Hedonic – Adaptation, Treadmill etc.- How it impacts your finance

Fear, Financial Independence, Human Brain

This word is suddenly in vogue or I have suddenly started noticing it. I have come across this word in more than 6 books in the last two months. Initially this word sounded very dangerous to me. Even though I read the meaning, it didn’t register with me in one go.

Remember I have told you multiple times, that you should get the money automatically deducted from your savings bank account and deposited into your investment fund – a Systematic Investment Plan (SIP). This way your brain will not need to make decisions every month. If you try to do this physically yourself, your brain will always show you all the reasons, why this won’t be a good idea because of some fear it throws up.

Since your brain was designed to ensure your survival as its primary objective, you can’t blame it for throwing these curve balls at you to ensure that it save energy for an attack, when it will need to be in full action.

During my recommendation for these SIPs, I also mention that you won’t even realise after some time that the deduction has happened , because you will adapt to spending only from the money that is left over.

This adaption to the new normal which human beings undergo so easily has a term in the English language called “hedonic adaptation”. In simple terms it also means that we quickly get involve into a new inertia, based on our environment very quickly.

This is exactly what happens when you get a pay raise. When you get the letter with your raise, you are euphoric. Then you get your first pay which is at the increased level. The euphoric has turned down to happiness. By the second month your increased salary also gets completely spent like the earlier salary. Its because you adapt to the new salary and your expenses increase to match the new salary.

So use this human tendency to your advantage to move towards your financial independence.

Till next time then.

Carpe Diem!!!

Advantage small investors – SIPs

Affirmative action, asset allocation, compounding, Financial Independence, Habits, Uncategorized

This is a continuation on my rant for doing Systematic Investment Plans (SIPs)

A lot of times I hear my friends , especially female friends say this….. my father / brother / husband invested in a specific stock Rs100,000/- and the stock has never recovered back and he lost so much money, so I will never invest.

I have literally had to coax people to understand the fallacy of the argument. Losing massive money is an outcome of getting in the market without doing your home work. If you listen someone else and do your investment or you see the stock market going up and you throw a dart at any name and buy the shares then you are inviting trouble.

First and foremost if you don’t understand about the ways companies work, operate, don’t get into the market on your own. There are so many ETFs which you can buy or MFs you can get. This helps spread the risk over multiple stocks.

Second even within these always ensure you are buying regularly in small tranches. By using the SIP facility you get to average over time as well as cost so even the fall in prices is actually an advantage for you.

Unlike big investors who have to look for a big price advantage to invest their millions or billions, for the small investor this is an advantage. They can enter the market at any time because the SIP will take care of any gyrations that the stocks go through and will end up with a very large core inthe long run.

The key is that you are not investing lump-sum, you are investing small amounts and you are investing systematically and you are letting compounding play its role in the long run, then your returns will be similar to the overall market

In the LONG TERM, and this is a very important point, in the long term the stock markets have given compounded returns in double digits. If you can spare small amounts of money every month for an extended period of time, its mi days boggling to the corpus you can create. In my earlier posts I have given ready to use charts to help you compute.

However if your time horizon is short then its better to put money in debt instruments so you are sure about your returns. These returns are small single digits but they are guaranteed.

Take your first step, start an SIP and get financial independence.

Till next time.

Carpe Diem!!!