Crazy Money, Stupid Money

The following is an excerpt (Chapter 1) from Money Makes Me Crazy! A Prescription for Money Sanity.

Has this ever happened to you? Things are going great then out of nowhere you realize that you are going to run out of money before you run out of month? When you check your bank balance you wonder where all your money went. And when you try to remember what you bought you don’t have a clue. Or, over a weekend when you have nothing better to do you decide to inventory of all the things you own. And at some point when you are knee deep in all your stuff you figure out that your money priorities might need to be adjusted. If this is you, has ever been you, or you know some like this—read on. You might find out why money, at times makes you crazy and sometimes stupid.

Everyone I know has a money story—crazy purchase, lost opportunity, paying too much for something, and so forth. Myself, I've had a conflicted relationship with money for as long as I can remember. My love-hate relationship with money exists because I am human. And we humans aren't very good with money — sorry. As hard as I try, my emotional, irrational brain keeps getting in the way of my thinking, rational brain. That's why I have a house that is too big, a car that cost too much, and a garage full of stuff I don't need but can't seem to part with. I have squandered both time and money in pursuit of happiness — money makes me crazy.

Since you’re human, I bet you are a lot like me. I suspect you have a list of dubious money choices you'd like to do over. Think about this for a few seconds. Have you ever bought anything on impulse? Do you always make a list before you shop? How's your budget going? Is your retirement plan on track? Are you always rational with your money? Does everyone you know feel and think about money the way you do? If not, why not? Here's the deal. I assume you are reading this book because you aren't always happy with your money decisions. Could my money affirmation be your money affirmation? Money makes everyone nuts from time to time. That's a given. What is important is how you deal with it.

I've been working with people and money all of my life. In the chapters that follow, I'm going to share with you my observations and best practices about people and money in order to help you get your arms around how you think and feel about money. If you believe everything you see and hear about money — from your brother-in-law to the “talking heads” on cable television — making good money decisions is easy. All you need is the right product, service, and/or technique and you can do it — all by yourself. I wish it were so easy. If it were, everyone would be rich and you would not have to read this book. Just look around. Lots of people, from every walk of life, don't seem to get it when it comes to money. “Normal” seems to be having money issues and not the other way around. Why? Because we all face four significant money challenges:

1. We are human. Our human nature gets in the way of making good money decisions.
2. We don't understand how money choices are made or how our unique money temperament influences our money choices.
3. We believe the common wisdom that we are rational decision-makers with our money and that all we have to do to be successful is select, own, and manage the right products and services.
4. The rules of money have changed. The rules that may have worked for your parents or grandparents might not work for you.

So why do you need another personal finance book? Good question. There are thousands of books out there—too many. Here’s a secret I learned a few years ago. All of the books, web sites, and “expert” advice on personal finance will do you no good until you first know how you think and feel about money. Money sanity is about behavior. If you want to manage your money well you must manage your spending behavior and know how you make your money choices.

Unfortunately, most of the personal finance information and guidance I’ve seen seems to use a “one-size-fits-all” approach. It’s good stuff, but it’s presented like it’s the Holy Grail. The challenge for you is to figure out if the recommended approach is suited to your money temperament. If it isn’t, you just get frustrated. For example, how many books and articles have you read about budgeting? They all say about the same thing. Set some goals. Live within your means. Track you income and expenses... This is all well and good, if you are wired to do the detailed work necessary to collect the data and build your budget. If you don’t like collecting and entering data, you aren’t going to do this drill for very long. Your temperament trumps whatever you want to do. That’s why you are really good at collecting data for a few days. Then you miss a few days, the drill get tedious, and soon you drop the whole program — you have to love human nature. Some people are wired to do this (a lot of them are in the financial services industry), but not everyone. The question is, “Are you?”

Down in the trenches where we spend our money, we know money decisions are emotional and that we all should be more rational with our money. We try hard to do the right thing, but it’s so difficult and the consequences of bad choices can be catastrophic. We also know that the “cookie-cutter approach” to money doesn’t always work, and at times it makes things more complicated. Here’s the bad news – managing money is difficult. But there is good news — it’s not impossible.

In the chapters that follow I want to help you look at managing money from a different perspective. I want you to see money through your eyes based on what you feel and think about money. I want to help you better understand your unique relationship with money – your individual money values and temperament. I want to help you improve your money knowledge. This will then help you develop your unique money strategy and action plan based on your money values and temperament. It's that simple. Your prescription for money sanity is to know yourself and manage your money behavior.

Managing money well is important. The challenge is to make a good decision with the available information you have, based on your situation. Unfortunately, life happens; you do sometimes get it wrong and you seldom get a "do over." We all know managing money is hard work — at least emotionally. However, it is not rocket science. It all comes down to four simple things:

1. Time. You don't have as much time as you think, and once it is gone you can't get it back. You have to manage your time wisely. Time gives you leverage and can make you money.
2. Money. You do need money to make money. You have more money than you think. You have to make choices. You need to really look at what is important about money to you. This is an allocation problem – where to spend your scarce dollars. The good news is, there are lots of ways to get money if you put your mind to it. Always invest in yourself first.
3. Rate of Return. This is simply all the financial products and services in the financial markets that "pay" you as either an owner or a lender. Here’s the critical point: as an individual you can only select how you want to be paid (the financial products you want to own or lend). The market determines how much you get paid. The key is to own the right mix of stuff and not chase the rate of return.
4. Behavior. Wealth and financial success are all about your behavior. Manage your behavior and you can control your money destiny. Financial success is not about financial products and services. Financial success is about knowing and accepting how you feel and think about money and having a strategy and plan that works for you.

Of the four, behavior is the most critical element of financial success. Since behavior is so important to your success, you need a place where you can observe and study money behavior. I assume you aren't a behavioral economist with a research facility and library, so we'll have to make do with what you have locally in order to study money behavior. The best place in the world to do this is your local mall. This is where money behavior all comes together. And it’s great fun to just watch.

The Mall

Here is a scenario to help you understand the feeling-thinking tug-of-war that is going on inside your head every time you have to make a choice with your money. You are the prime character in this story. Play along. It will give you a window to peer into your spending brain. We’ll come back to your mall throughout the book to help identify and explain money behavior.

This quick trip to “The Mall” happens daily all over the country. The location and players are different, but the behaviors are on-target. Role-play as you read the passage. Try to focus on the spending behavior. Ask yourself if you have ever had a similar shopping experience or know someone who has.

Suppose a friend you ride to work with asks if you mind stopping by The Mall on the way home from work to look at a new line of high-end shoes that are on sale at “The Big Expensive Department Store.” You know your friend has an important presentation later in the week. A new pair of shoes sounds like a good idea to you. You agree, but only if it is a quick “in and out” trip. You do not need anything and wanted to save your money for a big concert later in the month.

You arrive at The Mall at about 5:30. The Mall is an upscale development serving mostly professionals who work in the area. Parking is a mess due to construction. Therefore, you have to park at the other end of the building from The Department Store. You both agree that this will be a quick trip and head off for the entrance.

Upon entering, a delightful man greets you and informs you that today is “Construction Madness Sale Day.” He gives you and your friend a scratch-off coupon good only for today. You perk up and get a little excited about the prospect of saving some money on some good stuff. You scratch off your coupon and learn that you have “won” a 25 percent discount on all purchases. Your friend’s discount is only 15 percent – you smile and clutch the coupon. Even though you had not planned to buy anything, you keep the coupon because you never know what you might find “on sale.”

The two of you look at each other, high-five, and head to The Department Store – way at the other end of the mall. Immediately you sense the quality and “class” of The Mall. Everything seems “right”: the colors, the light, the noise level, the music, and the smells. Everyone you see looks successful and prosperous.

Along the way, you stop at a number of stores. You remember that you are saving for the concert and you do not buy anything (only looking and taking mental notes). The two of you finally reach The Department Store (your friend is not as self-disciplined as you and bought a “few” great finds on the way) and head to the shoe department.

You leave your friend and begin exploring The Mall. You have not spent any money but you keep thinking about your coupon and hate to walk away from the discount. You could give the coupon to your friend, but, “It’s mine.” The very nice greeter gave it to you, not your friend.

You again remind yourself that you are not there to buy – you are only looking. Then out of the corner of your eye, you see something special. A brand new, limited edition, super-shiny, first-person-you-know-to-own, state-of-the-art “THING.” (This is all about you. What does the “THING” mean to you?) You simply have to own one. Score: Mall 1, You 0.

You have been hearing great things about the “THING” for months. The advance material from the website raved about how great the “THING” is. All the expert reviews were awesome. Just wait until your friends see the “THING.” In addition, with your discount coupon you will save a bundle.

You give the clerk your credit card and the coupon. She congratulates you for your purchase. You are now one of the first to own “one.” You think to yourself how smart you are to buy the “THING” now, with the coupon. You think to yourself how much you are saving on shipping and that you will not have to wait for delivery. Life is good!

You rejoin your friend – who has bought two pairs of shoes and a suit (of course, they were on “Sale”). You share your story about buying the “THING” and receive accolades for the wisdom of your purchase. You both agree that you were smart to shop The Mall. You could not have “saved” as much somewhere else.

You and your friend decide to head back to the car. It is now 7:00 and you are hungry, so you stop at the food court for dinner. This affords you time to read the “THING” quick-start manual and ogle over your purchases. You also take the opportunity to text a few friends to tell them about your good fortune. They all agree that you are having a good day. After dinner, you pick up a few small things – a 25 percent coupon is a terrible thing to waste – and head home.

At the end of the month, you receive your credit-card statement. You notice that the interest rate is higher than last month and the balance is dangerously high. Upon examination, you realize that you paid a premium for the “THING.” In fact, when you look at your receipt you realize that you received a 25 percent discount from the store’s premium mark-up. If you had waited, you could have paid less online. You feel bad, but you think to yourself that regardless of the price, you have a first-run, limited edition “THING.” Not many people can say that. Of course, that has to be worth something.

You break out the calculator and do a little math. Between the “THING,” dinner, and a few extra purchases, you have busted your budget. You also realize you cannot afford to go to the concert – at least with this credit card. You look at the “THING” and sigh, “Now everyone has one.” However, good fortune again shines your way. You remember that you qualify for a zero interest rate on a new credit card if you make a balance transfer. You smile and say to yourself, “Sweet! I can go to the concert after all.”

Does this ring a bell with you? Can you place yourself, or someone you know, in the story? The scenario could unfold just about anywhere money choices are made — super market, website, golf shop, bank, college admissions office, financial advisor’s office, and so on. In the next chapter we’ll take a closer look at your trip to The Mall. For now, keep this in mind:

• Money success is between the ears.
• Know yourself first to better manage your money.
• The future is managing money behavior, not money products and services.
• At the end of the day, you will be held accountable for your money behavior.
• Good money outcomes require good money behavior.
• The Money Behavior System™, presented later in the book, is the new model for behavioral money management.

Action Steps

Ask yourself, or better yet, write down your answer to each of the following questions:

1. Why does money make you crazy?
2. What was your best spending decision? Why?
3. What was your worst spending decision? Why?
4. What is one word that best captures how you feel about money?
5. What is one word that best captures how you think about money?
6. How do you make your major money decisions?
7. Does money keep you up at night? Why?
8. What would it take to give you peace of mind in your chosen life style?
9. Are you pessimistic about your financial future? Why?
10. Are you optimistic about your financial future? Why?

Comments

[Jonathan]

This story literally makes me cringe. I cannot imagine living this way. I feel very fortunate that I have realized that I don't often get much pleasure out of "gotta have it" material purchases, and I only rarely make them. I am also fortunate that I don't have to make trade-offs like "if I buy something at the mall today, I can't go to that concert in 2 weeks" because of my general frugality - I can easily do both if I want. I generally do neither (I don't enjoy concerts either).

[Matt]

According to this I am not human. So that must explain alot.

My worst money decision was the purchase of my first vehicle. But I learned very quicly my mistake.

My best money decision was marrying my wife who has the same beliefs i do about money.

[BD]

Ugh, that just sounds like an example of irresponsibility. Thankfully, I've never fallen in love with any "THING" on that level. I keep a budget, and have emergency back-up plans/funds in case something breaks. So even though I earn next-to-nothing, I've never "unexpectedly" run out of money at the end of the money. Any shortfalls were already known in advance, were due to simply not earning enough that month to cover basic food and rent, and were planned for. (Shortfalls happen when you work freelance, so you must plan very carefully for them in advance).

Never experienced the sort of irresponsibility in this article though, and don't plan to.

[Robert Muir]

"You could give the coupon to your friend, but, “It’s mine.”"

I couldn't help but think of Gollum from The Hobbit. "My precious". :)

[Mike Hunt]

Epic Fail. This book should be called Money Management Minus 101.

Here's an idea for a book. It would be sealed in shrink wrap, page 1 would read Visit FreeMoneyFinance.com, and also read the Millionaire Next Door (available free online via pdf). All the other pages would contain sudoku puzzles.

And I guarantee it would be much better than this book.

Can you tell I don't like it much based on the first chapter?

-Mike

[Fdarka'ark]

I really like this excerpt! Will help combat the occasional impulses to purchase too large of a home, thus saving hundreds of thousands of dollars. Thanks immeasurably for posting!

[Elizabeth]

I have NEVER been anything like this. Yes, I like adjusting or looking at my "personal spending plan" daily. Never unexpectantly ran out of money at the end of the month. I plan things well in advance and the times that I do come up short, it's not much or even that much of a big deal. This just sounds like lack of financial disipline and diligence to me. I can understand, but personally, cannot relate.

[Concojones]

I wouldn't go as far as Mike's (hilarious!) comment, but I agree this book doesn't go to the heart of the matter. The effective cure for the person portrayed in the mall story is to go with "cash envelope system", and tear up the credit card.

[Mike Hunt]

I must apologize to the author of this post as my hastily written comment was a bit over the top. I guess most people have spent so much time on this site that they have good control over impulsive spending, that's why I thought the post was much more fundamental than Money Management 101- hence the comment of Money Management Minus 101.

I believe there is an audience for this book but strongly suspect that 95% of the FMF readers are well past this stage.

Best,

Mike