Money has a profound impact on your well-being, but few of us leverage our EQ to make smarter decisions when it comes to these all-important digits. We roped in Justin Els, CFP® and Director at TVC Wealth and Health Managers, to unpack the psychology behind wealth and arm you with the practical tips you need to optimise your financial life.
Evolving Priorities and Personal Fulfilment
Life is a journey of personal growth and self-discovery, and our financial decisions evolve alongside it. In the insightful book The Psychology of Money by Morgan Housel, Housel emphasises that finding personal fulfillment and financial stability requires aligning our financial choices with our evolving priorities.
Many of us evolve so much over a lifetime that we don’t want to keep doing the same thing decades on end. Some people live austere lives with little income and are perfectly happy with it. Then there are those who work their tails off to pay for a life of luxury and they’re content with that.
Both have risks. The former risks being unprepared to raise a family or fund retirement. The latter risks regret that you have spent your youthful and healthy years in a cubicle. Balancing present desires with future aspirations is crucial for long-term financial well-being.
Mastering Volatility and Taking Control
Traffic fines and tax fines mean you did something wrong. The natural response for anyone who watches their investment decline and views that decline as a fine is likely to avoid future fines. It sounds trivial, but thinking of market volatility as a fee, rather than a fine, is an important part of developing a mindset that lets you stick around long enough for investing gains to work in your favour.
Market volatility can trigger anxiety and impulsive behaviour, potentially undermining financial success. By reframing market fluctuations as an inherent part of investing, we can regain control over our emotions and stay committed to our long-term investment strategy.
Human nature is such that we tend to feel better when we do something. Although it sounds easy, even lazy, doing nothing is often the hardest thing to do. Imagine stock markets falling all around you (as they did in the first half of 2022) and everyone is selling. It’s natural to want to follow the crowd and join in. Prices may have fallen by double-digit percentages and, naturally, you want to protect what you have left. Your friends have smugly told you that they sold a few days ago for a big loss, but the situation is even worse now.
Under such circumstances, it takes real courage to do nothing.
But fast forward a couple of years. You’ve benefited from the discipline of sticking with the plan. Stock markets have recovered and you’re making money again. Meanwhile, your friends took their losses and have nursed their wounds. But have they got back into the market? Probably not. Waiting for markets to fall again, they most likely missed the boat.
The Optimistic Realist’s Mindset
Optimism doesn’t mean ignoring risks; it means maintaining faith in positive outcomes despite setbacks. Embracing an optimistic realist’s mindset enables men to face challenges head-on while keeping their eyes on long-term financial goals. This approach fosters resilience and empowers men to navigate the financial landscape with confidence.
It is also easier for men to be optimistic when they live below their means. Saving money is the gap between your ego and your income and wealth is what you don’t see. Wealth is created by suppressing what you could buy today in order to have more options in the future.
South Africans are overindebted with total outstanding unsecured borrowings of around R225 billion (40% of whom are in arrears, while 48% of borrowers are in default). This is according to a report by Differential Capital.
A lot of South Africans sadly do not live within their means and can end up in an impossible debt cycle before they know it. Lifestyle creep is also a real risk for new high earners, as they get caught up in impulse spending and don’t fully understand how money really works.
Practical Advice You Can Put Into Action Right Now
Now, let’s explore practical tips from financial expert Justin Els, CFP® and Director at TVC Wealth and Health Managers, to enhance your financial journey:
1. Goal-Oriented Investing: Finding the Sweet Spot between Risk and Control
Els emphasises the importance of embracing risk while maintaining control for financial success. He recommends his clients take a goal-based approach to investing, which allows them to align their investments with specific goals.
Factors such as the investment’s time horizon, risk profile, investment types, and asset classes should be carefully considered to ensure alignment with the desired outcomes. Additionally, the flexibility of goal timelines should be taken into account, enabling adjustments and strategic decisions as needed. By striking a balance between calculated risks and control, men can make financial decisions with confidence and optimize their chances of achieving their goals.
2. Mastering Emotional Intelligence: Navigating Financial Biases and Cultivating Discipline
Building emotional awareness and discipline is paramount in developing strong financial decision-making skills. Els says that he understands that various behavioural biases can unconsciously influence our choices. Two common biases he encounters among his clients are confirmation bias and loss aversion.
The tendency to seek out confirmation of our existing beliefs, can hinder objective decision-making. This is particularly the case during casual conversations around the braai, where men make most financial decisions. Additionally, the aversion to losses, where men experience a 2-2.5 times stronger negative reaction to losses compared to the positive reaction to equivalent gains, can cloud judgment.
Another bias to be aware of is the narrative fallacy. Humans are naturally drawn to compelling stories, and this inclination can lead us to prioritize narratives over objective evidence. It’s essential to recognize how stories can influence our perceptions and potentially misguide our investment decisions, particularly when alluring narratives are attached to high-priced or popular stocks.
By working alongside a Certified Financial Adviser, you can benefit from their expertise in keeping emotions and biases in check. A professional adviser can help you navigate these biases, provide objective insights, and guide you towards sound financial decisions based on your unique circumstances and long-term goals.
3. Set Clear Financial Goals
Research suggests that setting specific, measurable, achievable, relevant, and time-bound (SMART) goals is crucial for success. Individuals who have clearly defined goals are more likely to take consistent action, make effective financial decisions, and experience a greater sense of accomplishment when they achieve their targets.
As Els can attest, it’s common for clients to evolve their goals over time, reflecting the changing priorities and circumstances that life presents. For instance, one of his clients initially saved for an exciting adventure with the boys at Tomorrowland. However, three years later, that client’s goals transformed as they welcomed their firstborn, shifting his focus towards saving for his child’s tertiary education. This example emphasises the importance of regularly reassessing and adapting financial goals in response to evolving life circumstances.
4. Establish Financial Stability: Building an Emergency Fund and Ensuring Adequate Protection
Focus on building an emergency fund to protect against unexpected expenses. Els says this tip is paramount, noting that while it may seem straightforward, many clients struggle to implement it consistently.
Creating an emergency fund serves as a safety net, providing a cushion to address unexpected financial challenges without resorting to credit card debt or withdrawing investments earmarked for other goals. Justin dedicates spending approximately 10-15 minutes of each client meeting to discuss the importance of a solid financial safety net.
Furthermore, Els advises his clients to complement their emergency fund with appropriate insurance coverage to mitigate potential risks. For instance, having comprehensive medical aid, car and home insurance, and income protection can significantly reduce the need for a large emergency fund. This ensures that when unexpected events occur, such as a lost phone, the financial impact is minimised through insurance co-payments rather than having to bear the full cost of replacement.
An emergency fund not only safeguards against financial setbacks but also provides peace of mind.
Meet Justin Els
Justin Els is the director of TVC Wealth and Health Managers, a team of advisors with a passion for adventure, sport and fitness. Their focus is on helping clients integrate their finances as part of an active lifestyle. Get more info HERE.