Or are you setting yourself up for financial mediocrity?
In the book Atomic Habits written by James Clear, he recalls that, “…over 15 percent of U.S. soldiers stationed there (Vietnam) were heroin addicts.” However, counter to current beliefs about addiction, “…only 5 percent of them became re-addicted within a year, and just 12 percent relapsed within three years. In other words, approximately nine out of ten soldiers who used heroin in Vietnam eliminated their addiction nearly overnight.”
The findings from this result contradicted traditional research about addiction and habit formation. Typically, when we think of breaking bad habits (addiction in this case) or creating good ones, we assume it takes discipline, excellent decision-making, and maybe even superior self-control.
While these are great character traits to have, the researchers in the case of the Vietnam heroin addicts realized that the drastic changes in the environment of the soldiers were the main reason for the different addiction results.
According to the book, “When scientists analyze people who appear to have tremendous self-control, it turns out those individuals aren’t all that different from those who are struggling. Instead, “disciplined” people are better at structuring their lives in a way that does not require heroic willpower and self-control.”
One of the questions we get occasionally is, what is the difference between financially successful people and those who struggle?
The key to financial prosperity and wealth building is intentionally creating a disciplined financial environment in your life.
It’s not about superior stock market smarts or budgeting self-control. It is about setting yourself up for success by taking control of your financial environment and structuring your life in a way that sets you up for financial success.
Six ways to structure your environment for financial success:
Set up a framework for successful financial decision-making.
Do you have your top financial priorities taken care of before you spend money on the “wants”? When deciding whether you can afford something or before making large purchases, run through this mental checklist: 1.) Is your high-interest debt paid off? 2.) Is your emergency fund complete? 3.) Are you maximizing your 401k? 4.) Are you funding the backdoor Roth IRA? 5.) Are you working on college funding for the kids?
If the answer is yes to all five of these, then spend away and feel good about it. If you only have three or four taken care of then use extreme caution before proceeding and consider putting the purchase on layaway!
Use the KISS Principle- Keep it Simple Stupid.
Set up your savings monthly and automatically. Reduce the pain of savings by making it out of sight, out of mind. You will be amazed at how quickly you can adjust to living on less. Start saving small amounts if you have to and then slowly increase the saving amounts over time.
Think about how people in high-cost areas of living manage their finances. They spend twice as much as other people on their housing, gas and groceries, but they manage to do just fine. They spend less in other areas to make up for the higher costs. You can do the same.
Stay Humble, Hungry and Smart
Organizational health and business management guru, Patrick Lencioni says that the key to the ideal team player is someone who is humble, hungry and smart. I believe it also makes for great financial success.
Often, people believe they can outsmart the stock market and figure out the magic potion that allows so much success in the markets that they don’t have to save, spend less, and other difficult financial tasks akin to blocking and tackling in football.
This search for the magic potion is even more alluring for high-achieving, type-A personalities because they have accomplished so much personal success in other areas of their lives. We have seen very intelligent people fall prey to poor investment schemes or even financial scams because they falsely believe the stock market is a riddle to be solved and they have the answer.
Investing wisely is exactly like flying passengers safely from New York to Los Angeles. Airlines have been flying that route for a long time and trying to find a smarter path or flying a route too close to a thunderstorm to save time only introduces unrewarded risk.
Use caution for the Diderot Effect
The Diderot effect is a phenomenon that occurs when acquiring a new possession leads to a spiral of consumption that results in the acquisition of even more possessions. In other words, it means that buying something new can cause a chain reaction of buying more and more things because that new item makes one feel like one needs other things to go with it or to keep up with it. As a result, we end up buying things that our previous selves never needed to feel happy or fulfilled.
For example, my daughter is eight years old and learning to ride horses competitively. This could lead to subsequent and costly purchases: Purchase a horse for my daughter. Add fencing to our property. Update and upgrade our barn. Purchase a new horse trailer to travel to horse shows, etc. ad infinitum. Ugh . . . she’s never riding a horse again! Maybe I’ll get her interested in flying!
Understand the difference between skill and luck
Corollary – Understand the difference between speculation and investing. My father has a large portion of his wealth in one stock. It may go up tremendously in the coming years and months. I have no idea. And unfortunately, neither does he. This is what speculation looks like. We can analyze a single stock until we know everything about that company. Unfortunately, we cannot predict the next accounting scandal (Enron), we cannot predict when risk to a certain industry will cause a great company’s stock price to collapse (Covid-19), we cannot predict, God forbid, the next airline that crashes an airplane causing their stock to collapse. This is called business risk, in financial jargon. The good news is that with a globally diversified portfolio, business risk can be diversified away. By the way, there is nothing inherently wrong with speculation, just don’t speculate (e.g., Bitcoin) with your retirement funds or your children’s college savings.
Treat all aspects of your life as an investment
This is a repeat principle but it’s worth mentioning again. Being wealthy or rich, is much more than just a dollar amount in your bank account. I would even say someone who is rich in their health, relationships or other non-financial measurements might even be happier than someone who only has a large investment portfolio. So, invest in all the things that bring quality of life, peace of mind and real joy.
Simon Sinek’s book, The Infinite Game reminds me to think differently about how I invest in all aspects of my life. I’m not trying to win a game but instead enjoy life by having purpose and meaning.
One of the main ideas in the book is that certain aspects of our lives are finite and others infinite. A finite game is something you can win or lose, like football. An infinite game can’t be won or lost; the primary purpose is to survive, sustain and even enjoy our lives to the fullest by having a meaningful purpose or cause that brings true joy.Do not neglect other areas of your life at the expense of gaining financial wealth. “I wish I would have flown more trips and made more money,” said no one ever at the end of their life.