There’s a difference between speculating and investing, and it pays to know what the difference is.

Speculating is exciting, full of breathtaking ups and downs. If you chart it over time, it looks like a heartbeat. Probably an elevated one.

Investing, on the other hand, is slow and boring. In the short term, you may have some ups and downs. But if you chart investing over time (over many years of time), it looks like a long, slow curve upward.

Speculating is like a Vegas casino. Investing is like watching grass grow.

Know which game you’re playing.

-Carl

P.S. As always, if you want to use this sketch, you can buy it here.

The post There’s a difference between speculating and investing appeared first on Behavior Gap.

You can make a bad decision and have a good outcome… but that doesn’t make it a good decision.

Let me give you an example: There was a guy in his early 20s who sold everything he owned, borrowed some money from friends and family, went to Las Vegas, and bet it all on one spin of the roulette wheel.

Good decision or bad one?

I think we can all agree it was a bad decision.

But the story doesn’t end there. He actually won! I can’t remember the exact amount of money, but I remember it being a lot.

Let me ask the question again: good decision or bad? It was still a bad decision!

The fact that he got lucky does not make the decision good. It’s the process that matters.

Over time, the accumulation of many outcomes will make evident whether the process was good or not. But in the short run, focusing on the outcome instead of the process just leads to trouble.

-Carl

P.S. As always, if you want to use this sketch, you can buy it here.

The post Process Versus Outcome appeared first on Behavior Gap.

Once upon a time, I sent an email to my newsletter subscribers with a simple question: Is it hard for you to talk about money with your spouse or partner?

Most people said yes, but the response I got that really hurt was this:

“YES! It is hard, because it often feels defensive. She spent too much. He spent too much. Was that aligned with our values? What are our values? How come there isn’t more? And if only she would spend less, then I wouldn’t have to work so hard. :)”

If that sounds too close to home, imagine how it felt to see those words from… you guessed it… my wife!

I have to admit that upon reading that, I was discouraged. There was even a part of me that felt like a fraud. Who am I to be talking to other people about money if my own wife feels this way?

But I also need to admit she’s right. It’s challenging for us to talk about money. Not just with each other, but with our parents, our children, even our siblings, and friends.

And you know what? That’s OK.

This, my friends, is one of the keys to talking about money: knowing that it’s going to be hard. Sometimes, it’s going to be painful. And that’s OK.

Talking about money may not be necessary for all couples. But for the vast majority, it’s like taking out the trash or doing the laundry—just one of those things that has to happen.

So do your best, keep it as civil as possible, and maybe even think of it as an opportunity to connect more deeply. And, like anything else difficult in life, if at first you don’t succeed, try and try again.

-Carl

P.S. As always, if you want to use this sketch, you can buy it here.

The post Talk About Money Try Again appeared first on Behavior Gap.

Budgeting doesn’t have to be painful. In fact, it can be a fun game.

Some friends of mine played this fun little budgeting game I created called Carl Richards’ Budgeting Treasure Hunt.

When they started, they had a goal of saving $1 million dollars. Crazy, right? The only way that ever happens is by getting lucky in the stock market or an inheritance.

Years later, I got a call. “Carl,” they told me, “we did it! We just crossed the $1 million mark.”

They didn’t get lucky, and they didn’t inherit a ton of cash. They just played the game. Here are the rules.

1- Pay attention. Every time you spend money, just take three seconds to notice what you’ve done. Don’t judge, just notice.

2- Find wasted money. If you start to notice that certain purchases don’t make you happy, consider that wasted money. Another good place to find wasted money is in basic utilities or subscriptions you’re no longer using.

3- Automate savings. Take the wasted money you found and spend it! But the trick is, spend it by automatically saving it every month. This can go into a savings account, into an investment, or you can increase the amount you’re throwing at your mortgage.

4- Repeat. The goal is to see if you can move your automatic savings number up a little each month. This can actually be fun! Again, think of it as a game.

Meeting big financial goals is not about getting lucky or having a big break, it’s about consistently doing boring but effective things. The solution is not to grit your teeth and work harder at budgeting. The solution is a simple mindset shift from “Harder, Painful, Grrr” to “Fun, Exploration, Treasure Hunt.”

So stop trying so hard, and play the game.

-Carl

P.S. As always, if you want to use this sketch, you can buy it here.

The post Carl Richards’ Budgeting Treasure Hunt appeared first on Behavior Gap.

We are obsessed with comparing ourselves to others.

This is pointless behavior, of course. How other people are doing has nothing to do with how you are doing. But it’s what we do.

Don’t believe me? Consider this:

Researchers from Harvard gave participants two options:

     1. Earn $50,000 per year while everyone else earns $25,000.

     2. Earn $100,000 per year while everyone else earns $200,000.

People were told to assume that everything else (like the economy, the value of the dollar, etc.) stayed equal. So, more money meant the ability to buy nicer things.

Obviously, you’d pick Option 2, right? Of course we would want more money, independent of what everyone else had.

Wrong.

Half the people in the study didn’t want more money… they just wanted to have more than everybody else, even if it meant having less overall.

That. Is. Crazy.

It also shows just how competitive we are. We’ll sacrifice our own well-being just to do better than someone else.

My advice? Stop thinking about everyone else. It doesn’t matter how big anyone else’s house, truck, or 401(k) is… because they aren’t you.

-Carl

P.S. As always, if you want to use this sketch, you can buy it here.

The post Is mine bigger than yours? appeared first on Behavior Gap.

When it comes to personal finance, what matters is not beating some index. What matters is meeting your goals.

An index, of course, is just a broad measure of how a particular market has done. Think of it as the average. The investment industry seems to think their entire purpose in life is to convince you that the best thing you could ever do is hire someone to help you beat an index.

Whether that’s even possible is debatable, but let’s just focus on why it doesn’t even matter.

Pretend you live in some magic fantasy world where all of your dreams (according to the investment industry) come true, and you actually beat an index every quarter for your whole life. I hate to burst your bubble, but it’s completely possible—even in that unlikely scenario—that you don’t meet any of your financial goals.

Why? Because beating an index has nothing to do with meeting your personal financial goals! That has everything to do with careful financial planning.

Now let’s flip that scenario on its head. You slightly underperform the index every quarter for your whole life. But because of careful financial planning, you meet every one of your financial goals.

Doesn’t that sound a heck of a lot better?

-Carl

P.S. As always, if you want to use this sketch, you can buy it here.

The post Forget beating some index, instead, focus on your financial goals appeared first on Behavior Gap.

Let me tell you a little story about my wife and me.

At the time that this story took place, we’d been married for more than a decade. For a good chunk of that, I’d been writing a New York Times column about money and feelings. I was also a Certified Financial Planner.

Keep that context in mind as I tell you this story.

I had been traveling for a few days for work. I came home, sat down, and after my wife and I exchanged normal greetings, one of the very first things out of her mouth was, “Hey Carl, Kate remodeled her kitchen, and boy, it looks great!”

Now let’s pause real quick. Just ask yourself… what did you hear?

Because what I heard was: “Hey Carl, Kate remodeled her kitchen, and boy, it looks great… AND THE REASON I’M TELLING YOU THIS IS BECAUSE I WANT TO REMODEL OUR KITCHEN.”

I immediately stopped listening, and went into calculation mode. Approximately $49,672… at 6% interest… And so, I replied with the only possible rational response: “Cori, we can’t afford that.”

To which my wife replied, “What are you talking about?”

You can probably guess how the rest of the conversation went.

“You said you wanted to remodel the kitchen.”

“No, I didn’t. I said Kate…”

“Yeah, I know… but that means you…”

“No, it doesn’t. It means you’ve been gone for four days, and this was just me trying to start a conversation, which, by the way, is now over.”

…

Look, let me be super clear, this has nothing to do with gender. This isn’t me saying women spend money and men try to save it. There may be some differences in how men and women think about money, but if there are, I’m not privy to that information. This is just a specific example where my wife was saying something, and I was the calculator. Often the role is reversed, and my wife is the calculator.

The point here is that this conversation helped me realize that for 12 years, my wife and I were talking around money instead of about it.

This is just one example out of countless ones from my own life, and that readers have shared with me.

I think the reason we do this, the reason we talk around money instead of about it, is twofold.

1- Nobody taught us how to do it.
2- When we go to talk about money, it’s suddenly very emotional. We expect it to be rational, but it quickly ends up in the realm of feelings, and we say, “I’m never going to do that again.”

What I try to do now instead (and this is still a challenge for me), is this:

1- Ask questions. “Oh, that’s interesting. Can you tell me more about that?”
2- Clarify the conversation. “Are we talking about buying something, or are we just talking about something?”
3- Don’t calculate… Listen. This may be the most obvious one, but trust me, that doesn’t necessarily mean easiest.

Like I said, it’s a work in progress for me, too. So if you have any suggestions, feel free to send them my way!

What has worked for you?

-Carl

P.S. As always, if you want to use this sketch, you can buy it here.

The post How to have conversations around money appeared first on Behavior Gap.

The following is a message from the Center for Personal Finance Disease Control about a particularly dangerous virus called Pretend Investor Disease (PID).

PID is an especially malignant disease that, if left untreated, can suck your savings dry. It works by convincing you to buy an investment at a silly price for no other reason than the hope that it will continue to go up so you can sell it to someone else at an even sillier price.

Warning: This. Is. Not. An. Investment. Strategy.

There’s actually a name for the behavior PID causes—it’s called The Greater Fool Theory. It’s the idea that we can get away with doing something foolish because we assume that somebody else is going to come along and be even more foolish. See: Ponzi Schemes.

PID is incredibly contagious. The more you hang around pretend investors, the more you will be exposed to dangerous disease-spreading agents like insider tips, hot stocks, and hashtags.

If the thought, “I’m going to buy this and hope it keeps going up,” occurs to you, you may already be infected.

1- Stop what you are doing immediately.
2- Do. Not. Buy. That. Stock.
3- Seek help from a trained professional (e.g., a Real Financial Professional).

So far, the only way we know to combat PID is to have a rock-solid investing plan, based on your values and goals, that you don’t change when other people around you are doing things that look foolish.

PID appears to be all over the world. You may even run into asymptomatic carriers who have gotten wildly wealthy from hope-based investing by sheer luck. Just remember that for each of them, there are 10 more investors for whom PID has caused financial ruin.

Be safe out there, people, and stay vigilant.

-Carl

P.S. As always, if you want to use this sketch, you can buy it here.

The post Hope is not an investment strategy appeared first on Behavior Gap.

Investing based on past performance is like driving while looking in the rear view mirror. It. Will. Cause. Accidents.

Now, I know we’ve all heard the disclaimer repeated in every single investment advertisement: “Past performance is no indication of future results.”

We hear it often enough.

We might even believe it.

But then… what’s the first thing we do when we have a pool of money to invest?

In fact, what feels like the right thing to do?

No prizes for guessing because you know the answer. The first thing we do when we have money to invest is look for the investment that has recently done well. AKA, past performance.

Look, I get it. It feels like that makes sense. If you’re going to hire a contractor to remodel your kitchen, it would be reasonable to go look at the work they’ve done in the past and expect that quality of work to continue, if not improve.

But when it comes to investing, this does not hold up. Because investments go in cycles, looking at how things have done in the recent past leads us to buy high, which inevitably leads us to be disappointed, and then we sell low. And we repeat the process over and over and over.

Driving while looking in the rear view mirror doesn’t make sense. Neither does investing based on the past.

-Carl

P.S. As always, if you want to use this sketch, you can buy it here.

The post Rear View Mirror appeared first on Behavior Gap.

Repeat after me: You. Can’t. Time. The. Stock. Market.

Sure, there are data models that may be 93.7% accurate 91.8% of the time. But there’s no such thing as a stock market oracle or crystal ball.

The stock market is not like gravity or even the weather. It doesn’t follow set laws.

On any given day, the stock market represents the collective feelings of all of us. More often than not, those feelings are based on emotions (rational or not). And it is only in hindsight that we recognize our mistakes.

So while on one level, human behavior seems predictable (e.g., we get excited and buy stocks when they are flying high; we get scared and sell when stocks decline), it’s awfully hard to know what we’re doing until it’s too late.

The basic facts have remained the same. Over time (think 10, 15, or 20 years), stocks typically do better than bonds, and bonds typically do better than cash. Low expenses are typically a good sign of future relative performance. We also know that a diversified portfolio will help protect you from the variability of the stock market. Typically.

Beyond that, stock market timing is just a guessing game, and we’re pretending to know something we don’t.

I’m ready to stop pretending. Are you?

-Carl

P.S. As always, if you want to use this sketch, you can buy it here.

The post Now and Future appeared first on Behavior Gap.