Smart money management flows more from psychology than from math. Even very bright people make terrible financial choices. If we are honest, each of us has a story about how we’ve done dumb things with money.
These irrational choices are often the product of some psychological or emotional impulse.
As leaders, we think we make rational decisions concerning our business’s profitability, but today, I hope you learn one thing: You are not so rational.
“Behavioural finance” and “behavioural economics” explore how money management is more influenced by our emotions than by reason.
Read Also
Ground rules for farm family communications
Establishing meeting ground rules can help your family find ways to communicate that work for your farm. Here are some…
We might also think that external factors like interest rates and commodity prices might explain a farm’s success, but let’s imagine two farmers who farm side by side, and who started farming in the same year by buying farms of the same size and value, with approximately the same equipment.
We have all seen it: 30 years later, one may have a net value of millions while the other is bankrupt. That is when we realize something. A series of micro- and macro-decisions have led to positive results in one situation, but a negative outcome in the other.
In any business, some of us will be very successful and others will fail, despite similar external environments. Of course, some have very bad luck, but others make too many irrational money management decisions.
Some people desire to be the biggest in their industry and compare themselves to others in their town, province or country. Their decision to invest isn’t really based on the profitability but on the idea that another farmer could get ahead of them, perhaps in the number of acres owned, results by acres, or units of animals.
Any criterion can become a number to compare, like the size of our tractor or the number of cars we have. I’ve even met women who compete to have the most children. If the sister-in-law is pregnant, they decide to have another child.
How can we increase our awareness and implement more rational money habits?
- Reduce your exposure to status-based advertising. We become frustrated when we see those images of everything that we don’t have. We are bombarded with amazing success stories that influence us whether we want them to or not. The less you are exposed, the less you will use your energy to manage your jealousy and your desire for higher status.
- Avoid temptation. If you want to reduce your equipment investment, stop going to dealerships “just to look at what is new.” You can exhaust your reservoir of resistance to those promises of happiness.
- Think twice and pause. Ask yourself, “What is the need I’m trying to fill with that ‘investment?’” How could I fill that need with something else?
- Remember the trade-off. If I invest in X, what do I have to give up? Will you have to say no to other things? People who buy beyond their means through debt give up their freedom to choose in the future.
- Distinguish between needs and desires. We’ve been brainwashed to think we need big farms, big barns, and luxury items to feel worthy and to be respected. We never have enough. Unfortunately, in agriculture we have been influenced by materialism as much as everyone else; only our vehicles are different.
- Recognize irrational beliefs:
- “If I earn enough money and own enough of the right stuff, I will earn the love and the attention of others.” False: You can earn attention, but only the attention of the people who judge others by what they possess. And you cannot earn love. Is this really what you want to be recognized for?
- “If I possess X, I will be happy.” Think about all the things you possess. If every new acquisition made you happier, you should be very, very happy today. You always go back to your “happiness set point.” If you want to be happier, invest in gratitude, in your relationships, and in benevolence but not in more land, more tractors, or more trophies.
- “I deserve a brand-new pickup; I work so hard.” It is not a question of whether you deserve it but whether you can afford it (in the short and long terms).
- “When I have this, it will make me feel better, greater, and prouder.” Will you still feel so proud when you realize how much it is costing you, and how many other things you could do with that money?
Finally: Ask yourself the Socratic questions:
- Is it true? Are my choices making me happier?
- Is it good? Do the consequences of my money habits make me feel good in the long term?
- Is it useful? Are my beliefs and habits helping me reach my goals? Are they aligned with my values?
Take back your brain.We may never be able to be completely rational about our decisions; only a robot could do that. However, we can examine our beliefs and our emotions: pride, guilt, ego, desire, fears etc., all play a role in our decision-making.
You have to choose who drives the bus, and who drives the tractor.
