Don't let others influence your financial plan
Ah, high school. We all remember how fun our teenage years were. What stands out to me the most from that time are all the pressures we faced from many different sources. Many well-meaning people in our lives encouraged us to play by the old rules that said to get good grades to get into a good college and get a good job and work hard every day to save enough to finally retire.
And then there were the pressures we faced from our peers. The pressure to wear the right clothes, make the right friends, and act the way everyone else did.
You probably thought, like I did, that once you left adolescence you would also leave all that peer pressure in the past. Unfortunately, peer pressure is no less powerful as we grow older. Often other people influence our decisions more than we even realize.
One of the biggest areas in which peer pressure affects us today is in our finances. I'm sure you've been pressured to invest a certain way, save a certain way, and adopt certain attitudes about money that everyone else has.
But as we all know, doing what everyone else is doing is never the way to get ahead.
Mama always said…
"If everyone else jumped off a bridge, would you?"
When your mom or dad asked you this question, you knew the right answer was "no." But science says our brains don't quite work that way.
An article from the Journal of Neuroscience demonstrated that part of the human brain observes the confidence of those around us when they make their decisions, which in turn influences us. In other words, "someone else's confidence can sway and reassure our choices."
The participants in the study relied on their own experience to make decisions, but their confidence was greatly bolstered when they learned other people had confidently chosen a certain way. When they learned about other people's confidence, they were quicker and bolder in making their choices, demonstrating that our brain is responsive to the attitudes of those around us.
Being influenced by others' confidence isn't new in the investing world. Investor confidence is a prevalent metric often used to assess the market. It's not always the most accurate indicator of performance, but many people make investment decisions based on how other investors feel, often waiting for other, bolder investors to make moves before investing their own money.
How many times have you believed in someone simply because the person was extremely confident? Even if your own experience told you something might not work, it's tempting to listen to someone who has a tremendous amount of confidence in his or her beliefs. It's why so many people hand their money over to financial advisors, instead of taking the time to learn and increase their financial education for themselves.
It's also why people jump on certain "hot" investments without thinking about whether that investment is right for their financial goals.
As an investment technique, responding to others' opinions and attitudes rather than calling on your own experiences and gut feelings, is almost always a one-way ticket into hot water.
You, You, You
When you start making your financial plan, there are three questions you should start with:
- What's Your Reason Why?
- Where Are You Today?
- What's Your Plan?
Did you notice one word that appears in all of those questions? YOU!
Your financial plan is your own. Your reason why and your current financial situation, are unique to you. Certain notes of your story might match up with other people's, but at the end of the day it's your life, and no one else's.
So your financial plan must be as unique as you are. Meaning, it shouldn't start by asking what Tom is investing in, or what stock Cheryl is really confident about. It should start by looking inward, increasing your education, and making decisions based off your own experiences and attitudes.
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There is no "they"
A friend of mine was going through cancer a few years back and told me that after he received his diagnosis, he received one question from almost everyone he knew: "What do they say?"
"They" referred to his doctors. He visited three different doctors to get their opinions, and each doctor was confident in his diagnosis and how they thought he should approach treatment.
"But at the end of the day," he said, "It wasn't about what they said. It was about what I felt was right for me."
There is no "they" in your financial plan. That's not to say there aren't people whose opinions and beliefs matter. You shouldn't completely ignore other people and embark on a solo quest to financial freedom. As Robert and I have both said before, business and investing are team sports. You should surround yourself with people who will support you, encourage you, guide you, and mentor you on your journey.
What you don't need are people who will pressure you. The people you listen to should not be the peer pressure bullies from high school, telling you what to do. Instead, they should be the people you trust to give you solid advice and help you achieve your goals.
You can and should listen to others, take their advice into account, and learn from their experiences. And yes, you should make note of their confidence, while also evaluating whether that confidence has a foundation.
But at the end of the day, investing is your decision. Your financial plan should be based on the information you've gathered after researching and educating yourself.
What is your gut telling you?
We are influenced by people every day, in every decision. There's nothing we can do to filter out all opinions. But we can be conscious about how we act, and what we base our decisions on.
As always, educating yourself first, and giving yourself the tools to see through other people's attitudes to the facts, will serve you better in the long run. Instead of listening to someone else who is confident, you should start by building up your confidence in yourself first. Increase your knowledge, rely on your experience, consider others' opinions, and then listen to yourself.
Don't jump off that financial bridge with everyone else. Instead, build your own bridge to financial freedom.