I’ve been writing about the psychology of financial planning for the past couple of years – but I feel like I’ve only scratched the surface. As such, I want to make this a series of articles about the psychology of making money and living the life that you want. I know there are books out there – and plenty of them – that teach you the psychology of money, but they all seem to skip over a key aspect of how to make money: setting up systems and strategies to avoid, or overcome, financial distress. For example, if you put yourself on a course to become a millionaire, then you’ll learn about the best strategies to become rich. In contrast, if you invest in the stock market, you’ll learn about the best strategies for investment – but that doesn’t help on whether or not to invest in the stock market or in the lottery ticket. So, when we discuss money we’re really talking about planning systems, and how these systems can either prevent or overcome your money problems.
So, once again my first article in this series was about how to avoid bankruptcy and how to pay off debt. For today’s post I want to focus on the psychology of money planning and a few key rules you should follow to avoid the financial problems that will ultimately drive you to financial bankruptcy.
You can avoid money problems. But first you need to learn what they are.
A common myth is that you can’t make money, build wealth or get out of debt if you have bad credit. But this is a misconception. To make any money, to build wealth or to get out of debt all you need to do is focus on two things. The first is understanding how to make as much money as possible. The second is a system of financial planning that allows you to make that money. The latter is something I wrote about in this previous article: the psychology of financial planning. And the rule of thumb is that you need to understand how to make money before you can set up and follow financial plans to make money.
So, how do you plan for money?
Planning for money starts with the idea that your money is being invested in a financial plan. The planning system is made up of three parts:
1. Investing in financial plans
Like most things in life, you need to do two things to get the most out of your money: invest in the financial plans that are designed for you, and build a system to avoid the financial risks that can lead to financial catastrophe.
2. Building a system that avoids risk
The best thing you can do for your financial health (and for your financial plan) is to build a system that allows you to invest in the financial plans that are designed for you. For example, when you set money aside for retirement, that money is being invested in a financial plan that is designed for retirement income. If you build the mental habit of focusing on financial plans, then those financial plans will become more likely to materialize. When you focus on money, you invest more time and energy, and in more financial plans. So set aside time to focus on building a plan to take care of your finances, and you will save time later on when you need to do it.
3. Having a financial system
Now we get down to the nitty-gritty. What are your financial plans? It could be a retirement plan, an estate plan for your retirement (I’ve written here about how to build a financial system to avoid bankruptcy), a college savings plan, or a college savings plan that you never use. You want to know what you’re investing in, and then build a system to use those investments to protect your money, while maintaining discipline when it comes to your spending.
Here’s a quick example of what these steps look like in action.
In the example above, you are in the midst of building a financial plan for your financial health. It may go something like this:
“I want to retire at the age of 65. If I die before that, I want my children to inherit my house, and I want my house to be the asset that they build upon as they grow up. My wife will get one-third of what I make, and my children will inherit the rest.”
That’s a really simple way of looking at a retirement plan. I’ve simplified it a little – but you get the idea. What you put into this plan is you the individual – and it’s your money. You’re going to focus on what you can’t do – you can’t change your investment plan. You’re going to focus on what you can do – you can build a system that limits your spending so you don’t run out of money when you retire. Or, if you do want to change your plan, you’re going to focus on what you can change about it, rather than what you can’t change. This system of building a system is your financial plan.
So, here are some questions to ask yourself to create your financial plan:
How confident are you about the investment opportunities?
Who do you want to have financial independence?
How do you care for your financial well-being?
How long are you going to live?
If you care about your financial health, then you can develop a financial system, but you must first take the time to think about your long-term goals. This is where the discipline comes in.