From Basic Investing to Real Wealth: Your Path to Financial Freedom part 2

 

1. BEHAVIORAL FINANCE & MONEY PSYCHOLOGY

Money is not just about numbers. It’s deeply connected to how we think, feel, and behave. Behavioral finance is the study of how psychology affects our financial decisions. Even if you’re good at math, your emotions and mental habits can lead you to make poor money choices.

Let’s go through this concept step-by-step in plain English.

1. Understanding Investor Biases

Investor biases are mental shortcuts or emotional habits that often lead to bad financial decisions. They’re like “tricks” your brain plays on you, without you even realizing it.

Let’s focus on two major biases:

A. Loss Aversion

What it is: People hate losing money more than they enjoy making money.

• Example: If you find $50, you might feel a little happy. But if you lose $50, you’ll feel much worse.

• This fear of losing can make people avoid investing or sell investments too early.

Real-life Example:

Imagine you buy a stock for $100. A week later, it drops to $90. Even though markets go up and down normally, you panic and sell it to “cut your losses.” Then, two months later, the stock goes up to $120. You lost out on the profit because fear took over.

Why it’s a problem: Fear of loss causes people to make short-term decisions that hurt them long-term.

B. Overconfidence

What it is: People often think they’re better at investing or predicting the market than they really are.

• Example: Someone who made a lucky profit once might think they’re a “financial genius” and start taking huge risks.

Real-life Example:

John invests in a tech stock and it doubles in 3 months. Now, John thinks he knows how to “pick winners.” He puts all his savings into other risky stocks. A few of them crash, and he loses most of his money.

Why it’s a problem: Overconfidence leads to risky decisions and ignoring professional advice.

2. Building Long-Term Thinking Habits

One of the most important parts of wealth-building is thinking long-term. That means looking at your money over years or decades, not days or weeks.

Why Long-Term Thinking Matters

• Investing works best when you give your money time to grow.

• Markets go up and down in the short term, but they tend to grow over time.

• People who panic when prices drop and sell too soon miss out on the recovery.

Example:

If you had invested $1,000 in the U.S. stock market in 1990 and just left it there, you’d have over $20,000 by 2024. But if you jumped in and out trying to “time” the market, you could have ended up with much less.

Habits to Build

• Automate your investing: Set up monthly contributions so you don’t have to think about it.

• Ignore the news: Daily headlines are meant to scare or excite you. Stick to your long-term plan.

• Have patience: Wealth takes time. Don’t expect overnight results.

3. Mindset Shifts for Wealthy Individuals

Wealthy people often think differently about money. You can start adopting these mindsets even if you're just starting out.

Mindset #1: Money is a Tool, Not a Goal

Poor mindset: “I just want to be rich.”

Wealthy mindset: “I want to use money to create freedom, options, and security.”

• Example: A rich person might spend $10,000 on coaching to grow a business, not on flashy stuff.

Mindset #2: Focus on Assets, Not Just Income

Poor mindset: “I want a high-paying job.”

Wealthy mindset: “I want to own things that grow in value (like stocks, real estate, or a business).”

• Example: Instead of just working for money, a wealthy person invests money so it works for them.

Mindset #3: Delay Gratification

Poor mindset: “I want to enjoy my money now.”

Wealthy mindset: “I can wait for bigger rewards.”

• Example: Instead of buying a new car with every bonus, a wealthy thinker might invest the bonus and buy a car later from the returns.

4. Emotional Discipline During Market Downturns

The stock market goes through ups and downs. It’s totally normal. But the hardest part is controlling your emotions during the downs.

What Usually Happens

When the market crashes, people feel fear. They sell their investments at low prices. Then, when the market recovers, they feel regret and buy back in—at higher prices. This is the opposite of “buy low, sell high.”

Real-life Example:

During the 2008 financial crisis, many people sold their stocks after prices dropped 40–50%. But those who stayed invested saw their money bounce back in a few years—and grow even more after that.

How to Stay Calm

• Remember your why: You're investing for long-term goals (like retirement), not short-term wins.

• Zoom out: Look at 10- or 20-year charts of the market. The trend is usually upward, even with dips.

• Avoid checking too often: Don’t watch your portfolio daily. It will only create stress.

• Have an emergency fund: This gives you peace of mind and prevents you from selling investments in a panic.

Putting It All Together

Let’s say you’re just starting out. You don’t need to be a money expert. But if you understand your own behavior and start thinking long-term, you’ll already be ahead of most people.

Example Story: Gloria's Journey

Gloria is 25 and wants to build wealth. She learns that:

• It’s normal to feel fear when the market drops (loss aversion).

• She shouldn’t assume she’s smarter than the market (avoid overconfidence).

• By investing $200/month, even in a simple index fund, she can become a millionaire over time (long-term thinking).

• She reads books about how wealthy people think and realizes she can adopt the same mindset now.

• When the market crashes, she doesn’t panic. She keeps investing because she trusts the process (emotional discipline).

20 years later, Sarah is financially free—not because she had a high income, but because she understood her own money psychology.

Conclusion

Behavioral finance and money psychology are about understanding your mind as much as your money. Most financial mistakes come not from lack of knowledge, but from emotions like fear, greed, and impatience.