Hello out there. Yes, I’m talking to you. You, the totally responsible adult in the room, right? You, the guy or gal who has a real household budget and tracks all expenses you have to the penny every month. You, the responsible person that has an up-to-date will and all of your insurance policies are completely in order. Oh, and since you are that responsible person, you also have been maxing out your 401(k) contributions at work since you first became eligible and saving diligently for your retirement too. Yeah, right.
Most of us know what we ought, should, must, and are required to do that makes perfect sense to ensure our financial success, stability, and security now and in our future lives. The problem is that few of us actually follow through and do it all.
It’s kind of like trying to assemble something electrical or diffusing the wiring in a bomb and seeing that all the wires are the same color, no blues, or whites, or greens, only red wires. The instructions clearly warn you to avoid those red wires, but there you are staring at them and they’re all red! Why did God do that to us?
Red is the Color of Danger
Both business and behavior experts say there are some pretty good reasons for our negligence when it comes to our handling of money and our personal finances. It seems that in many ways, we’re just hardwired in that way and that causes us to mismanage it.
Although you can say that finance seems to be simple, you can also say that being simple doesn’t make it easy! Betterment.com, an online investment company has written that “It’s easy to understand at a higher level what you should be doing, but implementing it and sticking to it long-term is the part that is very difficult.” The long term is the catch. Our attention spans are short and even shorter when it comes to the big stuff like our finances. It’s not nearly as much fun paying attention as being impulsive, careless, and letting those red wires take control of us.
The Psychological Traits (Red Wires) We Have to Fight Against
Instant gratification is, experts say, one of the biggest challenges we face off against in our battle to be financially responsible. We all simply have a basic urge for immediate pleasure and that urge is fueled by the emotional parts in our brains.
It overwhelms the logical side of the brain that’s trying to point out that we probably don’t need that new pair of shoes or a delicious (but pricey) dinner out right now. That’s why so many people are more likely to use any extra money to indulge and splurge in a shopping binge than to tuck it away in a retirement plan.
Consumer financial education advocates warn that the answer isn’t to scold or beat you about this need. Retail therapy, the act of shopping and buying to make you feel good, is something we all do from time to time. Those experts say that after shopping you should put a date on the calendar to allow you to rationally review your purchase while at home and decide whether it was necessary. When spending on an expensive meal out, well, you don’t get a second chance to change that one.
If you are more of an online shopping addict, try setting up a special email folder so that sales alerts from online retailers are automatically filed away before landing in your inbox. That may help you avoid the temptation to shop.
Instead of spending, we should be saving. Do I sound like a broken record here? Probably, but I know I am right and have the scars to prove it. If I hadn’t been making strong attempts at saving for a really long period of time while I was younger, older Gary would be in much more serious trouble than I am in today.
The traditional financial advice to pay yourself first—put aside part of your paycheck before you even see it—is what I’ll call the “Unconscious Saving Process”. By automating the process, and incrementally increasing your savings every year, you can accumulate a sizable nest egg over time, and in most cases it’s painless and you hardly even notice.
Once you identify your goals and set up a savings plan, you will worry a lot less about your spending. By saving what you need to save first, you are limiting your risk at overspending quite a bit. Not eliminating the risk, but reducing the risk which is a great big first step to take.
The Credit Card, or CC Rider, See What You Have Done
Too many of us are willing to spend money we don’t have by pulling out credit cards or financing purchases. Often, this is fueled by a drive for social status and to keep up with our neighbors and friends, the infamous “Joneses”. That challenge has only gotten worse in this age of social media. In the past, we might have just heard about friends’ great vacations, fabulous dinners, and new cars. Now we’re bombarded with pictures and videos of them online everyday!
A 2016 Harris poll found that one in four people admitted to being jealous after seeing someone posting online about a purchase or vacation on their social media. Admit it, we have all had those feelings, haven’t we? OK, maybe not a weird meal at some really odd and expensive place in a distant city but a lot of other stuff right? Why again are we so obsessed with taking pictures of our food?
Trying to limit the time spent on social media can help you here.
Another financial challenge stems from a powerful force called the optimism bias. We just don’t think bad things will happen to us. We hear of bad things happening all the time to others, but believe that we have the ability to navigate our way out of something and in short, we think we are above average. That bad stuff just can’t ever happen to us!
This instinct is hard to overcome. Optimism is what gets us out of bed in the morning, and while it doesn’t make sense to be pessimistic, it helps to us to at least be aware of this bias. Taking a step back to at least acknowledge the possibility that things may go wrong will help you see the need to plan for the worst in case of emergency.
Facing Financial Reality
Even if we can’t predict what will happen to us, one thing (along with taxes) is certain: death. But because we don’t like to think about our own mortality, many people skip the important financial task of writing a will. But a responsible person has to think about what will happen to their loved ones after they’re gone. Those with blended families or multiple heirs could end up with a real fight over assets and property.
A will doesn’t have to be an expensive issue. A simple one can be $500 or even less. Some employers have employee assistance programs, which can provide a will without charge or at a very low cost. Check at work to find out about this kind of benefit. Oh, and that reminds me of another psychological trait (and my favorite) that we all have: It’s the fact that everybody loves a bargain!
You know that you have choices in life, so how often do you make the wrong ones, or perhaps worse, never even check on them to see what damage might have occurred. You have control over your own financial destiny but only when you pay attention.
What do you do to make sure that your financial future is trending positive?