Investing Money Wisely – Who Are You Listening to?

So you want to start investing money wisely?

In his book The Beginners Guide To Wealth, Noel Whittaker references a study that followed a group of people from the age of 16 to 65. He found that only 8% (1 in 12) of those people actually became wealthy.

So what does this tell us? Well, it should tell us that most people aren’t in a position to be giving us advice and therefore we should be selective about who we listen to – in other words we need to invest money wisely, or don’t invest at all.

When I was writing this, I thought the obviousness of this concept doesn’t warrant an entire post, yet we see so many people who listen and act on unqualified advice.

Let’s take the common ‘buying your first home’ scenario – I have friends who are in a big rush to buy a house and I can usually identify these reasons for this.

“The 5 Sneaky Influences of Home Ownership”

  1. Parental pressure
  2. The Great Dream ideology
  3. Peer pressure (to catch up to friends)
  4. Internal satisfaction of ‘owning’ a home
  5. To avoid paying rent ‘dead money’

What is rarely on this list is any consideration of the return on the investment – considering we’re dealing with loaned money this should be given the MOST consideration!

Instead what usually happens is ‘damage control’ – i.e how quickly can we pay our home loan to limit the amount of interest we will pay (check out this post about how to pay a home loan and build a portfolio at the same time).

Do you think it’s strange that someone would buy a house and commit to a $300,000 loan (plus tens or hundreds of thousands dollars of interest) without reading at least ten books on property and seeing at least three independent financial advisor’s?

I do!

This sort of follow up work will take time of course, but it is more than appropriately matched to the size of the task you are about to undertake – investing money wisely requires you to research.

Instead, we rely on the initial seed planted by our parents or friends (who likely know nothing more than us). We then visit one financial advisor who works for the bank and recommends us a home loan from their product list.

We rejoice when we get ‘approved’ a loan, no further research is done, a house is bought and we are financially locked for 10, 20, 30 years paying off a mortgage and filling the banks pockets. Did you know that mortgage comes from the french word mortir – which is French for a ‘death pledge’?

Now I only bring up this example because this is perhaps the most common case of blind leading the blind. I think this misguided advice phenomena exists for a two reasons:

1. ‘Advice is often a camouflaged justification of an individuals own situation.’

Think about this – how often do you hear someone tell you what they wish they had done and not what they have already done? People have a habit of justifying their circumstances. It is not sound advice – be weary.

2. ‘Familiarity isn’t always expertise’

People will give advice based on what they are familiar with – and what we are familiar with isn’t always sound advice. Take in opinions of legitimate experts (there’s a few at the end of this post).

THE KEY QUESTIONS TO ASK YOURSELF

So here’s the 4 key questions to think about when someone is giving you advice about investing money.

“The 4 Queries for Suspect Theories”.

1. Is the person in a financial position that you want to be in?

This is important because if the person is not, their advice needs to be carefully analysed. It does not always mean their advice will be wrong – if you had of asked Bill Gates or Warren Buffett what to do before they were wealthy, they would have given you great advice right? It is still always important to be weary of a persons position.

2. Is their financial success due to their own doing or did it fall into their lap?

Too commonly you will see wealthy people who inherited wealth and did not earn it for themselves. In some cases, this person might have learnt valuable lessons from their family who generated this fortune. In most cases however they are probably just enjoying the lifestyle that was handed to them without any clue about how it was obtained. Advice from such a person should be disregarded.

3. Did their method to achieving wealth rely on sacrifices that you would be comfortable making?

I have met people who have achieved great levels of wealth due to completely running themselves into the ground – working 7 days a week, never turning down work, seeing the profit in absolutely anything – and such hard work can be commended.

However, this has often come at the expense of sacrificing another part of their life – like spending time with their family. If someone got their wealth this way, you need to consider whether you would be comfortable making the same sacrifice to achieve your own wealth.

4. Does there method and mentality match up to the method that your qualified wealth idols used?

You need to have a point of reference – a wealth idol. My wealth idols are usually billionaires because I have the view that if another human can become a billionaire there is no reason why I can’t, it’s the shoot for the starts and hit the moon kind of mentality.

You can of course choose people less wealthy too. But if you study the lives of wealthy people there is a remarkable amount of consistencies regardless of how they achieved their wealth.

You should be aware of these consistencies and ask yourself whether this particular person has anything in common with your wealth idols methods and mentality.

If you answered no to any of these questions you need to evaluate this advice further because the person you are talking to may be in the 92% of people who are not qualified to be giving out advice about wealth and such advice should be disregarded or at the least carefully analysed.

The takeaway:

  1. Be aware of the '5 Sneaky Influences of Home Ownership'.
  2. Be sure to ask yourself 'The 4 Queries for Suspect Theories'.
  3. Look deep and think back - have you been influenced by someone unqualified without knowing?
  4. Don't follow 'most' people because 'most' people are wrong.

Check our links page for some great resources, here are 3 particular books that you will find super-helpful!:

Bodo Schaeffer – The Road To Financial Freedom

Robert Kiyosaki – Rich Dad, Poor Dad Guide to Investing

Noel Whittaker – The Beginners Guide To Wealth

Have you taken someone’s advice that you shouldn’t have? Are you investing money wisely? Leave your comments below and be sure to subscribe to our weekly newsletter!

Speak soon,

Tom

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