Category Archives: Spending

Buying Happiness Roundup: Does Money Buy Happiness?

- (No) Budgets , Spending , Uncategorized

You’ve probably heard it said that money doesn’t buy happiness. Is this true? Actually, there is a connection between money and happiness—but it’s not what you might think. Today’s blog is a roundup summary of my previous blogs on money and happiness. Take a look. Maybe you’ll find ways your income can boost your happiness level.

Connecting Money and Happiness

Although conventional wisdom says money can’t buy happiness, there actually is a connection between the two. If you’re unhappy because you don’t have money to buy food, pay bills or pay for healthcare, money sure helps! Nobel laureate Daniel Kahneman and his research team discovered that increases in income can bring increased happiness—but only to a certain point.

According to Kahneman, a psychologist and pioneer of behavioral economics, that point is $75,000 in yearly income for Americans. Apparently, as household income approaches the $75,000 threshold, making additional money seems to make us happier. Beyond that amount it doesn’t. If this concept of diminishing returns intrigues you, see my blog Does Money Buy Happiness? Sometimes.

Anyone with even a little money would want to get the most out of it. Perhaps the secret for buying happiness lies in whether or not you’re spending your money right.

Using Money to Increase Your Happiness

We can spend money in certain ways to increase our satisfaction and our happiness. Here are some proven spending tactics that just might put a smile on your face:

  • Small pleasures: Don’t miss out by spending lots of money on what you think will make you happy but won’t. Because our brains quickly adapt to them, big-ticket items can be taken for granted. Often a series of smaller purchase is better for boosting your mood. My blog Buying Happiness: It’s the Little Things helps you distribute your happiness over time. Unusual, small, frequent and even surprising purchases can reset your “happy meter” for enjoyment.
  • Meaningful experiences: Experiences trump objects and possessions when you’re on the market for happiness. You’ll reminisce about a vacation or a trip to an amusement park with a child more than the widescreen TV that quickly goes unnoticed. Experiences Are a Better Way to Buy Happiness encourages you to focus on building memories instead of adding to your material possessions.
  • Assistance for others in need: Here’s a great happiness booster: Use your money to benefit someone else. This can increase positive feelings even more than buying something for yourself. Any skeptics out there should try the easy experiment in my blog Spending on Others is Buying Happiness for Yourself. Science supports the fact that humans are wired for social connections. We gain pleasure from helping each other—and there are plenty of needs to be met today.
  • Delayed purchases: Studies have shown that looking forward to a happy event can even bring more pleasure than the event itself. Your imagination could be a deal sweetener. In my blog Buying Happiness: Anticipation Enhances Reality, I explain that “buy now, pay later” offers detract from your overall happiness. Saving for a purchase with the delight of anticipation gives you more for your money. It also helps you avoid added debt.
  • Gratitude: Do you have a tendency to see others’ possessions or financial situations and feel like a “have-not”? It’s time to count your blessings by looking at the big picture. Many people cannot read, don’t know what the Internet is and can’t even access clean water. One of my daughters inspired this blog: What Are You Thankful For? Gratitude involves a conscious choice. Without increasing your wealth one bit you can feel ten times better!

Getting a Better Perspective

More money might make you happier, but only to a certain point. Obviously, what matters is how you spend it.

None of the happiness-building ideas in this roundup are off-the-charts expensive. You don’t have to be financially independent to use money in rewarding ways. In fact, the difference between a rich person and one who enjoys his or her wealth is the motive for making money and how it’s spent.

Managing Your Money and Your Life: Spend Wisely

- (No) Budgets , Saving , Spending , Uncategorized

Imagine buying that new laptop you saw advertised. At the register, the associate doesn’t ask for money. Instead, she sends you to the back of the building to work 35 hours to cover the cost of your purchase. Immediately you wonder, “Is it worth it?”

For every buy, we’re actually trading the hours of work it took to earn the money, plus a lot more besides. Money is simply a way to store the life energy we put into working so we can use those dollars later for what we want.

In their book Your Money or Your Life, Joe Dominguez and Vickie Robbins expand on the concept of “money = life energy.” This idea has had a number of voices over the years. When you’re looking for financial freedom, it helps to think about money and personal finance this way.

Life Energy and Time

If saving money lets us store life energy, what’s life energy? The U.S. Bureau of Labor Statistics’ American Time Use Survey tells us we spend about 13 hours per day on basic needs like sleeping, eating, personal care, household chores and getting around. This leaves just 11 hours per day—only about 4,000 hours per year—for pursuing meaningful goals and wealth building. Our precious 24 hours each day plus the vitality (or lack of vitality!) we use to live them can be called life energy.

So the process of earning money converts life energy—taken from those 4,000 hours per year—into currency. It takes more than we think to trade life energy for money. For instance, the typical professional likely spends 8 to 11 hours each weekday working, getting to and from work, preparing for work and recovering from it. That means about 70% to 80% of our useful life energy gets converted to money. The sanity of that trade is for another post…

Real Earnings

Since spending money is really spending life energy, our money management efforts should include getting maximum happiness out of every dollar. But a dollar earned isn’t really a dollar! Just for kicks, let’s look at your real hourly wage, because there are work-related costs we don’t always think about.

Take your weekly after-tax take-home pay, subtract work-related expenses (like special clothing, dry cleaning and commuting costs) and divide by the number of hours a day you’re working or doing job-related activities. Here’s an example:
$1500 weekly take home pay – $100 gas – $25 dry cleaning = $1,375
40 hours working + 3 hours preparing for work + 5 hours commuting + 3 hours recovering + 4 hours checking e-mail at home = 55 hours
$1375 / 55 hours = $25 per hour (real hourly wage)

Scary, huh? Obviously the money we earn comes only at the high cost of life energy, which has great value. That brings me to the question of whether time is money or if money is time. Saying, “Time is money,” implies that money is the more valuable of the two, so we shouldn’t waste time because we’re wasting money. The truth is the opposite: Money is time, which implies that time is most valuable. We don’t want to waste our earnings because that wastes time.

Our most valuable non-renewable resource is time. We won’t get more years, days or minutes, and none of us knows how much time we have left. Time is wasted if we don’t do what we want in life. Managing money means we store it and consume it later to achieve our goals, have meaningful experiences and perhaps pass a little along to others who are special to us.

Something New to Try

That really cool iPad® costs not $500, but 20 hours ($500 / $25) of life energy! Are we handcuffed resentfully to our jobs because of what we’re buying? Or is it worth it?

Try this: Before making your next purchase, consider how many hours of scarce life energy you’re exchanging for the item. Then ask yourself if you’ll get enough pleasure from it to justify all those working hours. No matter the answer, you’ll be making a conscious choice that contributes to your happiness—and the value of what you have will increase in your eyes!

 

Ask Moneymentals: Splitting Money As A Couple

- (No) Budgets , Saving , Spending , Uncategorized

Know a cohabitating couple trying to make it work in love and finances?

Michael Goldman, CFP® and creator of Moneymentals helps couples figure out how to split their finances fairly.

What is Behavioral Economics

- Business , Saving , Spending

There’s nothing like a good buzzword—especially when you really know what it means. Here’s one that’s more valuable than you think: behavioral economics. It holds a surprising answer to why, despite all good intentions, careful planning and firm resolve, you can depart from reason and deviate from your financial goals until you’ve lost sight of financial freedom completely.

Much of traditional economic theory assumes we’re always perfectly rational beings who make money management decisions based on our own financial best interest. We all know that isn’t true. Behavioral economics is that blend of economics and psychology that examines how we really behave and make decisions around money versus how we’re supposed to—if we were robots, that is. An automaton would always have textbook financial behaviors based on pure logic and reason. We humans, on the other hand, are influenced by emotion, people around us, unreasonable thought processes, personal biases, changes in risk tolerance and so on. We’re somewhat irrational.

Irrational, but Predictably So

The best way to describe how people behave when it comes to money is a term coined by Dan Ariely and used for the title of a bestseller he authored: Predictably Irrational. We tend to be emotional, not rational, with money. Fortunately, our irrationality is predictable.

Behavioral economists have observed how we make certain decision errors in the same types of circumstances over and over. We’re pretty predictable and consistent. The value of discovering the patterns in our irrationality is that we can begin addressing it. Think about flipping a coin example. In a well-balanced coin, we know heads should come up about half the time. But if we know that the coin is weighted slightly so that heads comes up more frequently, we can use that info to guess heads and be right more than half the time. The same with human behavior – if we know about our tendencies, we can predict behavior and arrange the situation to take advantage of those tendencies.

Financial irrationality extends across society. However, according to the book Nudge by Richard Thaler and Cass Sunstein, it’s possible to structure our policies and financial services industry to nudge people to do what’s in their best interest. Here’s an example: By making automatic enrollment in an employee-sponsored retirement plan the default option instead of making non-enrollment the default, more people would participate in retirement plans. Why? It’s human nature to take the default choice because it requires no effort.

You can address the irrationality in your own habits by taking a look at some of the decision errors people often make.

Common Decision Errors

Many common financial decision errors involve predictable irrationality that’s tied into the difficulty our brains have with understanding probability.

One decision error we can fall into is described in my blog Mind Your Money: Optimism and Illusion of Control. By making the mistake of maintaining an all-pervasive optimism that includes the idea that we’re in control of things, we might think we’ll succeed when others can’t or win when the odds are against us. This can take the form of things like attributing lucky investment choices to skill, having early financial successes and expecting to repeat them, keeping a low emergency fund or none at all, and disregarding the need for insurance or estate planning.

We’re also prone to decision errors in our price perceptions. These errors relate to a common cognitive practice called anchoring. Anchoring is locking onto a certain price or value as a norm that influences our decisions about what we’re willing to pay.

For example, a loaf of bread is $5 where the cost of living is high, we’ll be willing to pay the same where the cost of living is much lower and we should be getting a better deal. This isn’t a big issue, right? Try it with a brand new car or a home! Anchoring can affect us when making large, infrequent purchases, negotiating prices, buying something unusual or assigning value to an investment.

There are all sorts of cognitive twists that can affect financial freedom. Some of these are loss aversion, representativeness, adjustment bias, cognitive dissonance, overconfidence, mental accounting, recency bias, availability and confirmation bias.

Money Management and Wealth Gathering

My blog Kirk vs. Spock: Human Nature Meets Personal Finance talks about what’s needed to tailor a financial program for humans with complex decision-making processes, this approach works with human nature—not just when it comes to decision errors, but through overall coaching and behavior changes around money.

 

Buying Happiness: Anticipation Enhances Reality

- Spending

I was in junior high. It was 1984, the album was 1984, and the band was Van Halen. “Jump,” the only Van Halen song ever to hit #1 on the charts, began with a dramatic synthesizer solo that became the band’s signature sound. At that time I knew one thing: I had to have a synthesizer.

I was so captivated by the then-new, techno synthesizer sounds that I even agreed to take piano lessons. My parents said if I’d stick with piano, they’d split the cost of a less-expensive electronic Casio® keyboard with me. It wasn’t a real synthesizer, but I wanted that keyboard more than anything. I daydreamed about it, studied its specifications, made detailed drawings and talked about it incessantly. Looking forward to my keyboard kept me going for months.

Making Me Wait

Anticipation is a great bargain, because envisioning future purchases can produce a very positive emotional response. When it comes to money and happiness, imagination is a powerful capability of the human brain that lets us experience happiness even before we spend a dime.

Sometimes anticipation is better than the actual purchase. Studies show that looking forward to a happy event can produce more pleasure than the experience itself because fantasy is not intruded upon by reality. In the case of my keyboard, the reality of the plastic keys was disappointing compared to the weight of the ivory piano keys I’d envisioned.

Even when reality meets or exceeds our expectation, anticipation is a deal sweetener. We get pleasure from the actual item or experience plus the extra happiness of anticipation beforehand. Interestingly, several studies have suggested that positive feelings from anticipating a future event are stronger than those from recalling a pleasant event in the past. In other words, people seem to prefer a happy future more than a happy past.

Getting Extra Happiness Free

Here’s how you can buy a bigger slice of happiness using your very human feelings of anticipation:

  • Avoid “consume now, pay later”: You get a better deal on happiness by saving for a purchase than from the immediate gratification of charging it on the spur of the moment. “No interest, no money down” offers may be stealing some of your happiness! When you wait and save, you eliminate the possibility of regretting the interest applied to a credit card later and increase your happiness up front. You might start practicing with small pleasures because it takes less time to save for them.
  • Give yourself time to anticipate: To get more from an expenditure, let yourself eagerly look forward to what you buy. Take extra time thinking about it, and enjoy reminiscing afterward.
  • Use anticipation as free happiness insurance: Anticipation makes a purchase worthwhile even if the reality is disappointing. You can savor the idea of a Mexico vacation even if your luggage gets lost and the water doesn’t agree with your stomach. Without anticipation, you just have a bad memory of a bad vacation.

The No-Budget Way to Spend Less and Save More

- (No) Budgets , Saving , Spending

You thought simple saving was within reach. You’ll do better this month, right?

Obviously we need a consistent, predictable way to decrease spending and increase saving. Despite this dilemma, we balk at the thought of completing a budget.

Why Budgets Don’t Work

Budgets are the traditional way of managing spending and saving habits. Yet psychologically and behaviorally speaking, budgets—like diets—don’t really work for most people. The New
York Times article Why a Budget Is Like a Diet—Ineffective tells us that human nature can foil the best of intentions!

Some people do well at budgeting. With couples, sometimes one person is more conscientious about money management and adhering to a spending plan. If you’re a good budgeter, keep it up, because it’s an effective tool. For the non-budgeting majority, there is hope! We can comfortably reduce spending and increase savings using the two-bucket spending method with a drip-by- drip savings plan.

The Two-Bucket Method

Behavioral economics research tells us we tend to separate in our minds various purposes we have for our money. This “mental accounting” can be to our advantage. If we have a purpose for a certain amount of money, we tend to avoid using it for other things.

The two-bucket method I describe here helps you start putting mental accounting to work on
paper! It’s simple:

1. Set up two bank accounts, preferably at the same bank. Ideally, one should be a checking account and the other a savings or money-market account. These are your two “buckets.”
2. Label the checking account your “Spend” account and the savings your “Save” account.
3. Link the two accounts so you can transfer money between them easily. Banks that allow you to set up automatic transfer via the Web (most do) are more convenient too.
4. Pay yourself first! Instead of depositing income into Spend, put it all into Save. If you have automatic deposits, direct them straight to savings.

Income goes directly into Save, so simple saving is your default option. Because the default requires no effort, you’re taking advantage of a behavioral economics technique called
automaticity. You are saving automatically and have achieved a big milestone for simple saving. Congratulations!

Saving Drip-by-Drip

Your mental accounting is probably already in gear. Here’s how to build your savings and imperceptibly nudge yourself to wealth:

1. Time an automatic transfer after each payday to move money from Save to Spend. The transfer amount should initially be 99% of your paycheck. If you are already saving, bravo! Set the transfer to preserve your current saving rate.
2. Always pay bills and take spending money from the Spend account. Keep track of your balance and don’t overspend it.
3. Each month, decrease your automatic funds transfer by 1% of your income. For example, if you started with 99%, transfer 98% from Save to Spend the second month, 97% the third month and so on. Each 1% is just $10 per $1000 in monthly income. If you’re paid $4000 per month, you’ll only be reducing spending by $40 per month. Painless!

Our brains are wired to notice sudden or dramatic changes, but not small changes over time.  We find small ways to trim. It’s possible to reach a savings of 20% or more of income without suffering from the pinch. Bill payments and basic “creature comforts” are a must, so when things get too tight, that’s the signal to stop increasing the percentage.

Time for a Reward—and a Fatter Retirement Account

Phew—no budget! Once you have money accumulating in savings, reward yourself. One way is to take up to 50% of what you accumulated in the Save account after six months and do something special or fun, like a nice massage or a dinner out. What about the rest of the savings? Well… remember your New Year’s resolution to put more in your retirement account?

What Are You Thankful For?

- (No) Budgets , Spending

“Daddy, what are you thankful for?” my five-year-old asked. We were at the breakfast table with my youngest, age two, after a hectic frenzy getting ready for school. This direct, innocent question was probably prompted by school discussions.

Surprised but inwardly pleased, I smiled and said, “Well, of course I’m thankful for you!” Then I smiled at my other daughter and explained how I was thankful for her too, as well as for my friends.

After I said, “I’m thankful this house,” my five-year-old piped up, “Yeah, because some people are homeless.” I agreed. “And some people are poor,” she said, “and we’re not poor.”

There are many reasons to count your blessings. It’s good for your soul and your mental well being. It’s also good for your personal finances due to something called social comparison.

Make the Right Comparisons

It’s human nature to make social comparisons, comparing ourselves with those around us. In particular, we tend to compare our wealth with others’, both consciously and unconsciously. The negative side is “keeping up with the Joneses”: They accumulate more and more possessions, so we think we need to match their pace. What a source of discontentment that can be!

There’s a flip side. A tried-and-true advantage of pausing to count your blessings is remembering how very fortunate you are. No matter what your plight or your station in the pecking order of socioeconomics, you’re probably better off than somebody else.

For example, are you reading this on a computer?

  • Likely you’re not homeless—and many people are.
  • You’ve probably eaten something today—and there are those who can’t even get clean water.
  • You have the means to access and use a computer, which many people don’t have.
  • You have time to read, while some are too busy.
  • You can read—and illiteracy, even in the United States, is quite high.

Thankfulness involves a conscious choice about our social comparison point. We can compare upward or downward. Always comparing ourselves to folks who are more materially wealthy than we are gives us the consistent feeling of a “have-not.” However, if we compare ourselves to those who have less and take a moment to be grateful for what we’ve got, we feel wealthy and blessed.

Giving also multiplies our sense of wealth. As I mentioned in my blog Spending on Others is Buying Happiness for Yourself, giving just $5 a day can boost your mood and positively affect your outlook.

See the Big Picture

We compare upward too often when we’re always exposed to people who have more. Watching newscasts or documentaries about less fortunate individuals brings reality into focus. We get a more balanced comparison and can truly see the heart-wrenching conditions numerous people face on a constant basis.

In high school I dated a woman whose parents had spent years as missionaries in Africa. Her father, Jack, was a minister. He’d eat only a small bowl of rice for lunch on a daily basis—and nothing else. For decades this was his way of reminding himself that most of the world lives off the same amount of food or less each day. Jack turned lunch into a thankful moment as part of his routine. He didn’t want to lose touch with how blessed and fortunate he growing up in this country where we have so much.

My blog With Buying Happiness: It’s the Little Things talks about fostering a sense of gratitude and avoiding taking things for granted. Yet another way to bring thankfulness into perspective is to compare your current wealth or possessions with having nothing. Maybe you need (or want) the latest iPhone®. What about having no phone at all?

Look Beyond the Trappings
Obviously, July 4th is more than just Fireworks and Thanksgiving is more than just turkey. A grateful outlook improves our satisfaction levels with life and with our possessions.

Maybe we should all be like Jack and have something in our day prompting us to pause and remind ourselves of how fortunate we are. So take a moment. Count your blessings and realize just how wealthy you really are. Regardless of what you have, you always feel richer when you’re grateful for it!

Spending on Others is Buying Happiness for Yourself

- Spending , Uncategorized

When I was younger, I had a regular Sunday evening volunteer gig helping prepare and serve meals for homeless teens at a local shelter. At first, I did it because it was the right thing to do. Soon I started looking forward to these evenings because helping the teens made me feel good. They were so appreciative, and it was obvious I made a positive difference in their difficult lives. Needless to say, the only cost was gas money to get to the shelter!

Just about everyone knows the good feeling that comes from helping others. Our brains are wired for social connections, so almost anything that strengthens these connections—including the way we spend money—seems to increase our happiness. There’s more to financial fitness than numbers, and the positive feelings we get from using money this way are very real.

Part Of How We’re Wired

Animals can’t create social networks more complex than ours, and only a few come close. In fact, ours is the only network that includes perfect strangers. Scientists believe the positive feeling from helping others is rooted the hyper-social nature of humans. We’re hard-wired to connect.

We might object to the scientists’ beliefs by saying those good feelings come from cultural influences or a person’s upbringing. This isn’t the case, because the effects of spending on others (prosocial spending) have been demonstrated from Canada to East Africa, making it a cross-cultural norm.

More Evidence for Getting From Giving

Many people involved in philanthropy and volunteerism say they get more back than they give, and evidence backs this up. A number of scientific experiments have demonstrated that prosocial spending tends to increase happiness.

One study using MRI scans showed that the brains of participants who were thinking of donating money to charity became active in brain areas usually associated with getting a reward. Amazingly enough, when we give, we feel like we got rewarded. Our brains act like we’re on the receiving end. It’s how we experience giving physiologically in our brains that connects money and meaning in this way.

The Expectation of Happiness

Imagine I just handed you a $100 bill outside the shopping mall. Do you think you’d get more satisfaction out of buying something nice for yourself or by dropping the money in the charity pot of the Salvation Army® Santa ringing a bell outside?

While most of us have experienced the good feeling that comes with giving, we seem to discount it when deciding whether to spend money on ourselves as opposed to someone else. We expect that we will feel happier after spending on ourselves than we will after spending the same amount on others. Interestingly, the opposite is usually true.

When we expect to feel differently than we actually do when an event occurs, we make what psychologists call an “affective forecasting error.” You might be unsure if you make affective forecasting errors when it comes to giving—unless, that is, you test the concept yourself.

Easy Experiment to Try

Research suggests that giving away as little as $5 a day results in a significant boost to your mood—but don’t just take my word for it. Try it yourself for a week as a fun-finance activity. Make it your goal to spend $5 daily for seven consecutive days on little treats or gifts for others. They could be family, friends, acquaintances or even strangers. The following week, buy a $35 treat for yourself—just a small pleasure—as a reward for your generosity.

I’d love to hear the results of your experiment. How did you spend the money on others, and how did you spend it on yourself? How did you feel each week? Be sure to post a blog comment and let me know!

Mind Your Money: Optimism & Illusion of Control

- Spending

Humans are an optimistic breed. We believe we can defy the odds and control our own destinies. When we’re told that about half of all marriages end in divorce, we’re still convinced we’ll live happily ever after. When we’re told that 80% of new businesses fail, we’re confident our startup will be the one in five that survives. When we’re told we’re more likely to be struck by lightning than win the lottery, we say, “Well, somebody has to win!”

It’s as if we’re born with rose-colored glasses pasted to our retinas. Though we usually don’t recognize it, we carry with us a persistent optimism and an illusion of being in control, and these can lead to faulty financial decisions.

Optimism and Overconfidence

Most people have a positive view of their abilities and prospects of success. This personal bias toward optimism and overconfidence is a fundamental finding in behavioral economics. Here’s a classic example: If people are asked to rate their driving ability, 75% to 80% think they’re above average. The same goes for almost any other domain: sense of humor, entrepreneurship, success in marriage, profession, grades and so on. Depending on the study, 75% to 95% give themselves above-average ratings, although by definition half should be above average and half below.

Such overconfidence is DNA-coded. If we weren’t so optimistic, we probably wouldn’t be motivated to do much of what we do—to try different options, innovate, make changes for
the better—because we wouldn’t have hope. We need optimism to push past inertia, even when it comes to raising kids or getting out of bed in the morning.

Illusion of Control

In addition overconfidence, we tend to have an almost irrational sense of how much control we have over circumstances. We actually think we can influence outcomes when we have no control! For instance, people are willing to pay four times as much for a lottery ticket so they can pick the numbers, even though winning numbers are selected absolutely at random. Do we actually believe that picking numbers ourselves makes us more likely to win?

Early success strengthens the illusion. For example, one study showed that people who correctly guessed the outcome of several early coin tosses rated themselves as much better guessers than those who’d started badly. Illusions of control also increase when you have many choices, the task is familiar, there’s a lot of information and/or you’re personally involved.

Resulting Money-Management Decision Errors

Our optimism and false sense of control are not necessarily bad. However, here are ways they can keep us from making good financial choices:

Interpreting lucky investing decisions as skill: Illusions of control can flourish in an investing environment. Sometimes we make a lucky guess and then believe we controlled the
outcome, only to find that the next outcome is disastrous because we never had control in the first place.

Banking on successes in real estate: During a real estate boom, a friend of mine purchased a condo that quickly doubled in value. He tried to repeat his success just in time for real estate to crash. Thinking we’re in control due to an early success, an abundance of information and personal involvement with a familiar task can lead to bad places.

Having a low or nonexistent emergency fund: Feelings of optimism and control can make us think life will always treat us well. For example, if we think we’re so proficient at our job
that we won’t get laid off or our car was such a perfect choice that it won’t break down, we
might underprepare for a layoff or car trouble. It’s dangerous to skimp on a 911 fund.

Underestimating the need for insurance and estate planning: Thinking, “It won’t happen to me,” when it comes to severe health problems, disability or an untimely death can lead
people to remain uninsured or underinsured. Many put off creating a will and pass a lot of stress to their loved ones after they’re gone.

Hope is essential for a happy life. Depression research shows that depressed individuals aren’t necessarily irrationally down, they’re just not as irrationally optimistic as the rest of us Perhaps the best antidote to the error of overconfidence is following the old adage to hope for the best, but prepare for the worst—with a bit more emphasis on preparing!

Kirk vs. Spock: Human Nature Meets Personal Finance

- Spending , Uncategorized

Are you disinterested, bored and frustrated when it comes to paying bills, balancing your checkbook and reviewing credit card statements? Do you feel like the day-in, day-out basics of money management are chores to be avoided? If so, you’re not alone. You’re human!

According to behavioral economists, many assumptions about how we should manage money come from an unrealistic view of human nature. Instead of being rational automatons guided by pure logic and objective reasoning, we’re influenced by emotion, personal preferences and social cues. Traditional approaches to personal finance make cents from the dollar perspective but not a lot of sense from the human perspective.

For my fellow Star Trek® fans out there, traditional finance is for Mr. Spock—the personification of logic in the original series—as opposed to Captain Kirk, who was often influenced by the illogical, emotional and unscientific.

For Real People

Like Kirk, we’re emotional, thoughtful, social human beings who act in complex ways while attempting to balance feelings and reason. Obviously personal finance can’t be all about
numbers and facts. If there were a financial fitness program that worked for people instead of robots, what would it do?

Inspire us: We need inspiring goals and the motivation to achieve them. Traditional methods involve budgets, scrimping, controlling our spending and denying ourselves. For example, we get a sense of failure and guilt if we don’t meet our goal of spending less in restaurants. Humans do better with a positive focus. We’re motivated by goals that mean something to us, like, “If I spend less on eating out, I’ll be able to save more money faster for my trip to New Zealand.”

Improve us: An effective program will tell us how we’re doing with our goals. We need to see progress and mastery because of our drive to grow and learn. The best feedback is positive and corrective, bolstering our confidence and showing us what to do differently.

Negative feedback tears us down, and vague feedback doesn’t tell us what we’re doing wrong, or how to improve. For example, feedback on retirement savings is characteristically poor. Most people know they should build a nest egg. However, “How much do I need and when?” and “How am I doing so far?” are usually unknowns.

Inform us: A human approach to personal finance would provide the information we need without overloading us. Technology gives average people more knowledge at their fingertips than Captain Kirk, but we can only process limited amounts of information. Excess data and choices tend to degrade rather than improve the quality of our decisions. Some Web and mobile apps automatically compile and categorize your spending, and some even track your investments so you can watch them react to market gyrations all day. This can potentially amount to noise rather than information, evoking feelings (fear, greed, guilt, pleasure and so on) but distracting us from real goals.

Connect us: A financial fitness program shouldn’t isolate us. Personal finance is often a solitary pursuit, but because we’re social by nature we want to connect with other people. Today’s wildfire spread of social media demonstrates this. Though talking about your money with others is often viewed as taboo or rude, common sense and research tell us that others can help us commit to and stick with goals—and achieve them—whether they’re financial or not. People can also be role models for success.

Entertain us: To make a difference, personal finance ought to be fun. Psychologists who study motivation recognize how play has power to engage us. There’s even a recent trend
toward “gamification,” which is applying game mechanics to non-game tasks so they’re more enjoyable and interesting. There are already money games to teach kids how to manage finances. Why can’t adults learn personal finance the fun way instead of the hard way?

Beyond our Galaxy

People are catching on to the idea that they don’t have to think like Spock to manage money successfully. In fact, our goal at Moneymentals is to provide a personal finance program for humans! If you’d like information about how to participate, please let us know.

Mr. Spock was consistently sensible and efficient—commendable traits. However, with his very human qualities and struggles, Captain Kirk became the inspiring hero who took us “where no man has gone before.” The conventional way of handling personal finance has brought us a sensible distance, but a more human approach can help everyone “live long and prosper”!