Understanding the behavioural side of financial decisions ...
Posted by Sam Bradford on 08/02/2024 @ 8:00AM
Money management is a crucial aspect of our lives, yet it is often overlooked or misunderstood. While we may think that making financial decisions is a rational and logical process, the truth is that our behaviours and emotions play a significant role ...
I wonder what Sigmund Freud would make of the psychology of money management in the 21st century?
One of the most common behavioural patterns in money management is herd mentality. This is the tendency to follow the actions of the majority, even if it goes against our better judgment. In the world of finance, herd mentality can lead to making impulsive decisions based on the actions of others.
"We should be considering our own financial goals and needs instead!"
For example, when everyone is investing in a particular stock or asset class, it can be tempting to follow suit, thinking it must be a good investment because everyone's doing it, right? However, this can lead to buying at a high price and selling at a low price, resulting in losses. It is essential to remember that what works for others may not necessarily work for you. Do your own research and make informed decisions.
Another common mistake in money management is trying to beat the market. Many people believe that they can outsmart the market and achieve higher returns by constantly buying and selling investments. However, research has shown that the key to successful investing is not timing the market, but 'time in' the market. In other words, staying invested for the long term and allowing your investments to grow over time is more important than trying to beat the market.
"This is especially important for young people, who may be tempted to cash out their investments for short-term gains!"
This can significantly impact their long-term financial stability, as they miss out on the power of compounding and the potential for significant growth over time. The perfect example of this is to keep paying into your pension, even if you can't see the immediate benefits, as it will pay off in the long run.
Savings are also a crucial aspect of effective money management, yet our emotions and behaviours can often get in the way of saving for the future. For instance, we may be tempted to spend all our money on immediate gratification, such as expensive purchases or lavish experiences, rather than saving for unexpected bills or emergencies.
Having a buffer for unexpected expenses is crucial for financial stability. Without it, we may find ourselves in a cycle of debt and struggling to make ends meet. Therefore, it is essential to prioritise saving and create a budget that allows for both short-term enjoyment and long-term financial security.
"Understanding the psychology of money management is crucial for making sound financial decisions!"
We can achieve financial stability and security by recognising and overcoming herd mentality, avoiding the temptation to beat the market, and prioritising long-term planning and savings.
Remember, it's not just about numbers and calculations; it is also about understanding our behaviours and emotions.
And that way we can make informed decisions for a brighter financial future.
Until next time ...
SAM BRADFORD
Would you like to know more?
If anything I've written in this blog post resonates with you and you'd like to discover more about the psychology of money management, it may be a great idea to give me a call on 07887 832222 and let's see how I can help.
I have been advising private individuals and businesses as a Financial Planner for over 20 years. I am a Chartered Financial Planner and Fellow of the Personal Finance Society and a Certified Money Coach.
As a Chartered Financial Planner, I hold the highest level of qualification available in the Financial planning profession as well as gaining a masters in Finance in 2021. I set up my own financial planning practice in 2020 to follow my passion of bringing straight forward, honest and easy to understand financial advice to those who need it.
I live in a 400 year old cottage with my husband, 2 dogs (Maia and Greg), 6 chickens and 3 beehives!
I love being outside and in nature and feel right at home digging in the veggie patch or going on road trips to the amazing UK countryside in our trusty camper van! I love being part of our local community and have volunteered as a scout leader for over 15 years as well as being the current President of the Rotary Club of Milton Keynes.
For fun, I also love all things creative from playing my accordion and guitar to painting and knitting! My most recent hobby has been to learn how to ring church bells at our local church (but this is still very much a work in progress!)
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