50 Reasons You’re Awful at Managing Money

Source – Morgan Housel 10 February 2014

Morgan Housel came up with 77 reasons why you are awful at managing money.  I reduced it to 50 – to make you feel better!

1. You let your political views guide your investments without realising that the market doesn't care who you voted for or which news outlet you find more honest.

2. Your definition of "long term" is the time between now and the next bear market, whenever that is (or whatever you think that is – such as a media report of impending cataclysm).

3. You suffer from the Dunnig-Kruger effect, lacking enough basic financial knowledge to even realise that you're making mistakes.  People's lack of understanding about things like compound interest and inflation can lead them to believe they're making good financial decisions when in reality they're tripping over themselves with failure.

4. For every $1 raise you receive, your desires rise by $2 or more.

5. You spend lots of money on material stuff to impress other people without realising those other people couldn't care less about you.  You'd be shocked at how few people care where your purse was made or how much noise your car makes.

6. You are unshakably certain about things you know very little about, particularly regarding monetary policy.

7. You have never been able to predict what the market will do next.  This doesn't deter you from trying to predict what the market will do next – and even debating it!

8. You don't learn vicariously from other people's financial problems.  By the time you get the hang of making smart money decisions, your life expectancy rounds to zero.

9. You think you're young, invincible, and don't need ACC, disability or health insurance.  Then icy sidewalks, big buses, moving cars, and rapidly dividing cells prove you wrong.

10. You get upset when you hear on TV that the government is running a deficit.  It doesn't bother you that you heard this on a TV you bought on a credit card in a home you purchased with a 10% deposit or less.

11. You take out $25,000+ in debt to earn a degree in a subject you're not interested in, doesn't offer marketable job skills, and for which you have no intention of working in -- all by age 22.

12. You're part of the roughly half of New Zealanders who can't come up with $2,000 in 30 days for an emergency, even though you're also part of the roughly 100 percent of New Zealanders who will need to come up with $2,000 in 30 days for an emergency at some point in your life.

13. The single largest expense you'll pay in life is interest after tax.  You'll spend more money on interest than food, vacations, cars, school, clothes, dinners out, and all forms of entertainment.  You do this because you don't save enough and demand a lifestyle you can't actually afford.  The future owns your income.

14. You're thrilled that the credit card you're paying 22 percent interest on offers 1 percent cash back on all purchases or gives you ‘cheap travel’ and free insurance.

15. You spent the last five years arguing why Keynesian/Austrian economists were all wrong.  The S&P 500 spent the last five years rallying 177 percent.

16. You think dollar-cost averaging is boring without realising that the purpose of investing isn't to minimise boredom; it's to maximise returns.

17. You work in a stressful job in order to make enough money to have a stress-free life.  You see no irony in this.

18. You try to keep up with the Joneses without realising the Joneses are buried in debt and can probably never retire.

19. You think $1 million is a glamorously large amount money when it's what most people will need to cover their definition of a pretty mediocre retirement.

20. You associate all of your financial successes with skill and all of your financial failures with bad luck.

21. Rather than admitting and learning from your mistakes, you ignore them, bury them, make excuses for them, and blame them on others.

22. Your perception of history extends back about five years.  This leads you to believe things like bonds are safe, the average recession is as bad as 2008 was, and we're in a new normal of high unemployment.

23. You say you'll be greedy when others are fearful, then seek the foetal position when the market falls 2 percent.

24. You let confirmation bias take control of your mind by only seeking out information from sources that agree with your pre-existing beliefs.

25. You think you're too young to start saving for retirement when every day that passes makes compound interest a little bit less effective.

26. You're investing for the next 50 years but get stressed when the market has a bad day.

27. You size up the potential of investments based on past returns, rather than investments that (A) you understand, (B) have a competitive advantage, (C) fit your goals, and (D) sell for an attractive valuation.

28. You don't respect the idea that "do nothing" are two of the most powerful words in investing.

29. You feel especially smart after last year's 30 percent market rally without realising that you had nothing to do with it.

30. You seek advice from a doctor to manage your health, an accountant to do your taxes, a lawyer to manage your legal problems, a plumber to fix your plumbing, a contractor to build your house, a trainer to help you exercise, a dentist to fix your teeth, and a pilot to fly when you travel.  You wouldn't consider doing it differently.  Then, with no experience, you go about investing willy nilly, all by yourself.

31. Hindsight bias fools you into thinking you saw the last financial crisis coming.  Worse, this fools you again into thinking you'll be able to predict the next one.

32. You think financial news is published because it has useful information you need to know.  In reality, it's published only because the publisher knows you'll read it.

33. You forget that the single most valuable asset you have as an investor is time.  A 20-year-old has an asset Warren Buffett couldn't dream about.

34. You think it's impossible to live on less than $35,000 a year without realising that literally 99 percent of the world does, even adjusted for purchasing power parity.

35. You can't acknowledge the role luck plays when making the occasional successful investment.  (Also true when worshiping investors who made one big call that happened to be right.)

36. You think the hybrid car is a better financial deal because it gets better gas millage, even though it costs $10,000 more than a comparable gas-engine model.  You'll probably need to drive for a decade before the hybrid upgrade pays for itself, but in reality you'll trade the thing well before then.

37. You hate finance, think it's confusing, and don't want anything to do with it.  You do, however, love money.  You see no irony in this.

38. You think the stock market is too risky because it's volatile, without realising that the biggest risk you face isn't volatility; it's not growing your assets by enough over the next several decades.

39. You think blowing money on frivolous stuff impresses people, when in reality it makes you look like an insecure, pompous, jerk.  (This is particularly common among young people who come into money for the first time.)

40. You're unable to realise that a 10 percent return for 20 years generates more money than a 20 percent return for 10 years.  Time can be a more important factor than return when building wealth -- and it's the one thing you have control over.

41. You don't respect the mountains of evidence showing that once basic needs are met, the amount of happiness each additional dollar of income provides diminishes quickly.  This causes you to spend most of your life chasing "the number" you think will make you happy, but probably won't.

42. You think of the stock market as numbers that go up and down rather than an ownership stake in real businesses with real assets.

43. Your investment decisions are guided by what the economy is doing, when the two really have very little correlation.

44. When planning for retirement, you don't realise that your life expectancy might be 90 years or more.  Retire at 65, and you could spend more than one-third of your life living off your investments.

45. You're unable to have a good time going for a hike, a bike ride, a swim, reading a book, or anything else that's free (or cheap).  Having cheap hobbies is a large, yet hidden, asset on your personal balance sheet.

46. You work so hard trying to make money that you don't have time to think about, or plan, your finances.  This is the equivalent to spending so much time buying exercise equipment that you have no time to exercise.

47. To paraphrase Carl Richards, you ignore history, basing your actions on your own very limited experience.

48. You worry about things you can't control, and things that are not relevant to your own finances.

49. You think that not changing your opinion about markets, the economy, and your investments is somehow noble, when it's really just shutting your brain off to the reality that things are always changing.

50. You don't realise that when you say you want to be a millionaire, what you probably mean is that you want to spend a million dollars, which is literally the opposite of being a millionaire.

Morgan Housel says there is something about money that gets the better of us.  Financial crises, investment bubbles, student loans, HP, debt defaults, large mortgages, poor savings.  It being one of the only areas in life we seem to get dumber at.

Individually, many of us are mired in debt or at best anxious, about money.

Entrepreneurs on the other hand are creating new products, boosting productivity, increasing standards of living and in the process creating new jobs.

In 2014 technology is expanding rapidly – fracking is changing the entire geopolitical landscape, 3D printing, the cloud, tablet and smartphone, apps and genetics are generating new amazing products, drugs and efficiencies – our knowledge of economics and finance on the other hand and our behaviours remain entrenched in habits inherited from a bygone age.

The information provided in this blog is not intended to be a substitute for professional advice. You may seek appropriate personalised financial advice from a qualified professional to suit your individual circumstances.