Money & the psychology of money
Every decision you make will cost you money. The decision to buy this or that; to attend this course or that; the decision to improve yourself today or wait; the decision to take that job or that; the decision to jump ship into business or wait; the decision to have a child or wait; the decision to get married or not. Some decisions are easier than others. Some costs can be measured directly in money today, while others are measured only in estimated opportunities.
If you are afraid to make decisions, for fear of what they would cost you, there are a number of considerations you must put into place. In the world of investments, decisions are much tougher because you cannot predict the future. You can look at a stock of a company and make a decision that when the price drops, you will buy. And then what happens is, it keeps rising. The moment you decide to buy, it starts declining. You can send the insurance sales agent away today, because you decided you will take the policy next month, only to find that you need the cover sooner.
Consider this real estate example about a friend who purchased a house in 1997 in Johannesburg at whopping cost of R180 000. This was a tough decision at the time because that house was expensive considering what she was earning. Speaking to her now, that house is fully paid, and is worth about R2 million today.
Making decisions based on cost, I suppose one has to always ask the question: will this item get cheaper in the future, in which case I should wait until it is, or is it likely to get more expensive, in which case I should buy now? When computers were first introduced, they were very expensive. I remember buying a 20 gig computer for P15 000. Today, my phone has more than three times that memory and costs three times less.
There may not be easy rule of thumb since there are so many factors that affect the price of commodities today. It may be easy to think house prices are overpriced today, and maybe they are, but when you consider that demand is not going down as the population increases, you might be standing here five years down the line still saying the same thing, but looking back to today as the time you should have purchased your house.
If you can’t make a decision based on cost, then you should consider whether waiting will reduce the costs or only increase them. You should never be afraid to pay a price for a good decision. In the case of a share on the stock exchange, if the price starts falling after you bought, the question is, will the company pay enough dividends to cover your loss, or is the decline only temporary?
We speak of the global financial crisis but very few of us really understand the causes of that. So we wait on the sideline, as if it’s a disease that will be cured and things will go back to “normal” again. The question is what kind of “normalcy” would that be? Will it be a “normalcy” of abundant financial resources or a normalcy of things being cheaper?
Many countries have to make big decisions. Greece is facing such a decision moment. Decisions that may mean hardships today due to the current pressure. The only question is, can they get the right leadership in place to sort out the problems, which will help them in future?
When making decisions, always consider the long term implications of what you are doing today.
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