Most people are in an abusive relationship with their money. It controls them, makes them miserable, and causes them to make irrational and stupid decisions. The first step in the journey to financial freedom is to transform your relationship with money. Follow these SIX easy steps today!
Step 1: Define Your Relationship with Money
You need to define whether you control your money or whether your money controls you. Is money your master or is money your servant? Does it control your moods? Do you use money as a measure of your self-worth? Do you define success in monetary terms? What is your happiest money memory?
Step 2: Seek to Understand How Money Affects Your Moods
The human brain does not react well to stress and money is the source of inordinate stress. Neuroscientists have discovered how chronic stress and cortisol can damage the brain and hamper the decision-making process. It has been discovered that the fear of losing $100 is far greater than the joy of winning $100. This curious asymmetrical relationship frequently manifests itself in stock market investing.
Stock market investors tend to sell their winners and hold onto their losers. They buy a stock, it goes up 10 percent, they think they are geniuses, sell the stock, and bank their profits. When the stock goes down 10 percent, they hold onto it and pray that it recovers. It then goes down another 10 percent and they start going to mass, lighting candles, and sprinkling holy water on their computers. After another 10 percent decline, they hire a priest to do an exorcism but refuse to sell. The stress associated with market loss causes short circuits in parts of the brain dedicated to making rational decisions.
Step 3: Understand that Money Should Not be Your Why
Financial freedom requires changing your relationship with money. When you work for money, money becomes your master. It rules your mind, your actions, and your desires. When money works for you, you are flipping that relationship. You are now the master. You are in control. Money works for you and you in turn work for a higher purpose. You need to find that higher purpose. It could be to provide for your family or give back to your community or your country. The thirst for money is insatiable. If money is your why, you will never be satisfied.
Step 4: Don’t Be Envious
Envy is an illusion you have created in your imagination. The people you envy are not as successful as you think. Focus on everything you have in life as opposed to focusing on what you don’t. This recalibration will yield exceptional results. Envy and gratitude cannot coexist.
Step 5: Give More than Your Take
There was a severe drought in the Indian state of Kerala in the early 2000s. The drought brought suffering to local villagers and farmers. The Coca-Cola bottling plant near the village of Plachimada, however, was ramping up its output. The villagers would see the heavily laden trucks come out of the plant and so decided to stage a protest which continued over numerous years. Coca-Cola eventually pledged to put more water back into the local aquifer than it extracted. It is important to give more than you take.
Studies in the United States show that entrepreneurs are twice as likely to donate to charities as salaried employees. In 1999, the Wall Street Journal coined the term "philantropreneur" to describe entrepreneurs that donate to charities regularly.
Here are six reasons why you should donate:
1. Experience More Pleasure – the Bible says that it is more blessed to give than to receive.
2. Help Others in Need – there is no lack of people in need in this world.
3. Get a Tax Deduction if donating to a registered charity - pay less tax and help others in the process - this is a win-win.
4. Bring More Meaning to Your Life – there is more to life than working and paying bills.
5. Promote Generosity in Your Children - reinforcing positive traits in your kids is always good.
6. Improve Personal Money Management – anything that gets you to pay closer attention to your bank account is a good thing.
Step 6: Get Educated
According to a 2015 Standard & Poor's Global Financial Literacy Survey, only 33 percent of adults worldwide are financially literate. The bar on this survey was not set high. Respondents were not asked to build complex econometric models or use Markowitz to find the efficient frontier on an investment portfolio. Simple questions about inflation, compound interest, and diversification were asked. The notable laggard in the survey was a rising economic power. China's citizens recorded an abysmal financial literacy score of 28 percent. Moreover, literacy scores were not going up.
The Financial Industry Regulatory Authority Inc.'s Investor Education Foundation's 2016 report found that 37 percent of individuals correctly answered four out of five financial questions. This was below the 42 percent reported in 2009. Humans are getting financially dumber, not smarter. Low levels of literacy are alarming as governments incentivize banks to make financial services available to a wider audience.
Moreover, in the last 30 years, the retirement savings landscape has shifted. Decision-making responsibilities have been transferred to financially illiterate participants who previously relied on their employers or governments for financial security and guidance after retirement.
One question that vexes me is why the formal education system has never focused on financial literacy? This education system is engineered to produce uncreative and loyal employees, not free-thinking entrepreneurs. As in most systems, however, imperfections exist. A minority fringe exit the system before graduating with their entrepreneurial fire unextinguished. Some spend their lives checking in and out of rehab, while others set up multi-billion dollar companies.
You need to rebel against everything you think you know about finance because it has been "taught" to you for the benefit of large financial institutions. Education is at the heart of financial freedom.
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