Hacking your brain to make the best financial decision is not easy as it sounds. Every day we make thousands of decisions from what to buy, eat, dress or watch. Using behavioral economics to shape financial planning in the country is necessary in avoiding biases and intuition that lead to irrational decisions. Here are the following recommendations in identifying and avoiding such costly mistakes.
Mindfulness – Knowing yourself is the best way to start and observing how you make decisions will bring you to a higher level. If you are considering investing a large sum of money, or you would like to buy or sell your current stocks, it is highly recommended for you to step back, list the cost and benefit of having that decision. Evaluate and see for yourself the good and bad side of jumping into that decision in the long run.
Be a visionary – Most people are currently suffering from myopia (near sightedness) but by thinking and seeing your life 10, 20, and 30 years from now, will give you an advantage. Seeing the lifestyle that you want and able to afford with a disciplined financial plan will help you to avoid expensive mistake and able to manage the risk involve. Compare that with the potential savings over time in your financial plan to help you stay aligned with it. The importance of it was also mentioned by Helen Keller when she told us “The only thing worse than being blind is having sight but no vision”.
Discipline – Willingness to continue over time will put you to momentum. When you create and maintain an overall financial plan and stick to it no matter what happen, the result is a stronger muscle of willingness that’s helpful when a tougher situation arises such as resisting the temptation of buying that expensive bag that you love or to bail out during unpredictable times, knowing that a buy-and-hold strategy performs better over the long term than trying to time the market. At the same time, discipline also can mean knowing when to sell. Gains and losses may happen over time.
Schedule it first –Doing nothing at all is often the easiest choice so having automatic savings and investing plan each month for important long term goals will save you so you can retire with dignity. For many, Myopians (near sighted people) they spend their money in different ways as fast as they can on short-term wants with nothing left or worse buried in debt. Even investors who want to save for retirement or know they should rebalance their portfolios often fail to take action because they never put their plan in a calendar.
Put it in writing – When emotion is up the logic goes down that’s the strategy of some investors work with advisors to set up a written investment strategy that includes scenarios and how they would act under those circumstances. This allows for flexibility within the parameters of a financial plan and helps avoid making decisions based on emotion. For example, the plan is like a playbook, it consist detail action to be taken if the market increased by 50% or went down by 25%. These game plans are not binding agreements but can provide meaningful ways if an investor begins to have uncertainty with his or her long-term strategy.
Get an accountability partner – According to Charles Duhigg “human beings behave well if someone sees what they do, while we behave our worse when no one else seems around”. Our human tendencies tend to go back to our old habit of comfort zone. Doing mental accounting like disregarding savings for an out of country trip while having so much debt with credit card and high interest loans proves to be insane. Find a coach, a buddy or even a community that will help you watch out for your irrationality.
David Isaiah Angway is a RFP and a financial consultant for IT-BPO-Banking, HealthCare Industry and Manpower Agencies. He is a conference speaker and was featured in ANC On the money, Bloomberg TV Philippines. He is also columnist at BusinessMirror, Rappler, and MoneySense magazine. He is a licensed nurse and a former Senior Fraud Specialist of the largest bank in the world, JP Morgan Chase & Co.
He is the CEO and founder of WinLongTerm Financial Consultancy, helping young urban and educated millennial (Gen Y). It sets and achieves their long-term financial goals by empowering them through behavioral finance.
For more information and concerns subscribe to winlongterm.com Facebook page or contact me at firstname.lastname@example.org, here’s also my mobile number 0925-787-7796