at the wrong time. Instead of buying based on the fundamentals of a company, as traditional investment theory would advise us to do, we buy a stock because we got some hot tip or the financial media seems to be covering the company more.It also might be because of a general lack of financial knowledge, which causes us to not fully understand the risk-reducing benefits of proper diversification. Maybe it's because we’re trigger happy, too quick to buy and too quick to sell on impulse and not able to stick with our investments over a relatively sufficient period of time for momentary market fluctuations to not matter much.
But when you think about it, it doesn’t seem to be in human nature to think for the long term or to be calm and collected in the face of mass hysteria or bad news. It seems like it’s more in our nature to go with what the whole pack is doing. It’s also in our nature to minimize worst-case or catastrophic scenarios, however, slight the chance of them might be. That may be why we’re sometimes too quick to sell. If we just wait a month and then rethink it, maybe we wouldn’t sell. But we don’t wait the month because we don’t want to lose our entire investment. It’s better to leave with a small loss than lose everything we’ve invested. A big win isn’t the equivalent of a big loss in our minds. A big loss holds more weight.
We can’t escape the inner workings of our minds, minds that have been shaped by thousands of years of evolution and minds that aren't equipped to handle the concept of patience or to perform a logical analysis of risk. Knowing that, it’s pretty amazing that we’re even as good at investing as we are.
I guess, when it comes to it, we have to admit that we weren't meant to be investors. If you believe current science, we were meant to run on the plains of Africa, eat, sleep, and have sex. The deepest parts of our minds have not placed for what is required to be an excellent investor in today's artificial world. Some of us are great investors, however. Why is that? I postulate that the greatest investors are able to be so successful not due to their ability to fully embrace their human nature and potential, instead of trying to fight against it. But, that's a story and a discussion for a different day.
5 Reasons You're a Terrible Investor - Why most people just can't seem to succeed at investing despite their efforts and wishes
Are you a typical investor? Research shows that the average investor in the United States significantly underperforms when compared to broad indexes such as the Dow Jones Industrial Average (Dow Jones) or the Standard and Poors 500 Index (S&P 500). Read the article below to find out the five main reasons for this disappointing phenomenon - and to make sure you don't fall into the same trap.
Too Many "Investors" are terrible at investing
Research shows that individual retail investors are not doing a good job at investing. Much research has come out showing that retail investors, on average, get much less than the overall market for the same level of assumed risk. This is ridiculous. This means that retail investors don't beat an index such as the Dow Jones Industrial Average (Dow Jones) or the Standard and Poors 500 Index (S&P 500). Instead, retail investors earn half of the return of the broad indexes on average.
If this doesn't surprise you, it should. How can the average investor earn half of a broad market equities index such as the Dow Jones or the S&P 500? Why wouldn't that "average" investor just invest in the index and get the index return? The reason must be because investors don't just invest in the index. They must do something else on average or else they would at least get the average index return minus trading fees and other incidental fees. Below are the five main reasons your or an average investor (hopefully you're an above average investor) fails to do well and fails to beat index returns.
1. You Trade too Often
The first reason that the average investor underperforms the market is because he or she trades too often. As we said above, if you just invest in the index you'll get the average index return minus any trading and incidental fees. There's a caveat there, however - you have to stay invested! You can't go in and out of positions consistently. By trading too often, you incur more fees and fees can really add up and eat away at your potential wealth.
For example, say an investor invests $750 a month in the stock market and the transaction fee is $7.50 (a reasonable amount at the time of the writing of this piece). That $7.50 will equal 1% of the investor's monthly investment, a non-trivial amount. If our hypothetical investor invests every single month and doesn't sell, he or she will have paid out $90 in fees. This is reasonable.
If, however, our investor is more erratic and buys and sells in a futile attempt to somehow time the market, he or she will pay a lot more in fees. Let's say the investor buys every week instead of every month, splitting his or her $750 monthly investment into $187.50 weekly investments. Additionally, our frantic investor also sells some amount every month. It doesn't matter how much he or she buys and sells in reality because most modern brokerage fees are usually flat (instead of a percentage of the invested amount). So, now we have the following costs:
Now, many investors don't invest $750 a month. Many invest more, but many invest less. Some investors can only invest $100, $200, or $300 a month. For them, the above situation would seem like a dream. For them, trading as often as the frenetic investor above would absolutely devastate their portfolio, requiring consistent extraordinary returns just to break even.
By trading too much, you put the breaks on your portfolio's growth. You might think you know what you are doing (eg. timing the market) or you might be scared of a downturn so you pull out for a while when the market dips, but all of that is incorrect for most investors as evidenced by their abysmally low performance as compared to a broad market index. For most investors, trading too much isn't a good an idea. They should stick with a good and suitable strategy and stay invested even if the market goes day. They should not be overconfident in their ability to predict price movements, understanding that there are thousands of well-trained, highly educated, and high-incentivized market participants attempting to do the exact same thing they are attempting to do.
2. You Hold Losing Positions too Long
Investors, by and large, tend to hold losing positions too long. Most top financial professionals and top investors seem to sell off losers quickly. Good investors are disciplined and are able to acknowledge losers when new information comes in.
I've experienced this desire to hold on to a losing stock in my own portfolio. I invested in a stock in an emerging market. My reasoning for investing in the stock was sound and many top financial professionals recommended purchasing equities in that specific market and of that specific firm. Two years later the position not only didn't move anywhere, but it had declined more than 10%. Things changed in the global economy - the country was doing poorly and exchange rates negatively impacted my investment. I didn't want to acknowledge the fact that I had chosen a loser because I bought the stock with a lot of conviction and spoke about my belief in the stock's future performance to others. However, I was disciplined enough to sell and free up the capital. I knew that the situation wasn't going to get better - it wasn't a momentary downturn in an otherwise great situation but was instead a structurally poor situation. the new information that had come in since I first entered into the position indicated that a prudent investor would exist and so I exited. It wasn't easy, but I'm glad I did it for two reasons. First, it freed up useful capital for investment into other stock. Second, it strengthed the "disciplined investor" muscle withing me by going against myself and forcing myself to do the prudent thing. I believe it will be easier (slightly easier) the next time a situation like this happens.
Why do investors tend to hold losing positions too long? That's a tough question to answer, but behavioral finance has attempted to answer it in recent years. It seems that investors only care about realized losses, not potential. Realized losses occur when you actually sell the position. When I sold my losing stock in the example above, the loss became realized. Investors generally seem to be fine with unrealized (or potential) losses because they are able to imagine the stock going back up. By selling the stock, they realize the loss and lose the opportunity for a price recovery. However, this is not a rational approach. Investments shouldn't be held because you can't stomach locking in your loss. Investments should be kept because they are still good investments and they are investments you would make today. whenever you're facing such a situation, ask yourself the following illuminating question: If I didn't own this stock (or any other type of investment), would I buy it today? If the answer is no, that's a good indication that you should sell it.
3. You Sell Winning Positions too Quickly
Investors typically hold on to losers too long, but they don't hold on to winners long enough. The average retail investor sells winners too quickly in an attempt to lock in the gains. It is possible that the same realized vs. unrealized phenomenon is at play here - investors prefer realized gains to unrealized gains. The problem is that selling to realize gains isn't a good reason to sell. Just as we discussed above, you should only sell a stock you own when it is no longer a good investment. You can ask yourself the same question we asked above: If I didn't own this stock, would I purchase it? If you would, then you shouldn't sell just because you made money with it. If you believe it's still a good investment and that it will rise in value, you should stay invested in it and you shouldn't sell it.
4. You're too Greedy
Greedy investors don't do well over the long term. Greedy investors buy and sell too often (Reason 1 above) and they often sell too quickly (Reason 3 above). Additionally, greedy investors get in at the wrong time and get out at the wrong time.
I'm sure you've heard of the popular investment saying: Buy low and sell high. Well, greedy investors often buy HIGH and sell LOW. They don't do it consciously, but they do it because they are unaware of what is driving their desire to enter or exit the markets. Greedy investors look at the market after a nice long bull run and ask themselves why they didn't get in earlier. Instead of rationally analyzing the current situation, they get in. Greedy investors take stock tips from people or get into speculative investments that have big upside potential but also a very big downside potential and where the chances of success aren't great. Great investors, however, try to find investments with big upsides but very little downsides (or no downsides at all - yes that might be possible).
When greed drives your actions there is little room for prudence and rationality to enter into the equation. You should attempt to keep calm in both bull markets and bear markets and do your best to objectively look at the situation. Additionally, it is important for you to keep in mind that quick money is very rare for the average investor because there are thousands of highly-trained, highly-educated, and highly-incentivized people in finance attempting to beat the markets. Do you think you can outdo them sitting at your computer at home or in your office? The answer is mostly likely "no" because you don't have a competitive advantage in this space. Instead, it is better to use your time and energy to play wherever you do have some sort of advantage. The desire for excellent returns and wealth is healthy, but greed is a destructive force both to your being and to your portfolio.
5. You're too Fearful
In the same vain as greed, fear also can be destructive to your portfolio. Fear can cause you to buy and sell too much (Reason 1 above). We said above that investors typically don't sell soon enough when they have poor-performing investments, but there are occasions where investors actually sell losing stocks too soon: panics.
During times of panic such as the Great Depression or the Great Recession (and even during less severe panics such as sharp market downturns and corrections), average investors seem to get scared and exit. This usually is a very bad idea, especially if you're diversified well. If you are diversified well and the entire stock market declined due to a major recession, everything is going to be down (correlations between asset returns usually go to one in times of panic). If everything is going down, that might mean that the situation isn't totally rational. There are some goods stocks and some bad stocks in almost every market - everything going down usually means that there's an irrational drop going on because of fear. If you sell, you're locking in the losses - something investors usually don't like to do but seem to do too often during great crises. A better strategy would be to hold it out and wait for a recovery. In addition to waiting for a recovery, great investors relish downturns and panics because they are able to buy more stocks at discounts - they buy the good companies that are down not because of the companies themselves but because everything is down due to a crisis.
You Can Become a Better Investor
What we can learn from the five reasons above is that most people and most investors:
Investing is one of the best ways to grow and preserve your wealth, but you shouldn't start investing unless you've done the 7 things below. Read the article below to find out how to create a proper foundation before you being investing.
1. Pay down your credit card debt before you start investing
Before you start investing, you must make sure to pay down your high-interest credit card debt. I'm not saying you have to be free from all debt here. For example, many people successfully invest with a mortgage and with student loans. There's a debate in the financial community regarding whether or not you should be totally free from all debt before investing. I am in the camp that believes that investing with some low-interest or asset-backed debt can actually be a reasonable financial plan. There's more to this analysis and we won't go into it in this piece, but it suffices to say that even if some debt is acceptable when beginning to invest, credit card debt is not.
Credit card debt is a terrible form of debt. It is debt for things you've already purchased or experienced and in most cases they can't be reliably sold off to pay off the debt. Additionally, most credit card debt is at a high interest rate (10% + on average). Credit card debt can be like a ball and chain on your leg as you attempt to run toward financial freedom and wealth - it won't allow you to go very far. You must remove the burden of high-interest credit card debt and vow to never take on such an insidious form of debt ever again before you being investing. Do not put any money in the stock market or any other market when you have an opportunity pay off your debt first. By paying off your credit tcard debt, you'll effectively be earning a return on your money equivalent to the credit card's interest rate.
2. Have an emergency fund in place before you start investing
Before you start investing, you must make sure you have a rainy day fund in place to protect you and your household from life's financial emergencies. An emergency fund will help you withstand life's storms and it will protect your soon-to-be wealth in the form of investments from liquidation should you need funds to take care of a financial emergency. Check out the links below to get one of the deepest looks at why you need an emergency fund and how you can build one up incredibly quickly.
3. Don't start investing until you have a proper structure of insurance in place for you and your family
Before you start investing, make sure you have the proper insurances in place to protect you and your family. Here is a non-exhaustive list of possible insurance policies:
You obviously don't have to purchase every policy above - purchase what you need in your current situation and adjust things as you move along in life and in your financial plan. If you're not capable of deciding which policies to purchase on your own, it is advisable to speak to someone who knows about these things. This could be a knowledge friend or a family member, but it might be wiser to speak to someone who would have a fiduciary responsibility such as a financial advisor or consultant.
4. Decide on whether to invest alone or to use some sort of financial fdvisor
After you've paid off your credit card debt, built up your emergency fund, and put proper insurance policies in place for your current financial and lifestyle situation, you must ask yourself the following question: Can I go it alone or do I need assistance?
Many people successfully invest alone, but many also fail miserably when investing on their own because they can't do one or both of the following importing things:
What this means is that if you want to be a successful investor you've got to have some basic knowledge about why things go up and down in price (both short term and long term). Additionally, you have to have the discipline and emotional control to not panic and not get greedy, two things which are poisonous to your financial future. If you don't think you are capable of both of the above, consider using the help of a financial advisor or a financial consultant (at least for a short period of time).
It's not easy to find a good financial advisor. There are a lot of salespeople or charlatans in finance, but there are also a lot of excellent, inteligent, and kind-heated people. The dififcult part is differentiaing between the two. Don't hesitate to interview your financial advisor and ask questions - it's your money they will help yu manage after all.
5. Take a Risk Tolerance Quiz before you start investing
Take any online quiz with a grain of salt, but I strongly suggest that you take a reliable online risk tolerance quiz to help you better understand your risk tolerance and your emotional capability to handle volatility within your portfolio. There are two well-know solid quizzes like this: one is from Rutgers University and the other is put out by Wells Fargo.
6. Think about what you're investing for
Before you start investing, think about what you are investing for. Are you investing to:
When you think about what you're investing for, you will get a picture of a very important concept called time horizon. Your investment time the horizon will help you determine the risks you can take in your portfolio - the longer the time horizon the riskier your portfolio can be because you will have more time to ride out the ups and down.
7. Give some money away, even if all you can give away is a tiny amount
Before you start investing, and once you have paid off your credit card debt, built up your rainy day fund, and put proper insurance policies in place, you should give some money away. You can give it to a non-profit organization like the Red Cross, to a person asking for money on the street, or to a friend or family member hat is in need. The fact that you're now ready and able to invest means that you're better off than most people on this big blue planet of ours. You should be thankful for this and that gratitude should compel you to do something nice for your fellow human beings, especially those who aren't as fortunate as you are. You don't have to give a lot, but it should be a meaningful amount of money for you. I promise that this action will warm your heart and it's likely that you'll keep on giving throughout your life.
P.S. Start investing with matching-style accounts like 401ks
P.S. Make sure to put your first investment dollars in accounts where you get a "free money" (eg. some sort of match). This is usually an employer-sponsored retirement account such as a 401k. With such a match you get immediate returns. For example, if you get a 100% match, it's like getting a 100% return on your money right away with no risk. You can't beat that.
The unexpected benefits of saving and investing money - growing your wealth can bring you a certain type of joy and peace
Many people think that saving money and investing it is hard. They feel that saving is on the opposite spectrum of fun and that it involves scrimping, denying yourself, and harsh self-discipline. Saving does involve self-discipline and can be difficult at times (especially for those who are less-inclined to do it and for those who are new to building wealth), but like many difficult things, it can be very rewarding and even very fun.
I love saving money and seeing my accounts grow. When I earn money, I plan to put a portion of that money into a savings account or into my investment portfolio. It might be that I am a natural saver and that I have a general propensity to save (due to early experiences or due to genetics), but I love spending too. I enjoy nice experiences and nice things and my friends and family know me as a very generous and giving person (of course I am able to be very generous because I am a conscientious and diligent saver).
I love everything that has to do with saving money and building wealth. I enjoy picking investments or screening mutual funds or ETFs. I love seeing my balances grow and monitoring my investments. I love the security that comes with seeing my wealth increase and how it allows me to be a better friend, better family member, and better person overall. I love how saving is fun to do on its own and how it allows me to have a much more enjoyable life.
I don’t view saving as self-denial because I understand that some expenses don’t happen every month. I know that some expenses occur every year, every five years, or once in a lifetime. I know that when I save I am allowing my future self to bear those expenses calmly and easily. I know that when I save I am acting as a mature adult and demonstrating an important characteristic that sets humans apart from other animals: planning for the future.
If you don't view saving the way I view it, that's fine. You should still do it anyway because that is what a responsible adult does. However, I believe that if you stick to it long enough and see some success with it, you will feel similar to the way I feel about saving.
I went to the orthodontist today to get a fixed retainer removed. It was put in about a decade ago, when I was a teenager, right after I had my braces removed. It was supposed to keep my bottom teeth in place, but after a decade in my mouth it started wearing out. Last week I had to get it repaired and more recently another part of the retainer broke off, making repair impossible and requiring the removal of the entire fixed retainer.
Why am I telling you this? I'm telling you this because I had a really interesting insight during my orthodontist visit, specifically as he was removing the excess adhesive (which bonded the retainer to my teeth) and polishing the back of my teeth after removing the retainer.
I am not afraid of going to the dentist at all, but I do understand that dental work performed with no anesthesia can be excruciatingly painful. My parents, who grew up in the former Soviet Union, tell me how painful such work was as they did not have anesthesia then (or they did not have access to it). Obviously, with no anesthesia, people likely neglected dental work. Additionally, I experienced dental drilling when I was a young child with relatively little anesthesia (I am not quite sure why) and I remember that it was very painful, even though some anesthesia was used. It is a very unique and particular type of pain and it is extremely uncomfortable. So, I knew that drilling teeth with no anesthesia at all is extremely painful from stories and a past experience with relatively little anesthesia. With this knowledge and with this past experience I sat down to get my retainer removed.
The orthodontist told me that he wouldn’t use any anesthesia because he wouldn’t be drilling into the teeth or doing anything that would hurt. He told me he would just be removing glue from the surface of the teeth after he removed the retainer. He removed the retainer and then he began removing all of the excess adhesive with a dental tool that looked very similar to the tools that dentists used on me when I had fillings in the past. I am a layperson when it comes to dentistry, so I assumed it was the same tool and I assumed it was capable of drilling deep into a tooth.
As he began removing the adhesive from the back of my teeth I felt a tiny bit of pain. I wouldn't even call it pain. It was more of an annoyance, but I knew very well that the minor annoyance could turn into excruciating pain should the dentist go deeper into the tooth. I thought to myself, what about when he finishes removing the adhesive? Then the drill will be touching the actual tooth and there will no longer be a layer of adhesive between the drill and the tooth. Will that hurt? It will likely hurt!
I didn't say anything while he was drilling because I trusted the orthodontist, but the annoyance increased and I felt a very slight tinge of pain. Now I was a little nervous, but I still trusted the orthodontist because I knew he worked with children and that he likely had an abundance of anesthesia. He would likely use it if he felt that there was even a chance of pain as medical professionals are overly cautious when it comes to these things today.
When he took a break from the drilling and the adhesive removal, I took the opportunity to ask him about my concern because I was pretty curious. I told him what I thought would happen and he told me that it wasn't possible. He said that what he was using was a rubber drill tip, not a metal drill tip capable of lacerating and drilling into the tooth. He said that even when the tip touches the tooth with no adhesive, which it would do soon once all of the adhesive was removed, it still wouldn't hurt. My outlook on the entire procedure immediately changed in an instant and I was shocked at this.
When he began drilling again the minor pain went away completely. Obviously I still felt the same sensation I felt before, but now I knew that it would never be different than it was now. I knew that the drill was not even capable of causing the pain which I was afraid of and that made the entire thing not just a little bit more tolerable, but turned the whole thing into a completely different experience. I now wanted him to continue with the procedure despite the light discomfort because I wanted the back of my teeth to be as smooth as possible and for all of the adhesive to be removed.
I know this is a simple example, but I cannot ignore what it has taught me. My assumptions played an enormous role in my experience at the orthodontist. I felt the same sensation (maybe even a greater physical discomfort after I found out), but something changed. The sensation in the beginning was combined with a certain fear that it would increase and an assumption that the tool that was being used could also grind deep into my tooth. After I learned about what was going on, my old assumption died and was replaced with a different assumption, this time a more accurate one. That accurate assumption allowed me to understand that the tool had a rubber tip and was incapable of drilling into the tooth. It was not the same tool that dentists use to drill into teeth to fill cavities.
What can we learn from my experience? We learn that assumptions matter a lot. I've always felt this before, but my experience at my orthodontist really brought this home for me. It was an almost profound experience in terms of how quickly I learned and internalized something pretty important. We won't always be able to change our assumptions and when we get more educated and our assumptions do change, we might realize that our original assumptions gave us more peace of mind. However, whenever we're suffering in one of endless ways we can suffer, we should take a minute to think about whether or not our suffering is caused in part by an assumption that we have. We should then seek to understand why we have that assumption and really do our best to understand whether or not it is rational, correct, and true or whether it is only based on ignorance and our own limited past experiences. An assumption can act like a pair of glasses that color everything else we see in the world. Change the glasses and you can change your view of the world.
We all know (or should know) that buying a lottery ticket is truly a waste of money in the formal sense of the concept. Your chances of winning are likely less than your chances of getting struck by lighting. Even with an enormous jackpot, the expected value of the bet is almost always, if not always, less than what you pay to play. Therefore, it's not an investment or even a good gamble. You're better off playing something with far better odds. Even still, you're better off keeping your money in your pocket. If that's the case, why do so many people still play?
There are various theories as to why the lottery is so popular even though it's such a bad bet (e.g. tax on those not good at math, tax on the poor, tax on the uneducated, irrational individuals, overly optimistic individuals, etc.). I have my own theory on the matter. I don't have proof that it's right, but it seems interesting and probable to me.
The lottery is a cheap form of entertainment and that is why lower-income individuals seem to represent the largest portion of lottery players
Numerous studies have shown that the vast majority of lottery players are low-income individuals. I believe that this is fairly important in trying to understand why so many people play a game with such horrible odds and low expected value relative to the cost to play. I don't think that these low-income individuals are deluded or all bad at math. I believe you will find a broad spectrum of people in this low-income group, some of which might be math geniuses. However, all low-income people have at least one thing in common: they don't have a lot of money. I believe low-income people are the largest represented group when it comes to lottery players by far because the lottery is a form of entertainment and one of the cheapest forms of entertainment around.
To believe my theory you have to believe that gambling is entertainment. I enjoy blackjack and I definitely believe there is a lot of entertainment value in blackjack and various forms of gambling. Among various other things, you get an adrenaline rush in anticipating the potential reward and fearing the potential loss. Low-income people might not be able to spring for a $5-a-hand (if you can find a table that cheap) blackjack table or make a trip to Las Vegas to play the penny slots. Even the poorest people, however, can likely afford to spend a dollar or two on a lottery ticket. Lottery tickets might just be a form of entertainment.
If lottery tickets are a form of entrainment, then people buying lottery tickets aren't as irrational as some would have you believe. They are paying a dollar or a few dollars for a similar type thrill to the one I get at a blackjack table. I am great at math and I understand statistics so I understand that blackjack is a losing proposition. I don't care, however, and I believe many lottery players don't care either. Because I know, and I believe many lottery players know, that we're not in it to win, just to have a good time. We don't come with more than we are comfortable losing and we're fine when we lose because we received entertainment value for the money we spent. If I lose $100 at a table and I got four hours of adrenaline-filled fun and a bunch of free drinks out of it, I am happy.
For a few dollars you get to buy the lottery ticket, fill it out and think about the numbers you want to choose, and then wait and anticipate, hoping that you win and getting a bit of an adrenaline rush in the process. I wouldn't play, but it just might be a good value proposition to some people. Maybe it's not a waste of money after all.
Note: When I discussed gambling and entertainment I was only talking about individuals who are healthy gamblers and see gambling for what it really is. If we are discussing individuals who are addicted to gambling for the various reasons one can get addicted to such an activity, that is a different matter entirely and that is beyond the scope of this article.
I'm at the gym waiting for a buddy of mine to show up and workout with me. After a long day at work I didn't want to workout. I wanted to go home and rest or basically do anything but exercise. However, I made plans with my friend already and I didn't want to experience that feeling you get when you break a promise to yourself, so I somehow made it to the gym. Sitting here in the gym's lobby waiting for my friend to arrive I remembered a quote I heard before, although I am not sure who said it originally. I tried to search for the quote on Google but it seems that it is attributed to many individuals.
"The hardest part is showing up."
Now that I'm at the gym I don't feel this desire to leave. I've already broken the main part of my internal resistance to working out by just showing up to the gym. I know that I will have to have an intense workout session, but that's perfectly fine now that I'm already at the gym. It's hard to explain and it seems to not make a lot of sense because the difficult part is still ahead of me. I've only completed the easy preliminary task. However, that easy preliminary task seems to have been the most important part. If I just show up to the gym I'll likely work out. It's not likely that I'll show up and then just get up and leave. Maybe it's because getting up and leaving will mean a change of course and a change of plans. Maybe that's what the difficult part is: actually getting started. Once I'm already at the gym inertia is acting in my favor. To leave the gym now would require me to go against that inertia.
I'll keep this little insight in mind next time I have a difficult task to do that I don't want to do. Obviously the task has to be of a particular variety for the principle to be effective, but it is easier to think about just showing up than thinking about the entirety of the task in front of you.
And now, given the rise of cyrptocurrencies and crypto assets to quasi-mainstream financial assets, we're dedicated to providing quality, relevant, and interesting material on cryptocurrencies and cryptoassets. Articles on Bitcoin, Ethereum, Ripple, Cardano, and many more cryptocurrencies and cryptoassets can be found on Pennies and Pounds - all that in addition to a plethora of information on what cryptoassets are, how the entire crypto industry came to be, blockchain/immutable ledger technology, mining, proof of work, proof of stake, and how to prudently invest in crypto if you are so inclined (based on your risk tolerance and ability to withstand the volatility that will come with a crypto portfolio).