Problem A: In addition to whatever you own, you have been given $1000. You are now required to choose between the following options:
Option 1. A 50% chance to win $1000
Option 2. A gift of $500
Which would you choose?
Problem B: In addition to whatever you own, you have been given $2000. You are now required to choose between the following options:
Option 1. A 50% chance to lose $1000
Option 2. A loss of $500
And your choice?
To Problem A, most people choose option 2, the safe bet. To Problem B, most people choose option 1, the gamble.
The two questions are effectively identical. In both cases, if you chose the gamble, you had a 50-50 chance at being worth $2000. If you picked the safe bet, you had $1500. But when you frame the safe bet as a loss, people generally take the gamble. The reference point that enabled you to distinguish between a gain and a loss wasn’t a fixed number, it was a psychological state.
The above is an excerpt from The Undoing Project, a book (thanks Mum for the Christmas present) by Michael Lewis.
The financial conundrum faced at some stage during most people’s lives has nothing to do with how much you make and everything to do with how you manage it. It comes down to your habits. Your habits come from your decisions. And your decisions come from your psychology around money, saving, spending and (self) worth.
It’s almost a taboo to love money which shows just how misunderstood it is. The concept is often explained away as greedy, materialistic, unspiritual and a list of other traits which are socially shunned. This is just where my interest piques. I love the psychology of it and am fascinated by the behaviour associated to finances.
It tickles my mental funny bone when people who fly the “life’s not about money” flag are the first to become emotionally consumed by their rent going up $15 a week.
The goal is to make money work for you, meaning it comes in for the purpose of creating opportunity (be it time, head space, physical premises, education, etc) to allow you to contribute your unique gift to the world - whatever that may be. We all have a gift* and it generally needs to be funded to be sustainable.
Sustainability becomes essential when you consider that living your life purpose is the most efficient thing you can do for maximum fulfilment – and – you’re actually wired for it already. What’s more, people will pay you to fulfil it. ‘Two birds’. Two very pretty birds.
The first thing you need to do is truly value money and wealth building. If wealth building is not high on your values, then it doesn’t matter how much you earn, it will all get consumed by other expenses (planned or unplanned) and won’t accumulate enough to ever work for you. It is never about how much you make, but always about how much you keep. A person who makes a lot of money and spends it all, has less at the end of the year than the person who earns less but methodically saves 10%.
In order to raise wealth building on your values, you need to become clear on how having wealth will enhance your life. Keep in mind, this is not a list of ‘how to spend wealth’, it is a list of how having wealth and accumulating savings can serve your life and your grand purpose. The best way to gain this clarity is to list all the reasons how and why it would serve you.
To break it down, categorise your answers across seven areas of life: How having wealth benefits you Spirituality, Mentally, Financially, Physically, your Family, Socially and with your Career. For example, in terms of career, accumulating wealth could mean you could be more selective about which job you accept, making sure it is best suited to your lifestyle, rather than accepting any job simply because you need income. That would be one way accumulating wealth served your life. Another, in terms of physical health, could be that you had less stress in your life as a result of knowing you had enough financial cushion behind you to weather bad economic times.
The greatest impact comes when you look at how accumulating wealth serves your three highest values. When you take the things that are most important to you in life and then join the dots with 150 reasons of how building wealth truly supports these things, that is when you rewire your brain, creating and cementing new neural pathways around saving. Then it’s not something you try at anymore. Rather, it is in your blood. You just changed your psychology. You save automatically without thinking because you’re now wired that way and the option to save comes up trumps at each decision point.
That’s where the goodness happens! It’s work, yes. This exercise costs your time, up front, for a massive return. Life. Options. Choice. Opportunity.
*Not sure what your purpose is? Refer to my Eudaimonia program to see if this is something that might suit you.