I played competitive basketball back in my day. I’m not sure why I said back in the day since I’m not that old as I write this. Anyhow, I played basketball since grade 7 and was fortunate enough to also play some college ball (see, I’m young). For a causal basketball fan the sport might seem to be only about talent and the team with the most talent is more likely to win. But the truth is 90% of the game is played above the shoulders, which means talent plays a role but its a much smaller than the causal fan might realize. For me, personal finance is the same, to be successful at personal finance you need to understand most of the challenges you’ll face are fought above the shoulders. Let me explain further.
Most of us either intentionally or unintentionally assume a person who have a lot of money or higher is educated is likely to be better at their finances than someone without a lot of money or isn’t educated. It seems like a logical conclusion because we make two assumptions in my opinion. First, we assume each of us always makes the logical choice when all the facts are made available us. Just think about buying something as simple as a TV. While the BestBuy branded TV has the same features as the Samsung TV most of us still buy the Samsung TV, which is much more expensive but has similar feature and performance as the BestBuy branded TV.
Secondly, making more money doesn’t buy you a shield from financial collapse. It’s not as though if you make $100K per year you are not protected from financial collapse due to your income level. Both low income individuals and high income individuals, such as celebrities, file for bankruptcy.
If it’s not about how smart you are or how much money you make, then what skill makes someone more likely to be successful at their finances?
The answer is simple. They are able to manage their emotions when it comes to financial matters. When it comes to personal finance; its less about arithmetic and more about emotional discipline. It comes down to mastering the skills of controlling your emotions and knowing when to use it and when to completely take it out of a situation. It don’t matter how great your math skills are or that you make million dollar a year or have an MBA. If you lack emotional discipline around your finance you’re not going to successful in the long run.
Still not convinced? Let me provide you an example that illustrates my point on emotional discipline and what I’m trying to get across. I want you to think of the last vacation or trip you went one. I now want you to try and answer the following questions on a piece of paper or in your head.
1. How much did the trip cost you?
2. What was the name of the city and country you visited?
3. How long were you gone for?
4. How many hours did you spend planning for trip?
5. What was your favorite part of your trip?
6. What was your favorite food or drink?
7. What type of activity did you do, if any?
8. Name something you learned on your trip?
Now, I have another set of questions for you to answer.
1. What’s your net worth or family net worth as of 2015?
2. How much money do you need to retire and when do you plan to retire?
3. How much money do you currently have in your TSFA, non-registered, or RRSP accounts as of 2015?
4. What’s your monthly operating expense for your household?
5. What’s your household emergency reserve at as of Dec 2015?
6. How much debt do you currently have roughly?
7. What’s your annual interest cost on your debt roughly?
8. How many hours would you say you’ve spent planning your finance or retirement in 2015?
How many of the questions from the two groups could you answer? If you could answer both set of questions, congratulations! You’re on the right path to success. If you couldn’t or could only answer more from the first set of questions, why? Both are important in my opinion yet most of us can only answers the first set of questions. Why? It comes down to emotional discipline.
Emotions get the best of us and finance is the worse place to let your emotions get the better of you. To have emotional discipline means you do both the things that excite you, such as planning a vacation, while also recognizing to do the things that are not as exciting, to some anyways, to ensure you can continue to do the things that do excite you.
Most of us will spend more time planning a vacation then we will ever spend thinking about our finances or what we want our money to do for us. It’s vital you understand success is less about numbers and more about how well you control your emotions when dealing with money. Make decisions that strengthens your financial foundation along with improving the quality of your life by learning to control your emotions.