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5 Things You Should Know About Personal Finance

5 Things You Should Know About Personal Finance

    Money.  Oh money.  It makes the world go ’round.  It’s one of the biggest reasons for divorce.  It either frees us or enslaves us.  It is the commodity of all commodities.  And yet, as much as many of us make, most of us know so little about how it works.  I blame our parents.  They should have known.  They should have taught us.  Well, either way, I’m about to give you a quick crash course in cash money 101, and how personal finances should work.  Buckle up and enjoy the ride.  Hopefully you’ll be enlightened.

    1. How a credit card works

    Credit cards are an interesting commodity.  They can either work for you or against you, depending on how much you know about them and how smart you are with them.  The biggest problem with credit cards, though, is that we gain access to them before we know enough about them.  Your parents should have taught you how they work, but sadly, many adults don’t even know exactly how they work.  This article should help.  Read it.  Then read it again.

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    2. How to create a budget

    Budgeting is something that people either love or hate to do.  Personally I hate it.  But I keep a general budget because it’s important to know where my money is going.  A friend of mine knows where every dollar he spends goes.  I’d rather divide my money into 2 different accounts, business and pleasure.  I give myself an “allowance” to do whatever I want with monthly, and the rest stays in my “business” account for bills and other living expenses.  Need a crash course on building a budget?  Check this out.

    3. The time value of money

    The time value of money is a simple principal to understand:  basically it states that any amount of money is worth more today than the same amount of money in the future due to it’s earning potential.  This means that if you have $100 to invest today, it’s worth more than $100 a year from now, because it could be gaining value through investments for a year.  Let’s assume you average 9% on your investments… Your $100 today will be worth $109 in a year, whereas getting $100 a year from now is only worth about $91, due to the value of money lost in the year.

    This is very important when you consider the next point…

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    4. Start investing early

    Take a look at this chart.  Basically what it states is that when Saver B starts investing earlier on in life, the time value of his money allows for gaining potential so much greater that even though Saver A invested more than 4 times the amount of Saver B, Saver B has gained more than $400k more than Saver A by retirement.

    Moral of the story?  If you start investing now, you’ll have much more than if you wait till you make more money, even if you invested more in the years to come.

    5. Let your money work for you

    We were all taught that it is important to gain a good education and to learn valuable skills to enter the job force and start a good career.  But here’s what few of us have learned:  more important than having a good job is learning how to make your money work for you.  Consider this: if you can save $500k, and you average 10% on your investment portfolio, you will gain $50k annually without doing anything other than having the money.  $2 million will earn you $200k per year (earning 10%).  $10 million will earn $1 million per year.  The more you invest, the more you’ll make, without lifting a finger (well, other than managing your money, of course).

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    Sure it’s important to have a good job.  But it’s even more important to be investing your money, no matter how much you’re making.  If the goal is financial security and freedom, it doesn’t take rocket science; just a little discipline and sacrifice early on.  And what you’ll gain is so much more than what you could buy today.

    One last note:  $1 at age 18 can’t get you more than a coke, or maybe a dollar menu burger.  But $1 at age 18 is worth $54 at age 60 (assuming 10% again).  Keep that in mind the next time you stop at Starbucks.  Your cup of joe is actually taking more than $150 out of your retirement fund.

    Spend wisely.

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    Photo Credit: aresauburn

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    Last Updated on July 17, 2019

    The Science of Setting Goals (And How It Affects Your Brain)

    The Science of Setting Goals (And How It Affects Your Brain)

    What happens in our heads when we set goals?

    Apparently a lot more than you’d think.

    Goal setting isn’t quite so simple as deciding on the things you’d like to accomplish and working towards them.

    According to the research of psychologists, neurologists, and other scientists, setting a goal invests ourselves into the target as if we’d already accomplished it. That is, by setting something as a goal, however small or large, however near or far in the future, a part of our brain believes that desired outcome is an essential part of who we are – setting up the conditions that drive us to work towards the goals to fulfill the brain’s self-image.

    Apparently, the brain cannot distinguish between things we want and things we have. Neurologically, then, our brains treat the failure to achieve our goal the same way as it treats the loss of a valued possession. And up until the moment, the goal is achieved, we have failed to achieve it, setting up a constant tension that the brain seeks to resolve.

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    Ideally, this tension is resolved by driving us towards accomplishment. In many cases, though, the brain simply responds to the loss, causing us to feel fear, anxiety, even anguish, depending on the value of the as-yet-unattained goal.

    Love, Loss, Dopamine, and Our Dreams

    The brains functions are carried out by a stew of chemicals called neurotransmitters. You’ve probably heard of serotonin, which plays a key role in our emotional life – most of the effective anti-depressant medications on the market are serotonin reuptake inhibitors, meaning they regulate serotonin levels in the brain leading to more stable moods.

    Somewhat less well-known is another neurotransmitter, dopamine. Among other things, dopamine acts as a motivator, creating a sensation of pleasure when the brain is stimulated by achievement. Dopamine is also involved in maintaining attention – some forms of ADHD are linked to irregular responses to dopamine.[1]

    So dopamine plays a key role in keeping us focused on our goals and motivating us to attain them, rewarding our attention and achievement by elevating our mood. That is, we feel good when we work towards our goals.

    Dopamine is related to wanting – to desire. The attainment of the object of our desire releases dopamine into our brains and we feel good. Conversely, the frustration of our desires starves us of dopamine, causing anxiety and fear.

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    One of the greatest desires is romantic love – the long-lasting, “till death do us part” kind. It’s no surprise, then, that romantic love is sustained, at least in part, through the constant flow of dopamine released in the presence – real or imagined – of our true love. Loss of romantic love cuts off that supply of dopamine, which is why it feels like you’re dying – your brain responds by triggering all sorts of anxiety-related responses.

    Herein lies obsession, as we go to ever-increasing lengths in search of that dopamine reward. Stalking specialists warn against any kind of contact with a stalker, positive or negative, because any response at all triggers that reward mechanism. If you let the phone ring 50 times and finally pick up on the 51st ring to tell your stalker off, your stalker gets his or her reward, and learns that all s/he has to do is wait for the phone to ring 51 times.

    Romantic love isn’t the only kind of desire that can create this kind of dopamine addiction, though – as Captain Ahab (from Moby Dick) knew well, any suitably important goal can become an obsession once the mind has established ownership.

    The Neurology of Ownership

    Ownership turns out to be about a lot more than just legal rights. When we own something, we invest a part of ourselves into it – it becomes an extension of ourselves.

    In a famous experiment at Cornell University, researchers gave students school logo coffee mugs, and then offered to trade them chocolate bars for the mugs. Very few were willing to make the trade, no matter how much they professed to like chocolate. Big deal, right? Maybe they just really liked those mugs![2]

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    But when they reversed the experiment, handing out chocolate and then offering to trade mugs for the candy, they found that now, few students were all that interested in the mugs. Apparently the key thing about the mugs or the chocolate wasn’t whether students valued whatever they had in their possession, but simply that they had it in their possession.

    This phenomenon is called the “endowment effect”. In a nutshell, the endowment effect occurs when we take ownership of an object (or idea, or person); in becoming “ours” it becomes integrated with our sense of identity, making us reluctant to part with it (losing it is seen as a loss, which triggers that dopamine shut-off I discussed above).

    Interestingly, researchers have found that the endowment effect doesn’t require actual ownership or even possession to come into play. In fact, it’s enough to have a reasonable expectation of future possession for us to start thinking of something as a part of us – as jilted lovers, gambling losers, and 7-year olds denied a toy at the store have all experienced.

    The Upshot for Goal-Setters

    So what does all this mean for would-be achievers?

    On one hand, it’s a warning against setting unreasonable goals. The bigger the potential for positive growth a goal has, the more anxiety and stress your brain is going to create around it’s non-achievement.

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    It also suggests that the common wisdom to limit your goals to a small number of reasonable, attainable objectives is good advice. The more goals you have, the more ends your brain thinks it “owns” and therefore the more grief and fear the absence of those ends is going to cause you.

    On a more positive note, the fact that the brain rewards our attentiveness by releasing dopamine means that our brain is working with us to direct us to achievement. Paying attention to your goals feels good, encouraging us to spend more time doing it. This may be why outcome visualization — a favorite technique of self-help gurus involving imagining yourself having completed your objectives — has such a poor track record in clinical studies. It effectively tricks our brain into rewarding us for achieving our goals even though we haven’t done it yet!

    But ultimately, our brain wants us to achieve our goals, so that it’s a sense of who we are that can be fulfilled. And that’s pretty good news!

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    Featured photo credit: Alexa Williams via unsplash.com

    Reference

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