Change your bad money habits to make good investment decisions

Investors often face several confusions while investing due to lack of understanding about the suitability of different investment avenues. If these problems are not tackled initially, they could lead to a flawed investment decision, which can prove disastrous for your finances.

Lack of knowledge

To be in control of your hard earned money, the best way is to educate yourself about your investment. There’s no substitute for knowledge. It’s the starting point for building long-term wealth. Getting educated and staying in-control of your investment aids in defending your portfolio from unnecessary losses and the biggest benefit is that it provides peace of mind around money. Financial literacy will bring you not only financial wealth but also social wealth.

Bad habits

We are creatures of habit, even when it comes to our money matters. While some habits can pave the way for wealth and prosperity, others can lead to financial ruin. Bad money habits become so ingrained in us that they have the power to ruin future investment plans. Let us look at some of them:

Avoid random shopping – Shop with a list that will help you save your money from being spent on unwanted stuff

Make a budget – If you don’t keep track of your spending pattern, you will never know where the leaks are and how you can stop them. If you find it difficult to stick to your plans, you can start by keeping a track of your cash flow, segregate your expenses between need and luxury and carefully re-evaluate where every penny goes. An average of 30-35% of your monthly income should be directed towards investments.

Just because syndrome

Always remember one size doesn’t fit all. This applies as much to clothes and shoes as it does to investments. Stop making irrational decisions related to your investment only because your friend or relative told you or they themselves are invested in it.

Inflation

Inflation is like a bug that eats into your savings and leaves your bank balance hollow. A lot of people grapple with how to insure oneself against inflation. It is important to understand the meaning of real rate of return, which is after deducting the expected rate of inflation from the nominal rate of return.

If you expect your investments to grow at 12% per annum and inflation to grow at the rate of 7% per annum then the real rate of return would be positive 5%. On the other hand if you expect your investment to grow at 5% and inflation to grow at 7% then the real rate of return would be negative 2%, that is, inflation is eating up your money, your money is de-growing by 2% per annum. In order to maintain the same standard of living you enjoy today your investments need to grow at a substantially positive real rate.

Behavioral biases

All investors are prone to behavioral biases which can have an adverse impact on their investment returns. These biases affect our behavior and prevent us from acting in our own best interests. Some biases to avoid include:

Due to loss aversion bias the pain of losses is twice as much as the pleasure of gains and investors are adamant to avoid entering the markets in the same fear.

As a result of bandwagon effect, when we rely too heavily on social information — listening to what our neighbors and friends say — we slowly begin to ignore our instincts.

The real challenge for being financially successful is fighting your enemies that block your path and pull you down. It is those who overcome these enemies and keep on the course that find financial security and, eventually, financial independence.

You won’t be successful in every battle. However, if you manage to turn a few losses into wins, you’ll find yourself moving faster and faster on the path, with more confidence and momentum than ever before, and that alone will go a long way toward bringing you the success you desire.