As we think about money and our relationship with it, it is important that we face some salient truth about our relationships with money.
I will discuss 3 aspects of our relationship with money and how such knowledge can improve the relationship.
- You are not a rational decision maker when it has to do with money
- You are not rich: I will say you rich, your environment only made you poor
- Money must be worked for
You are not a rational decision maker when it has to do with money
That statement seems unbelievable until you discover it to be true yourself.
When you go out to buy a something, you will negotiate the last Naira out of every purchases. But not quite on all purchases.
Buying something of N250, you can spend another 30 mins negotiating for a price reduction by a mare N20.
However, while buying something of N250,000, you tend to let go of as much as much N10k. You ordinarily will just feel it is okay.
That’s rational right? No.
How does knowing this help you? I am calling it out here to bring your consciousness to it so you can reverse your order of thinking. When you are buying the item of N250k next, check comparable price, both online and offline before making the purchase. You will save more doing that than squeezing every N20 out of your N250 purchases.
When it comes to money, rationality isn’t cheap.
You are not rich: I will say you rich, your environment only made you poor
Nassim Taleb in the book Fooled by Randomness recalled the story of a couple – Marc and Janet.
March works as a corporate lawyer in New York city and earns $500k/month. They live in a high end neighborhood but cannot live up to the standard of the neighborhood.
Marc’s decision to live in the high end neighborhood may be justifiable though. The demands of his work means he has to live close to his office.
Nassim Taleb said:
But the costs on his wife, Janet, are monstrous. Why? Because of their relative nonsuccess—as geographically defined by their neighborhood. Every month or so, Janet has a crisis, giving in to the strains and humiliations of being snubbed by some other mother at the school where she picks up the children, or another woman with larger diamonds by the elevator of the co-op where they live in the smallest type of apartments.
Why isn’t her husband so successful? Isn’t he smart and hardworking? Didn’t he get close to 1600 on the SAT? Why is this Ronald Something, whose wife never even nods to Janet, worth hundreds of millions, when her husband went to Harvard and Yale and has such a high IQ and has hardly any substantial savings?
Marc and Janet’s case provides a very common illustration of the emotional effect of survivorship bias. Janet feels that her husband is a failure, by comparison, but she is miscomputing the probabilities in a gross manner—she is using the wrong distribution to derive a rank. As compared to the general U.S. population, Marc has done very well, better than 99.5% of his compatriots. As compared to his high school friends, he did extremely well, a fact that he could have verified had he had time to attend the periodic reunions, and he would come at the top. As compared to the other people at Harvard, he did better than 90% of them (financially, of course). As compared to his law school comrades at Yale, he did better than 60% of them. But as compared to his neighbors, he is at the bottom! Why?
Because he chose to live among the people who have been successful, in an area that excludes failure. In other words, those who have failed do not show up in the sample, thus making him look as if he were not doing well at all.
I hope you get the message now. You are rich. You are only living in the wrong environment or you are comparing using a wrong sample size.
Money must be worked for
Another misconception about money is that you must work for it, work to make it and work to have it.
While that might be true up to some level, you need to work towards a stage in life when money starts to work for you.
For money to work for you, you need to start accumulating assets that generates cash with or without you.
The assets are such that all they required from you is your initial capital (money and/or time). Once you pay such price, you can earn money on them for life.
An example might be
- Someone who puts a N100m in a fixed income asset that pays a 10% interest per annum. Such will get N10m every year and that might be enough to cover all living expenses.
- Someone who creates a digital product that people want to buy and that s/he sells every now and then. You create such digital products once and you earn on it for life.
- Someone might also build a business that can exist without her or him and that pays dividend yearly for his upkeep.
- Someone might also invest such money in the stock market in companies that pays dividend.
Basically, options abound for you to make money work for you.
Fixing those wrong believes has improved my relationship with money and I really hope it will improve yours as well.
This is a content from my paid personal finance community