❝Doing well with money has little to do with how smart you are and a lot to do with how you behave. And behavior is hard to teach.❞ -Morgan Housel
I'm sitting at my desk in math class. I'm in middle school, and I'm pretty bored. At the end of class, the teacher asks if I could speak to him for a minute. I am being chosen to take advanced math classes. I've always been good at math, and now it seems my teacher is noticing. I start taking the advanced classes, but it's still not what I would call challenging; it's actually fun. This math stuff just really makes sense to me.
Ten years later, I'm working as a bank teller part-time as I go to college. I'm taking a lot of finance and economics courses. Between my work at the bank and my courses, I'm learning a lot about personal finance. Most of my presentations in front of these classes are about personal finance. It seems like personal finance is just an application of math. I quietly wonder to myself how people can do dumb things with their money. They must know better, I imagine to myself.
Two years later, I have to cut back my hours at the bank because the upper-level classes are pretty intense. I have to supplement my income with credit cards. It's okay, I think to myself, because I will have graduated and moved to Minneapolis in just a few months. I'm going to get a high-paying job, and all my problems will be solved.
Shortly after moving to Minneapolis, I work as a desk jockey helping people peddle subprime mortgages to people who can't afford them. I hate this job. I hate what the company's doing, and I hate my role as a cog in this machine that I don't like. As a result, this job only lasted a few months. Now I find myself unemployed in an expensive city.
By the time I found the job that would eventually launch my career, I have racked up over $25,000 of credit card debt across 15 credit cards. My minimum payments are enough to pay rent at a nice apartment. My interest payments over a year are over $5,000.
I don't quite understand it. Personal finance is supposed to be about math, and I'm good at math. How do I get into the situation?
This is when I learn that money is not about information, logic, and math; money is about emotions, behavior, and psychology.
PERSONAL FINANCE BASICS ARE SIMPLE
It's easy to believe that personal finance and investing are nothing more than a math problem. We think that because the basics are pretty simple. The basics include spending less than you make, saving for the future, and not making any big mistakes.
Because of this seeming simplicity, we believe if we just had more information, a better equation, or more data, we would make better financial decisions. Then we are hard on ourselves when we don't achieve what we set out to do. We might even doubt our intelligence because we couldn't figure out the math problem.
Just because something is simple does not mean it's easy.
SIMPLE IS NOT THE SAME AS EASY
There is a difference between something being simple and something being easy. Some things can be both simple and easy, like mowing your grass. Some things are neither simple nor easy, like rocket science, for example.
Simplicity is about concepts and rules. The opposite of simplicity is complexity. Easy is about a low level of difficulty. The opposite of easy is hard, or difficult.
Personal finance and investing fall into the camp of simple because the concepts are pretty straightforward.
Money does not fall into the camp of easy, however, because money is emotional.
MONEY IS EMOTIONAL
Something being easy refers to how difficult it is to actually do. Unfortunately, personal finance is not easy. Money is not a math problem; money is a psychology problem. It's about managing our emotions and our behaviors. That's hard to teach, learn, and implement.
You can think about personal finance as having two sides. The first side is the exterior side. This is what most of us think about when we think about money. This is the mechanics, strategies, and tactics that we try to implement. Exterior finance is where you find math. The other side is the interior side of money. Interior finance is where we find our emotions, feelings, and motivation. All the exterior financial knowledge in the world won't help us if we are unable or unwilling to implement that knowledge.
The first thing to realize after learning money is emotional is that money is hard for everybody. There are a lot of negative emotions attached to money, including guilt, shame, envy, anxiety, fear, and regret. You've heard of some of these concepts before, but perhaps maybe not in context. Envy is the driving force behind our attempts to keep up with the Joneses. Fear is what's behind FOMO, or the fear of missing out.
These and many other emotions are tied to all of our financial behaviors and decisions. We will do a lot to avoid negative emotions. One antidote to learning how to better accept negative emotions is mindfulness. When we learn how to accept our emotions without judgment, we can better manage them.
Most of what we do with our money makes no logical sense to an outside observer. However, if you understand the emotional state of the person making the decision, or the Money Script that is driving these decisions, every decision makes perfect sense.
STAGES OF CHANGE
If you are anything like me, you think that people naturally want to get better and will do anything possible to better their lives. It follows, then, that if people aren't better, then they simply don't have enough information. Once the information comes, the change will happen. That's tempting to think, but that's not how we are wired.
Any of us can remember times in our lives when we were fired up about making a change. There was something that we were locked onto, and we were going to do it no matter what. When we feel like this, we are highly motivated, but it's more than just being motivated. We are intrinsically motivated. When we’re motivated intrinsically, it means that we want to change for the sake of change. We are not changing for anybody else. When we have intrinsic motivation, nothing can stop us.
A more common form of motivation is extrinsic motivation. Extrinsic motivation comes from outside of us. This comes in the form of information, logic, peer pressure, warnings, and so on. Extrinsic motivation is not worthless; it can work for a short while. But unlike intrinsic motivation, where nothing can stop us, anything will stop us with extrinsic motivation.
If you aren't where you want to be with your money, it's not because you lack intelligence, information, or knowledge. Money is emotional, and trying to address emotional problems with logical tools will get us nowhere. Learn to identify and live with those emotions that come up when you think about money. Then you'll be able to start the process of managing your emotions and improving your relationship with money.
You get one life; live intentionally.
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Related Money Health® Reading
References and Influences
Adams, Scott: How to Fail at Almost Everything and Still Win Big
Ariely, Dan: Predictably Irrational
Ariely, Dan, and Jeff Kreisler: Dollars and Sense
Clear, James: Atomic Habits
Kahneman, Daniel: Thinking Fast and Slow
Klontz, Brad, and Ted Klontz: Mind Over Money
Krueger, David: Your New Money Story
Krueger, David & John David Mann: The Secret Language of Money
Newcomb, Sarah: Loaded
Robin, Vicki: Your Money or Your Life
Wagner, Richard: Financial Planning 3.0
Zweig, Jason: Your Money and Your Brain
Note: Above is a list of references that I intentionally looked at while writing this post. It is not meant to be a definitive list of everything that influenced by thinking and writing. It's very likely that I left something out. If you notice something that you think I left out, please let me know; I will be happy to update the list.