July 1999

Human Nature Risks Biggest
Threat to Financial Success, Part 1

© Talbot Stevens

I have a confession to make. If you promise not to tell anyone, I'll admit that what my wife has been telling me for years is right. Financial success is more about emotional human nature behaviour than the black and white world of math and taxes.

The truth is that the biggest threat to your financial success has nothing to do with the economy, interest rates, or even how well or poorly stock markets perform. Ironically, the biggest risk to your financial independence is you, and more specifically, your behaviour as a consumer and an investor.

Perhaps the most dangerous human nature risk is living beyond your means. The reasons for this behaviour are numerous. Millions of dollars of advertising tell you that you should have everything as soon as you want it. Keeping up with the Joneses has never been easier in this "no down payment" world of easy credit.

Today's generation expects their parents' standard of living yesterday, not remembering that their parents took 20 years to get there. Credit cards offered to students solve this problem and help get them in the financing habit as early as they can find a co-signer. Short-term gratification wins out over saving and discipline almost every time, as proven by savings rates of near zero or below in Canada and the U.S.

When researching titles for my book Financial Freedom Without Sacrifice, it became obvious that the most valuable advice for many was to simply live within their means. Of course, no one wants to hear that so I focused on the more "marketable" theme of how to benefit without lowering your standard of living.

In researching the book The Millionaire Next Door, the authors found that the most prevalent characteristic of millionaires in the U.S. was that they were frugal, frugal, frugal, and lived well below their means. The appearance of wealth does not always equate to the existence of wealth, and can sometimes be the reason for the lack of it.

Never being satisfied is another natural behaviour that makes it difficult to get ahead financially. We constantly strive to improve everything, including our standard of living, and of course the quantity and quality of our "toys". Previous generations had one TV for the family. Many homes now have three or more TV's, including a big screen unit that can cost thousands. Of course, as a sport fan, I fully acknowledge the "need" to watch the big game on a big screen.

On the investment side, investor behaviour or performance is much more important than investment performance. This is true in many ways. While increasing your investment rate of return has obvious benefits, the investment savings rate is more important. In other words, a good saver can produce a larger retirement fund than a good investor that saves less, particularly over shorter time periods.

More human nature risks are discussed in next month's Strategy Sheet.

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