Category Archives: Uncategorized

Spending on Others is Buying Happiness for Yourself

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!

What is Financial Freedom Anyway

- Retirement , Saving , Uncategorized

It’s interesting how elusive something can be if you don’t have a good definition for it. For instance, lots of people want financial freedom, but what exactly is it? Some see it as a vague goal or distant dream. Others think financial freedom is only for an elite few. Financial freedom is a great concept, but can you define it and determine where you stand with respect to being financially free?

How Most People Think About Financial Freedom

Before I give you my take on this, let’s explore what most people think:

Financial freedom is being out of debt: Often people make financial freedom synonymous with freedom from the shackles of debt. I agree this is important, because until you dig yourself out, you’re certainly not free. Consumer debt—that relentless revolving credit—is extremely restrictive. It seems more painful than a secured debt like a mortgage, but today secured debt can be insecure. Recently we’ve seen how a mortgage can impinge on freedom. A house that’s under water isn’t truly a secured debt anymore!
Financial freedom is having just enough to meet my needs and fund my retirement: Some think a person is financially free if there’s enough money coming in from passive sources, now or in the future. The word “passive” in this case refers to income for which there’s no need to work. Investments, social security and pensions are some examples. By being careful, a person in this category can afford a traditional retirement at around age 65.
Financial freedom is having enough for my needs, most of my wants and a very comfortable retirement: Some people think financial freedom belongs to the independently wealthy, those who can do whatever they want without spending time working. These individuals might have had a windfall and used it wisely. It could also be that their careers, investments and money management techniques made them very prosperous. The end result is an extremely comfortable retirement and many wants being met over the years.
Financial freedom is being able to purchase anything and everything I want: Certain people think financial freedom applies only to the small category of extremely rich people like Warren Buffett and Bill Gates. There is nothing purchasable they cannot buy.

Financial Freedom as a Continuum

Those are reasonable ways to describe financial freedom. However, here’s why I think they miss the mark: They’re all-or-nothing definitions where you’re either free or you’re not. Financial freedom isn’t about whether or not you’re free. It’s about degrees of freedom.

At Money Mentals we don’t say, “At this point, you’re financially free.” Instead, we talk about incremental freedom. We call it Months of Freedom, which how many months you can go without having to earn an income.

Freedom to Celebrate

My blog Seeking Financial Freedom, not Just Retirement talks about how retirement is being redefined today. We need to redefine financial freedom as well, because the all-or-nothing approach is inaccurate and too restrictive. It can even be a real downer! Many people can’t feel like they’re free until they’ve achieved tremendous riches—so why start? For some, just digging out of debt is a long road.

If you think of freedom as incremental, buying another unit of freedom is within reach. Tracking your Months of Freedom gives you a lot of freedom in itself, because each little bit saved brings you closer to another month gained. Your time takes on a whole new meaning. The discipline and sacrifice involved in work become more worthwhile.

Financial freedom doesn’t have to come all at once at the end of your life. For example, someone with a small amount of freedom might choose to take a sabbatical or work part time.

Most of us never get to the Warren Buffett and Bill Gates version of financial freedom. Many may never even get to the comfortably retired version. That doesn’t mean we have no freedom at all! Let’s reframe our thinking so we can celebrate our progress and keep on becoming increasingly financially free.

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”!