Psychology of Money

Michael is constantly stressed about his finances. Although on paper his income should cover his expenses, somehow he can barely make it through the month. His emergency fund has less than $100 in it, and his credit card debt keeps growing.

Although he's young, he's anxious about the future. How will I ever pay for my kids' weddings, he wonders, if I can't save anything now?

He avidly reads any finance article he can get his hands on and often buys finance books, but somehow, he never sees success. He tries to spend responsibly, budget, and put away money, but after a few weeks, he inevitably goes back to his old habits. He wants to change, but it never sticks.

Knowledge and information-the bulk of the previous articles are great, but they can only take you so far.

Dave Ramsey, financial expert and author of The Total Money Makeover, famously says, "Personal finance is 20% head knowledge and 80% behavior."

I can't argue with him, but I personally feel that the numbers are actually closer to 5% and 95%.

SIMPLE, NOT EASY

Truthfully, finance is simple-but not easy. Every finance book preaches the same main principle: spend less than you make. The rest of the book or method is just tips on how to apply it. Picking better investments or tax-free options help too, but that won't bring in more than let’s say 20% more than you would have gotten without it.

When it comes to finance, we know all the information. It's only in the application that we get stuck.

How do we get ourselves to do things that are simple but hard?

Let's start with what doesn't work.

Willpower Doesn’t Work

We often think we fail because of a lack of willpower, but really, the culprit is a lack of planning. Willpower isn't a long-term strategy. It's just treading water; sometimes you win and sometimes you lose. If willpower would work so well, then you wouldn't keep falling again and again. Blaming our lack of willpower is a mistake and doesn't get to the root of the problem.

Rav Shlomo Wolbe says (Alei Shur, chelek beis, p. 156), "This is an important principle in educating others and ourselves: we should relate to everyone as if they have no free will and they're compelled by their nature, education, habits, and biases... Furthermore, we shouldn't rely on our free will."

A Goal isn’t a Plan

Relying on our own strength without making a plan is unlikely to be successful. Goals too, aren't a plan. They're important, but they're just the end point. Imagine you want to go on a trip and plan to get there by thinking about your destination and summoning up all your willpower. Making a personal goal without coming up with a plan of action is just as useless.

WHAT DOES WORK?

The first place to start is one time actions. When you're full of motivation, do one thing that will have a long-term impact and doesn't require constant willpower.

I would first start with a one time action that will make it harder to spend indiscriminately in the long term.

Years ago, I made a decision not to carry credit cards, since I found that I spent more when I had them. Instead of using them and trying not to spend more, or even having to decide whether to use credit or debit, my decision was already made for me. You can make similar decisions, such as to avoid certain websites, stores or aisles where you tend to spend without thinking. If you decide not to go there, you won't have the inevitable fight. You’ll win before the fight’s even started.

Just Put it Away

You can also take other types of one-time actions.

When you receive your tax return, put a lump sum into savings. Putting away money each month is hard, but putting a large amount in savings once doesn't require constant willpower. If you invest $3,000 for 20 years with 7% returns, you'll come out with $138,000 for an investment of only $60,000. Signing up for life insurance and asking for a raise are other examples of difficult actions that will reap significant rewards.

If Michael follows this advice, will he see financial success? It's a good start, but it won't help him with weddings and retirement funds. We'll discuss more ways to implement financial advice in the upcoming article on automation.