Key Messages
The Behavior Gap: How Tuning Out Advice And Focusing On Your Personal Goals Can Help You Invest Wisely And Live Happily
The Behavior Gap by Carl Richards is all about helping people to make smarter financial decisions so that they can stop worrying about money so much.
Through this book, he provides sage advice on how to tune out the noise of the world when it comes to money and instead focus in on your own personal financial goals.
In this book, you’ll learn why The Economist’s advice isn’t always the best, why trying to predict the future isn’t worth your time and energy, and why you should talk openly with your children about money.
Making wise financial choices can be daunting for many people, but with The Behavior Gap you can learn better strategies for managing your finances so that you don’t have to worry or stress about them anymore.
Closing The Gap Between Knowing And Doing: How To React Rationally In An Unpredictable World
The behavior gap is a phenomenon that arises whenever there’s a difference between what we should do and what we actually do.
From overeating to excessive investing, this gap can result in negative consequences if left unchecked.
For example, during the 1990s dot-com boom, people were seduced by the potential of huge profits – so they borrowed money against their home equity and invested over $44 billion in stocks.
As it turned out, when the NASDAQ shed half its value, these people lost their investments and found themselves deeply in debt.
This poor decision-making reflects the herd mentality: Instead of making careful decisions, we sometimes act exactly like those around us without pausing to consider our own options.
Additionally, the behavior gap is tied to our natural desire to avoid pain and seek pleasure – which often leads us astray.
To close the gap, it’s important to think beyond today’s trends and remember surprising past events such as the 2008 debt crisis or Long-Term Capital’s downfall.
These anecdotes illustrate how important it is to invest carefully and avoid getting caught up in boom-and-bust cycles – especially overconfidence – which often leads people into taking more risks than needed.
Invest In A Way That’S Tailored To Your Goals, Not Emotions
If you’re looking for the world’s best investment, think again–there isn’t one.
Instead of seeking out the mythical “unicorn,” make financial decisions based on your personal goals, such as saving for college, retirement or a second career.
That way, you can judge investments more accurately and make more informed choices about where to put your money.
It’s impossible to predict how investments will fare over time, so making good decisions about which investments to make is essential for reaching your desired financial future.
A good example of this approach is saving up for college fees–aim to have around $240,000 saved up 18 years in advance if your goal is to pay tuition fees at that point in time.
Of course, this won’t help too much if your kids don’t get accepted into a school so helping them with their homework and academic prep is also important!
On the other hand, some people look at their portfolio as though they are collecting baseball cards rather than investing – they buy shares based on magazine recommendations without having a coherent plan or strategy.
Don’t do this – instead, identify which financial instruments help you meet your goals and limit yourself only to those products.
Making rational decisions based on principles instead of emotions will ensure that you reach your desired outcome with ease!
Don’t Follow Generic Financial Advice: Explore Your Own Strengths And Goals For A Strategy That Suits You
When it comes to financial advice, there is a good reason to be skeptical.
While we all love giving and taking advice from others, the reality is that most of the generic advice we hear will never suit our personal situation.
For instance, many of us might be told to exercise everyday in an effort to lose weight, but for someone with a heart condition this could easily backfire.
The same applies to financial advice; what works for one person won’t necessarily work for everyone.
Additionally, many “expert” advisors have conflicts of interest and may not always offer the best advice.
That’s why it’s important to understand that when it comes to making your own financial decisions, you are your own expert!
Instead of trying to emulate others, take some time to explore your own goals, strengths and weaknesses and design a portfolio that suits your current understanding of the market.
That way you’re more likely to make informed decisions based on facts and not just generic tips that don’t always apply.
Learn To Look Inward Instead Of Outward To Make Financial Decisions That Will Lead To Happiness
It’s true: money can really only buy you so much happiness.
That’s why a recent study by Nobel Prize winner Daniel Kahneman and Princeton professor Angus Deaton found that happiness is correlated to income only up to an individual earning level of $75,000 per year.
Beyond this point, those with higher incomes don’t enjoy commensurately higher levels of emotional well-being – no matter how much money they have.
This means that beyond a certain threshold, money is merely a tool for pursuing your personal goals and the things which bring you true satisfaction in life.
Money can allow you to travel and explore the world, buy a big garden, or support a cause you deeply believe in – but it can’t guarantee genuine fulfilment.
In order to make the best financial decisions for yourself, then, it’s crucially important to understand what truly makes you happy.
Cut through all the noise about the economy and maintain focus on your own values: what really matters most? Align your use of assets according to these core beliefs & desires – that way, you’ll be able to rest assured that your money is being put towards something worthwhile.
Don’T Follow The Herd: How To Avoid Financial Misinformation In Mainstream Media
Mainstream media can be especially deceptive when it comes to financial advice and markets.
The herd mentality it creates can easily lead us astray, causing us to take comfort in knowing that everyone else is making the same decisions.
However, following the crowd can have costly consequences – like in the subprime mortgage crisis of 2006, when stock market prices fell 57 percent from their October 2007 peak due to housing prices being massively overvalued.
Therefore, it’s important not to follow the herd and avoid relying too much on mainstream media for advice about money.
Instead, we should make more conscious decision by taking a step back from all the news and noise so that can tune back into our real goals.
By doing this, we’ll be less likely to succumb to pressure from misleading messaging, enabling us to make more informed and accurate decisions about our finances.
The Difference Between Planning And Formulating A Plan: Plan For What Is Happening Now, Not What You Think May Come In The Future
Staying on track with your financial goals requires planning and preparation for potential surprises.
Even if you make the perfect plan, there’s still a chance that the future may throw an unexpected curveball at you.
That’s why it’s important to think about making constant course corrections, adjusting your plans and strategies as needed.
To do this, imagine yourself piloting a long cross-country flight – it won’t matter how correct and precise your plan is initially; if you’re just a bit off-course when you take off, by the end of the journey you could end up in Maine instead of Miami!
It’s best to think in shorter timeframes of 3 years rather than trying to tackle the entire 15 year goal all at once.
Make small adjustments throughout to keep yourself from getting overwhelmed by the bigger picture.
In this way, even if unexpected events occur, you’ll be able to stay on track with your financial goals by preparing for surprises and making adjustments when necessary.
How To Avoid Making Emotional Financial Decisions
When it comes to investing, it’s important to be honest with yourself and make rational decisions.
That means getting rid of stagnant assets and only investing according to your personal goals.
To start off, you need to acknowledge that a great investment requires just as much luck as skill.
You may make smart decisions that lead to successful investments, but at times you could also be simply lucky.
To ensure your emotions don’t take over when making financial decisions, the Overnight Test is an effective tool – ask yourself “if someone sold all my investments overnight, which stocks would I buy again tomorrow?” This can help us cut through our pre-existing biases and really evaluate our investments objectively so we’re not hanging on to something just because we’re used to it.
In addition, when considering any potential investment ask yourself “is this playing a clear role in helping me reach my personal long-term financial goals?” If not, then don’t do it!
Don’t invest in something just because it’s trendy.
It’s more important to focus on building savings for retirement and other future objectives instead of seeking short term gains.
Ultimately, making rational investments requires us to be honest with ourselves, get rid of stagnating assets and only invest according to personal goals.
Even if we take all these precautions there’s no guarantee what decision will produce our desired outcome – we’ll just have to make the best possible decision today and take responsibility for its outcome.
Accepting The Unpredictability Of Life Is Inevitable To Ensure Financial Stability
The Behavior Gap Book Summary emphasizes the importance of taking responsibility for our decisions, while at the same time acknowledging that we can never be entirely in control of what comes next.
For example, an acquaintance of the author had gone into serious debt trying to keep up a façade of success so he could buy expensive clothes and drive a BMW.
Instead of deceiving people into thinking he was successful, he should have worked diligently and made progress closer to his goals.
This would have taken hard work, patience and discipline — all qualities necessary for positive change.
Similarly, when it comes to improving our finances, it is important to examine our assumptions about what really matters and be mindful that some seemingly beneficial investments might not actually help us much in the end.
The author provides one such example; despite setting off on a long drive to save money on gas, he realized midway through that if he’d saved ten cents per gallon from a 20-gallon tank, the savings would have added up to just $2 at best — which was far below what he used for gas on his drive there.
We must also remember that we cannot predict every outcome or hope to always achieve the desired results after we take an action.
This is especially true when investing in someone else’s future, like when sending children to college — their chosen path after graduation may be different than what we anticipate or plan for them.
It is best to come to terms with this kind of uncertainty before it happens and be prepared for surprises along the way.
We Shouldn’t Be Afraid To Talk Openly About Money With Our Loved Ones
Talking about money with friends and family can be an uncomfortable topic, but it’s also essential.
While we may feel inconvenienced by having to talk about finances openly, it can lead to better decision making and mutual understanding.
For instance, the author in The Behavior Gap illustrates how his misunderstanding around money almost led to an argument with his wife during a conversation they were having with a friend regarding their kitchen renovation project.
To avoid similar miscommunication in the future, it’s best to acknowledge your own unconscious biases towards money and strive to find a common language.
The same idea applies when talking to children.
For example, the book details an example of parenting wherein the mother told her children ‘we can’t afford that’ if they asked for something unreasonable.
Far from causing awkwardness, this approach ended up leading to an enlightening conversation where the kids showed genuine concern for their parents’ well-being – a proof of how speaking candidly about money issues isn’t just helpful for our financial health but emotional health as well.
The Power Of Simplicity In Achieving Financial Goals
When it comes to making financial choices, the rule of thumb should be to always keep it simple.
Complex strategies and expensive products are usually a waste of money and time.
This is best exemplified by the weight loss industry where people spend $40 billion annually relentlessly chasing after complex diet plans and products, without achieving their desired results.
Therefore, if you want to make smart financial decisions, don’t be tempted by instant gratification and learn to delay it.
Building slow and steady capital requires you to be patient with yourself and take small steps in order to accumulate long-term wealth gradually.
It may not sound interesting, but this conservative approach can actually lead big results over time.
As an example, the author once met a gentleman who had turned a relatively small inheritance into an impressive fortune – just by simply avoiding extravagant purchases and investing regularly on boring things like everyone else does!
Wrap Up
The Behavior Gap is a book about taking responsibility for your financial decisions and investments, by being honest and thoroughly examining the factors involved.
The key message here is that it’s important to close the behavior gap by letting your financial decisions align with your personal goals.
A good advice to take away from this book is to take time each month to reflect on both your personal goals and your investments, and make sure they are in sync.
This way, you can make decisions based on how they support each other rather than work against each other – whether it’s investing in a bank account or stock.
Overall, closing the behavior gap can be done by reflective investing that takes both personal goals into consideration when making investment decisions.
By doing this, you will be able to better manage money and take full responsibility of it.
