Money & Psychology – Part 3

For the next few weeks, I want to discuss money and psychology. What are some of the tactics of marketing that can cause us to consume irrationally?

Podcast Details:

Podcast Title:  Money & Psychology – Part 3

Podcast Series: The Maven’s Keys to Financial Contentment

The Maven’s Keys to Financial Contentment is my idea that true financial contentment can be found when an overlap of money and beliefs occur.  Many people ask the question of how to be “financially content” and this is a discussion to uncover those answers.

Link to Show Episode

So last week we covered 2 ways marketers have used tactics that influence us into decisions on how we spend our money. Go back and listen to episode 25 to play a little catch up as I want to move right into Part 3 discussing two additional tactics.

“Pavlovian” Association

“Pavlovian” Association -This is the idea of associating a product or idea with something we are already familiar.

I think the biggest exploitation I’ve seen is when athletes (or celebrities) are used to promote products. I’ll be dating myself here, but back in the day, Reebok came out with this pump technology for their basketball shoes.   And apparently the idea was that the pump gave you a more secure feel around your foot and ankle making the show inherently more comfortable–essentially a tighter shoe. But I know my peers were thinking they could jump higher and all types of things just from wearing this shoe. Well, then Reebok was wise enough to get Dominique Wilkins to endorse this product which obviously affected sales positively.

(1989 Reebok Pump Commercial – featuring the “Human Highlight Film” -Dominique Wilkins)

Social Proof

Social Proof – This idea is closely tied to “Association” in my opinion, but it takes it to another level when our peers say that something is good.

Right? I looked up to Dominique Wilkins as an aspiring 15 year-old wanting to play in the NBA, but when the captain of my basketball team in High School is wearing the same shoe….well I had felt like I needed a pair!  (I wanted to dunk too!!)

Animated GIF  - Find & Share on GIPHY

(Needless to say, I didn’t need the Reebok pump to pull this off…)

Social proof is how companies like Amazon or Google use “reviews”. These are your peers telling you that the product is good or bad…they are providing these endorsements based on what they have experienced. If we aren’t careful we’ll consider all social proof as objective advice which it is not–but marketers are counting on the fact that we will.

Next week we’ll put a nice bow on all this and talk about how we use all this to make better decisions with our finances that affect our life.

 

#finlit
#behavioralfinance
#behavioraleconomics
#moneymindset
#psychology

 

Helpful Links:

Rob Cialdini’s Influence Book

Charlie Munger Talk on YouTube

About Me:
Dominique Henderson, CFP® is founder of DJH Capital Management, LLC., a fee-only, registered investment advisory firm specializing in comprehensive financial planning and wealth management.

#FinancialLiteracyBootCamp

Sound bumps provided by www.bensound.com

Strong Considerations During Career Transition

No matter how hard we try, we all inevitably face career transition. Having had experience with my fair share of career transition, I thought I’d share some of the things that successful career-changers have implemented…

Podcast Details

Podcast Title:  Strong Considerations During Career Transition

Podcast Series: Financial Literacy Boot Camp

Link to Show Episode

No matter how hard we try we all will be inevitably faced with a career transition–whether that be within the same company but a new position, a new company altogether or a complete career change and the ever so famous “starting your own business”. Having had my fair share of career transition I thought I’d share some of the things that successful career-changers have implemented.

Here’s a list for your “consideration”…

They consist of the following:

Consider Cash Flow
This is what will kill a new business quick if you are an entrepreneur. And it is not necessarily your business expenses, but your personal living expenses [that don’t stop] when you are trying to get a new venture off the ground.  Or perhaps you are going to a high base salary to a more commission based job.  Whatever the scenario, you’d do well to have good cash flow management strategies in place prior to your transition. A good rule of thumb for your bank account is to have 3-6 months in living expenses. This can be more but not less.

Consider Your Company Benefits
If you split this into 2 categories–current considerations and future considerations–you might think of things like company benefits such as medical care as something to consider in your career transition. How similar is the coverage between Company A and Company B?  If this is misunderstood, you can be leaving benefits on the table.   In the future consideration camp, consider “deferred compensation” and 401(k) accounts as things to try and maximize without leaving much behind.  A lot of people leave the money in the plan because they don’t know what to do with it but this is not the best choice in most cases. Another thing could be vested shares of stock or options or other types of incentive pay. These all should be carefully reviewed for the ramifications of you leaving or transitioning from the company.

Consider Your Biggest Asset–Your Home
Buy/Sell/Rent my home?
Check out another version of this explanation from my Facebook post.
One of the best financial decisions I made before starting my company was to refinance my home mortgage from a 30 yr loan to a 15 yr loan. This freed up some monthly cash flow and ultimately was the best decision for me and my family based on our long-term plans. I’d highly recommend reviewing your long-term housing plans prior to career transition to see if it makes sense to find a way to reduce interest, make improvements, etc before you take a pay cut.  I often get clients caught in whether they should rent, buy or sell when they are forced to move to a new city. Well, there is some math to this. If you decide to rent out [a previously purchased home], consider if the all-in cost of renting will be less in what you could charge. And if so, is that difference big enough for you to become a full-time landlord or pay someone to manage the property. If not, save the land lording for a game of Monopoly and look to sell your home.

What if you are upside down?
When you are underwater on the mortgage, it may be best to just rent our previously purchased home because you have no other choice.  But if you’re in a career that has you moving frequently and you haven’t purchased a home, you may consider renting until you get more stationary. Believe me, I know the hassle more than most being a military brat, but at some point, you have to be smart about your finances. And buying and selling homes without making any money is not a smart financial transaction and it will negatively impact your net worth.

Consider Your Mate
Hopefully, it goes without saying that if you are in a marriage relationship, you need to get your spouse’s support on any move.  If you want to add unnecessary stress to your relationship, just ignore my advice here.  Having been married for over 20 years, there hasn’t been any major move I’ve made in my career without the support of my wife.  When things are not looking rosy, you’ll need the support of your significant other in those times especially.

#financialplanning #careertransition #newjob #finance #financialadvisor #financialtips #financialadvice #episode55

Helpful Links:

About Me:
Dominique Henderson, CFP® is founder of DJH Capital Management, LLC., a fee-only, registered investment advisory firm specializing in comprehensive financial planning and wealth management.

Sound bumps provided by www.bensound.com

Money & Psychology – Part 2

For the next few weeks, I want to discuss money and psychology. What are some of the tactics of marketing that can cause us to consume irrationally?

Podcast Details:

Podcast Title:  Money & Psychology – Part 2

Podcast Series: The Maven’s Keys to Financial Contentment

The Maven’s Keys to Financial Contentment is my idea that true financial contentment can be found when an overlap of money and beliefs occur.  Many people ask the question of how to be “financially content” and this is a discussion to uncover those answers.

Link to Show Episode

The 5 Ways to Spend Money

So last week we discussed the 5 ways to use money.  And I invite you to go back and listen because you’ll need context for today’s discussion.
Today I want to start uncovering some of the hubris that plays a part in that “manipulation”.   A lot of what I’ll be discussing going forward will be the synthesis of things I’ve heard from a couple of sources primarily and that is a speech given by Charlie Munger at Harvard back in 1995 and some things I’ve read in Bob Cialdini’s book “Influence”.  I’ll put links to both in the show notes.
Basically, both describe how we as humans fool ourselves into bad judgment and poor decisions because of cognitive biases we have.  Here are some examples of our irrationality…

Psychological denial
Psychological denial – The premise is that our reality is too difficult to bear, so we make up something to justify our behavior.
I think the most common instance of this being used against us in when people play the lottery.  So statistically speaking, you have a better chance of being struck by lightning than playing the Powerball.  I don’t have to even get terribly scientific to prove that either.  There are 300 million people in the US so that means there’s at least a 1 in 300,000,000 chance for starters, but when you factor in that people buy multiple tickets…

Consistency and Commitment Tendency
Consistency and Commitment Tendency – This is the idea that we as humans like to be consistent and stick to our word.

Which in and of itself is a great thing–we want people to honor commitments (especially the ones they have made to us).  But what if what you are sticking to is just DEAD WRONG.  I’ve covered this in a previous episode of the FLBC, where I’ve seen investors that own a company stock and they hold on to that investment even though it is losing value and this is because of a bias they have.  Marketers realize this and they know that even if they sell you a bad product or service you will continue to buy because of your commitment to what you have said you will do.
 
Next week I’ll cover 2 more common tactics that are used by marketers as we continue our discussion on Money & Psychology.

#finlit
#behavioralfinance
#behavioraleconomics
#moneymindset
#psychology

 

Helpful Links:

Rob Cialdini’s Influence Book

Charlie Munger Talk on YouTube

About Me:
Dominique Henderson, CFP® is founder of DJH Capital Management, LLC., a fee-only, registered investment advisory firm specializing in comprehensive financial planning and wealth management.

#FinancialLiteracyBootCamp

Sound bumps provided by www.bensound.com

How Do the Rich Really Get Rich?

Today we cover a subject that nearly everyone is interested in and that is getting rich. And more specifically, how that process happens. I provide the “Cliff Notes” version of the actual mechanism on how wealth is generated.

Podcast Details

Podcast Title:  How Do the Rich Really Get Rich?

Podcast Series: Financial Literacy Boot Camp

Link to Show Episode

What is Systematic Risk?
So there is a term called systematic risk. And I have to cover this because it will give context on “how you get rich”. Systematic risk is the risk inherent to a “system”. Think of investing in the stock market and the risk that comes with investing in equities.  There are risks inherent to that type of investment that are unavoidable and non-diversifiable. This would be defined as the uncertainty associated with investing in this system.

This is not to be confused with “systemic” risk which is risk similar to the collapse of 2009 where subprime mortgages almost took down the entire financial system. So if you invest in a system (e.g. commodity, stock, bonds, Bitcoin, etc.) you will have systematic risk. Lowering your total systematic risk will be a function of you accessing the types of risk, isolating them, and attempting to mitigate each individual risk. This is nearly impossible which is why it is inherent to the system.

What is Nonsystematic Risk?
Which now brings me to non-systematic or unsystematic risk. This is risk not inherent to the system but instead is very specific and is able to be diversified.  If you were an Enron employee in the early 2000s and most or all of your 401(k) was in Enron stock you have both systematic and nonsystematic risk, the latter due to the lack of diversification in your portfolio.  Nonsystematic risk can always be reduced or eliminated by spreading your investment dollars across multiple asset classes.

So How Do the Rich Rreally Get Rich?
Well, in short, they have a lot of nonsystematic risk in their portfolio. They have very concentrated positions in their portfolios. They usually use leverage to magnify their concentrated bet also.

Is this safe…?   It totally depends on the person.

In Ashvin Chhabra’s book, The Aspirational Investor, he has a chapter entitled: “How Do People Become Very Wealthy?” he talks about the Forbes 400 list and the 4 categories of wealth that comprise the list.

1) Business Owners comprise 60% of the list
2) Financiers comprise 20% of the list
3) Inheritors comprise 12% of the list
4) Real Estate Veterans comprise 8% of the list

#financialliteracy #financialadvice #financialplanning #forbes400 #wealth #rich #money #episode54

Helpful Links:

About Me:
Dominique Henderson, CFP® is founder of DJH Capital Management, LLC., a fee-only, registered investment advisory firm specializing in comprehensive financial planning and wealth management.

Sound bumps provided by www.bensound.com

Money & Psychology – Part 1

For the next few weeks, I want to discuss money and psychology. What are some of the tactics of marketing that can cause us to consume irrationally?

Podcast Details:

Podcast Title:  Money & Psychology – Part 1

Podcast Series: The Maven’s Keys to Financial Contentment

The Maven’s Keys to Financial Contentment is my idea that true financial contentment can be found when an overlap of money and beliefs occur.  Many people ask the question of how to be “financially content” and this is a discussion to uncover those answers.

Link to Show Episode

The 5 Ways to Spend Money
For the next few weeks, I want to discuss money and psychology.I’m going to begin this series with a concept I read in Ron Blue’s Book “Master Your Money”. And I’d like to use that as context to set up the first part of this discussion. He mentions a lot of things in this book and I highly recommend it for its principles and content.

There are 5 ways to spend money he says:

1) Tax Payments
2) Debt Payments
3) Giving
4) Lifestyle Support
5) Saving

I bring this up because of these 5 ways there are some that are pretty constant…the first 3 ways are going to be “constants.” No matter how much you try, most of your income will be spent in those categories.  Taxes alone can take almost 40-50% of what you make over your entire life span…even when you die!

So this means that lifestyle support and saving fall to the bottom of the list in priority and proportion of income remaining to allocate there. Further, if you are over-consumptive in nature, you will have even less to save and invest.

And this is where “marketing” psychology comes into play.   I’ll discuss this more in Parts 2 and 3 of this series for you.  But, in short, you have to realize that the greatest marketing companies which are out to sell a good or service understand this hierarchy (of spending) and they are vying for a piece of the pie. They are hoping and putting a lot of effort into the “bet” that you will regard #4 over everything else on the list. Therefore, they use various tactics to make you consume more, when in reality a large portion of that consumption is unncessary at the time you consume it or AT ALL.

Next week, we’ll discuss some of those tactics that are being used “against us.”

#finlit
#behavioralfinance
#behavioraleconomics
#moneymindset
#psychology

 

Helpful Links:

About Me:
Dominique Henderson, CFP® is founder of DJH Capital Management, LLC., a fee-only, registered investment advisory firm specializing in comprehensive financial planning and wealth management.

#FinancialLiteracyBootCamp

Sound bumps provided by www.bensound.com