When I first made my initial foray into investment last year, I've realized through personal experience, there is a lot of psychology at play for investment. I wanted to learn more about this behavorial psychology and took the opportunity to visit the national library to search for books to read. Its about time I got an update in more aspects of finance, cos I would like to admit there are many many things I dont know about.
One thing I realized also is that while we have a personality that is expressed socially. There is also a money personality of sort, as in our beliefs on money and also the way we manage our money. While looking through the books about stocks, I flipped through many books about personal finance, which arent anything new, typical stuff, and came across this book. Its about Financial Dysfunctions. Relevant cos in any behaviour, there's functional and dysfunctional.
The title of the book is " Why Smart People do Stupid Things with Money" by Bert Whitehead. The title looks superficial at first but browsing through it, I found it very different from other typical personal finance books.
Its an interesting and easy book to read. Inside for the first time, I am introduced to the concept of Money Personalities, 7 Common types of Financial Dysfunctions, a thorough explaination about the Financial Life Cycle and Functional Asset Allocation. Its not about numbers but explained with analogies that makes sense and also with parallel references to medicine and doctors. I've recognised some personalities and dysfunctions that I had personally experienced and from people I know. Definitely a good read. Almost finished. I need to look through certain parts again so that it stays inside my brain.
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From the various new ideas to me. I wanna highlight this - Saving and Paying off debts at the same time and a similar idea of not paying off mortage extra quickly.
To me, previously for the discussion about credit card debt, I mentioned about paying off more than minimum or it will balloon.
But reading this book, where the author advocates Both Paying off and Saving money at the same time.
If a person with excessive consumer debt only focuses on paying off the debts, he will end up with no savings.
The reason why he ends up in large debts because he is good at paying off the debts.
The reason why the person continues to have 0 savings is because he is not good at savings.
So the permanent change is to start saving while paying off the debt. Aim to save 10% of gross income.
Why not pay off the high credit card? The author observes from his clients (he is a fee-based financial planner of 30 years), those who pay off their debts without saving do become debt free more quickly but as they do not replace their old negative habit with a new positive habit, they will end up in debt again as they feel compelled to reward themselves for paying off. Whereas his clients whom save 10% while continue to pay off their debts, end up more positive because after paying off their debts, they have positive savings (money saved in bank) and not still at a 0 saving.
I think this is a very different approach that is more logical financially than what is being preached as common knowledge.
The other is about not paying off mortgage quicker than scheduled. The new concept for me is 'leveraging' in a positive way. So if there is extra money, instead of paying off the mortgage, invest it. To illustrate:
A - has $500,000
$300,000 paid towards home loan (through extra mortgage repayment)
$100,000 in stocks
$100,000 in liquid assets
versus
B
$150,000 in home loan (no extra mortgage repayment)
$200,000 in stocks
$150,000 in liquid assets
B makes more sense cos the extra money helps to 'diversify' into the other two assets and one is not so exposed in the real estate market.
Makes alot of sense but sometimes due to our money personalities and dysfunctions, we dont make alot of good money decisions. Even make irrational ones.
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