7 Habits That Wreak Havoc With Our Finances
Money seems so cold, lifeless, and hard, whereas the human touch can provide warmth, softness, and even caring. So why does combining human nature with money so often lead to disaster and terrible choices?
Between 60% and 80% of American households are living paycheck-to-paycheck in one of the most affluent countries in the world (the US comes in 12th behind the likes of Switzerland, Luxembourg, the UAE, Macao, and Qatar). With more than 17M millionaires, the US is home to 41% of the world’s millionaires. What money problems and challenges have these 17M American adults overcome that the rest of us still face? Unfortunately, human nature and even impulses shed some light on this question.
Why are we so naturally bad at managing money?
Human nature leads us to live in survival mode, spending resources now rather than waiting for tomorrow, blending into our social groups, seeking show rather than substance, fleeing at the first sign of financial danger, and trusting others in unfamiliar matters.
Healthy financial behaviors lead to short-term stability (no debt, no collections, emergency savings) as well as long-term security (investment accounts, funded retirement plans, real estate ownership, etc.). With so much to gain from overcoming human tendencies, we ironically spend more time and effort discussing principles and important ideas rather than practical steps to actually combat the opposing nature we must overcome in order to create and preserve wealth.
1. The more you earn, the more you spend.
Ask any individual going through financial troubles what the answer to her or his problems is, and you will almost always hear the same response: “I just need more money.”
Pose a similar fill-in-the-blank statement to any group of adults (or teens, for that matter), and you will get the same answer every time: “The more money you earn, the more money you ?” Answer: “Spend.”
On an individual level, humans think that just having more money would solve all their financial problems. This explains why so many people play the lottery, plunking down $5 to $50 a week (often 2% to 15% of their income) for tickets to this empty financial dream.
On a group level, though, we understand and accept this truism: “The more we earn, the more we spend.” Of course, we accept it as a general rule for other people, but we struggle to believe that it would ever apply to us individually.
How this tendency hurts us
This tendency affects all but those who can oppose it at every income level. If you spend every penny every month at $15 an hour or at $30 an hour, you will likely spend every penny at $60 an hour or more.
Human nature from our long-ago history developed an impulse to enjoy what we have today because we might not have it tomorrow. Without the conscientious effort to fight this impulse, we will continue to promptly spend every dollar that comes our way.
You spend what you have, living for today and not for tomorrow.
Examples
How else to explain the large percentage of multi-million-dollar lottery winners who end up back where they were originally, or worse, within a matter of just a few years? Many continue to gamble at casinos, losing much of their new wealth the same way they won it.
Practical steps to take and habits to develop
Even at low and modest incomes, make a commitment to yourself to save something, anything, from every source of income. Even if it’s $1 a month, not only can you claim to be a saver, but you can face yourself in the mirror knowing you are not forced to live paycheck-to-paycheck.
2. You care too much what others think
The idiom “Keeping up with the Joneses” exists in English-speaking countries far beyond US borders. It describes our tendency to benchmark our standard of living on the perceived standard of living of our neighbors, friends, family members, coworkers, and other people we interact with. This usually stems from easily noticeable items, including homes, jewelry, vehicles, fashionable clothing, and vacations.
How this tendency hurts us
This tendency leads to financial problems based on two poorly conceived notions.
First, we have no real concept of the financial facts of others. They may take vacations every month, but they may also finance those vacations with high-interest credit card debt. They may have a nice home and always have a nice vehicle parked in the driveway, but their expensive leases and high mortgage might mean they struggle to pay their utilities or replace a piece of furniture when necessary.
Additionally, this human tendency fails to take into account our own financial resources. Basing our lifestyle expenses on the purchases and financial choices of others usually leads to a mismatch between our own spending and our income. This inevitably leads to living on the verge of a financial crisis because we can’t save anything from month to month.
Practical steps to take and habits to develop
The best defense against the financial dangers of keeping up with the Joneses involves the creation and implementation of a realistic spending plan. To develop such a plan, make note of how much money you have coming into the household each month. Then, note all possible expenses you might face throughout the month, prioritizing them as 1) survival, 2) critical convenience, 3) lifestyle choices, 4) trivial, and 5) hopes and wishes. Start adding potential costs to each expense until you have a total possible spending amount for the month. If the potential spending exceeds your income, begin eliminating expenses listed with priority #5. If you still need to cut expenses, eliminate those with priority #4, and so on, until you have “balanced” your spending plan.
With this plan in place, each time you find yourself comparing your lifestyle with that of the Joneses, you can compare the tempting purchase to your priorities, seeing where it comes in your own list, not where it comes on someone else’s priorities.
3. You are the financial average of your social network
You may recognize this tendency, related to the Joneses principle above, in posts that claim we are the average of the five closest friends we spend time with. Most such articles address this principle from the point of view that we will physically weigh an average of our five closest friends or that we are as likely to smoke as the average of our five closest friends.
In reality, we achieve and maintain the average health and finances of much more than just our five closest friends. While each successive connection diminishes in degree, our first-level, second-level, and even third-level connections influence our financial and health choices to a great measure.
We are social creatures, having depended upon our tribes and villages over millennia to provide protection and sustenance. So, when we see others within our own circles or the circles of those connected to our own, we find their behavior more acceptable and even more inimitable, becoming more likely to dress like, speak like, act like, and behave like those within three social degrees of ourselves.
How this tendency hurts us
This tendency can exert both positive and negative influences on us. It can break down walls built of ignorance and bigotry by introducing us to the types of people we previously esteemed poorly, whether for their place of origin, their profession, their lifestyles, their religion, or otherwise.
On the other hand, this tendency can lead us to overspend when we frequent social groups with lifestyles far above or even below our own.
Examples
Examples usually portray someone getting involved in social circles above their financial means. However, the tendency can also induce people to develop poor financial habits based on the spending behaviors of social circles with incomes much lower than their own. Strangely enough, some of these influences push you to the same negative outcomes.
If your social circle includes many people of a net worth far above your own, especially circles that focus on consumer possessions, you might feel pressure to drive a fancier car to feel more comfortable with the group. You might be surprised that not all wealthy social circles value the purchase and consumption of vehicles, homes, and other status symbols. In fact, as The Millionaire Next Door makes clear, most households of high net worth place little value on using possessions to impress others.
On the other extreme, some low-income social circles focus on owning nice vehicles as well. You might see this in some communities or neighborhoods where homes are on the verge of falling apart. Despite the poor housing conditions and poverty, you might find late-model Cadillacs and Camaros parked on the streets. Similarly, as the first tendency of human nature noted above indicates, when people struggle financially from day to day, they often strive to procure a nice albeit small asset like a vehicle rather than a large long-term asset like a home because it’s easier.
Practical steps to take and habits to develop
Since this human tendency influences us based on the values of others (we buy nice vehicles because others value nice vehicles), you can counter this influence by first making a list of your own financial priorities. These should not include dollar amounts but, instead, achievements and activities that you want in your life that will require funding. They might involve education, travel, time with family, and being able to volunteer.
Most importantly, this list must feel meaningful to you. Once you have it written down, you can take any future pressure to spend on things that matter to others and see if it fits within your own list. If it does, great! If not, you will have an easier time dismissing the temptation.
4. You crave riches rather than wealth
Because we more easily see riches (possessions, consumer goods, etc.) than wealth (investments, bank accounts, businesses owned), we too easily place them higher on our list of wants.
How this tendency hurts us
That’s an easy one. Riches involve spending money while wealth involves saving and investing it. Spending is easy. You see something you want, and you buy it. That is, of course, if you have the money for it. That’s the rub. Living rich requires a constant flow of cash, which generally means you must continuously work more and more hours to afford more and more expensive possessions.
All the while, the time required to earn money for the accumulation of possessions means you will have less time to spend on the priorities you have listed previously.
Examples
Riches clearly include luxury vehicles, sports cars, and even top-of-the-line trucks used for commuting and not heavy-duty work. A rich life includes much haute couture, homes far larger than necessary, and vacations taken to foreign countries, especially when one has not even explored the national and state parks in his or her own backyard.
Oddly enough, riches can even include movements like standard Financial Independent/Retire Early (FI/RE) that ironically focuses on living frugally in order to save a million dollars or more to allow for early retirement. Examples abound of people who have achieved this incredible milestone while still in their 20s or 30s yet feel empty. Chasing the $1M savings milestone exemplifies a rich life, but not wealth. Riches have no personal meaning. What you do with that $1M, is what will have meaning to you. What would you do with that $1M? That’s wealth.
Practical steps to take and habits to develop
Keep track of two numbers and watch them for patterns. First, calculate your net worth by adding your assets (cash accounts, property, vehicles, investments, business ownership, etc.). Then, subtract your liabilities (all debts, from mortgage and student loans to car loans to store cards and credit cards). If this number does not consistently increase month after month, consider what you might be doing that creates negative pressure on your net worth.
Next, track your monthly expenses using a form like the one from Money Fit here. You want to make sure your monthly expenses stay below your income, thus freeing up cash to save and invest.
5. FOMO leads to purchasing the newest and most expensive consumer items
The fear of missing out makes up just one subset of a whole host of decisions and choices we make based on fear rather than on logic or rationality. From consumer expenses and lifestyle decisions to political choices, eating behavior, and gossip magazine purchase, we don’t like the idea of being left out of group trends.
For villagers and tribe members struggling to survive, being left out meant being left behind or left alone. Life alone would become much more difficult and precarious.
Fear still drives many consumer decisions today.
How this tendency hurts us
The problem with fear-based decisions, especially when they involve money, has to do with our lack of information. Like gazelles scattering before a lion, we don’t look where we are going, so long as it’s away from the perceived danger.
When told that if we don’t make this purchase or buy that product we will miss out, we buy first, and only later think about whether we can afford it.
Examples
The Apple company provides a perfect example of how a business takes advantage of this human tendency. Do you remember a time (2007-2016) when new phone versions would come out every year or two? Fans of that particular phone would camp out on the store’s sidewalk for a week to be among the first to get the new version. These fans (remember, this is short for fanatic) did not want to be the last one to get a new phone or have to wait a month.
Of course, the best example of businesses preying on FOMO involves a simple widget located at the top of many retail websites. It might say, “Just 4 left” inducing a fear based on scarcity, or it might show a countdown and say, “This discount is only available for another 3 minutes.” This second marketing trap activates our fear of losing something we don’t even have. Even though we haven’t yet made the purchase, this scare tactic makes us think we own the discount and are about to lose it.
Practical steps to take and habits to develop
Following the information in the previous section, you have created a list of your most important financial priorities. Condense that list and transfer it to a business card-sized piece of paper that you then insert into your wallet in front of your cash, your debit card, and your credit card(s). This forces you to confront your priorities when some marketer kicks your fear into gear. Look over your priorities prior to making the purchase and ensure it fits into your most important goals.
6. You run from perceived danger to perceived security
As described in the FOMO tendency above, we run from what scares us. We have no specific heading other than sticking with the crowd and putting distance between ourselves and the origin of our fear.
When it comes to our finances, the more informed we become, the less scary they are. This can make a difference of tens of thousands of dollars when our environment turns dark and gloomy.
Consider downturns in the market. Investors who have little understanding of their 401Ks or IRAs will listen to anyone talking about the market and follow their advice. This leads to the investor selling their stocks and other investments when the market values plunge. Later, they purchase stocks back after their values have increased.
How this tendency hurts us
This is the exact opposite of what a smart and rational investor does. You are supposed to buy low and sell high, but market panic leads to people selling low and then waiting for the market recovery to buy again when prices are high. Buy high sell low sounds like a poor strategy because it is. No wonder so many consumers fear investing.
Examples
Besides the above example of buying stocks high and selling them low in market plunges, flights of fear can also involve our employment. Consider the employee who has a disagreement with his or her supervisor and chooses to quit rather than work out a compromise or work through their differences. The employee considers their job with floccinaucinihilipilification (esteeming it as valueless – I had to use this word at least once in my professional life) because fear drives her or him away from the perceived threat of the supervisor.
Fearfully running from perceived danger to the nearest shelter (e.g. leaving a secure, income-producing job because of hurt feelings rather than addressing the hurt feelings directly) will likely lead to destabilized household finances and away from an opportunity to grow professionally, personally, and socially by dealing with the source of concern.
Practical steps to take and habits to develop
Commit now that during the next market downturn (and there WILL be another market downturn in your life since they occur frequently), you will make a rational choice rather than react with fear. Commit to yourself now that the next time a difficult situation confronts you at work or in your career, you will face it and grow from it rather than allow it to chase you away from opportunities for progress.
7. We trust experts to tell us what we can afford
When it comes to finance, because so few take the time to learn how the stock market, credit scores, or even credit cards work, we often rely on so-called experts to guide us in our money management choices or even to make those decisions for us.
How this tendency hurts us
Relying on experts without informing ourselves regarding the issue at hand often means we don’t even know the difference between a purported expert, a charlatan, or worse, a scammer. Placing our financial decisions in the hands of someone who lacks credentials, experience, and skill will almost certainly lead to financial loss.
Examples
Consider consumers preparing for the purchase of a home. When they head to a lender to qualify for the mortgage, they can place themselves in financial peril if they haven’t informed themselves of their own financial situation. Too often, prospective borrowers complete a loan application and ask the loan officer to qualify them for the largest possible loan the financial institution will approve. The consumer, instead, should first understand how much of a monthly payment she or he can afford, not accept the maximum payment set by the lender. Otherwise, such a payment, while approved by the lender, might overwhelm the borrower’s monthly budget.
Similarly, if an investor relies completely on a financial advisor to take care of his or her retirement plan, that consumer has turned over all critical decisions to someone who may not actually have his or her best interest in mind. In fact, without proper education, the consumer might not even understand the difference between a financial advisor who sells insurance products, one who provides advice based on a straight fee (least biased), and one who offers guidance based on commission. Choosing the wrong expert could cost the consumer tens or even hundreds of thousands of dollars in lost earnings over several decades.
Practical steps to take and habits to develop
At the very least, before meeting with an expert, from a loan officer to a financial advisor to a credit counselor to an insurance agent, do an internet search for “important questions to ask a…” followed by the expert’s title or job description. Doing such a search for “important questions to ask a financial advisor” results in lists of 20 questions, 17 questions, 9 questions, 10 questions, 15 questions, and more to ask your advisor. Sometimes, just knowing the questions to ask opens you up to learning about a topic.
Related Questions
Is money good or bad?
The dichotomy of good and bad suggests money has a will for good or bad. Money has no will of its own and is, therefore, neither good nor bad. It is a tool that can be used by a person or organization for good or bad ends, much like a hammer can be used to build things or destroy them.
What is your financial personality?
Even siblings who grow up together in the same household can have different money personalities that lead to various approaches to money management. Some are savers, others spenders, others hoarders, and still others sharers, each varying by degree from neutral to aggressive.
