"If you're spending all your time scrubbing corners with a toothbrush, you're kind of missing the point." ~ Sandra Lee
We've been doing it all wrong.
A cursory look at personal finances in America is all you need to understand that most people still struggle with managing their money. Low savings rates, massive debt, excess consumerism, folks working past age 70 because they have to in order to pay their basic bills; these are all telltale signs of a fundamental problem.
Some folks believe that we just need to teach financial literacy and that will fix the problem ... but financial literacy training is ineffective (at best). James Kwak calls it a fallacy. I'd tend to agree. Just because you know what's "right" and it makes sense doesn't mean you'll actually do the "right" thing.
Many others come from the camp that believes that folks just need to suck it up, create a budget, make sacrifices and start saving (a lot of) money. "Do it because you have to. There is no other way."
These are good ideas in theory, but in practice they are problematic for most people because the human brain is wired to seek pleasure and avoid pain in the here and now. Budgets are like diets. They almost always fail because they involve pain, sacrifice and self discipline - none of which are attributes that are attractive to that part of your brain making almost all of your financial decisions.
It's trying to AVOID pain, not have more of it.
Financial planning as a profession has tried to address this issue, but we're doing it all wrong, too.
Financial planners are by nature analytical, linear thinkers. We are trained to look at problems rationally and strategically. We have learned the best way to address every financial issue you can imagine (and I've seen a lot of them in my 12 years as a planner).
But we can only make suggestions. In the end, you (the client) and only you must follow through and take action. You make dozens if not hundreds of financial choices every day. Without a serious shift in HOW you frame those decisions and your basic subconscious habits around money ... you're going to keep on doing the same things that got you into trouble in the first place, whether or not those were the "right" things to do.
Is it any wonder that most folks don't work with a real financial planner. The process feels a lot like going to the dentist. More pain.
Even the most basic of personal finance management (PFM) tools are built on a mis-guided foundation.
The most important feature of a PFM tool is that be used every day. Again, you make dozens if not hundreds of financial decisions every day. The tool you are using to guide those decisions should also be front and center in your mind every day.
From our own experience with a PFM tool that we released two years ago (the Cash Flow Hydrant™), the vast majority of users that signed up did not continue to access it after the first few days: 10% are currently "active" and only 3% check in on close to a daily basis. I can't confirm it with a link but I've heard the same story of lackluster engagement with all the PFM tools out there, including the big daddy of them all - mint.com.
A DIFFERENT APPROACH
For most people, these tools don't work because they are based on traditional budgets ... and budgets don't work well for most people because they start with pain, sacrifice and self-discipline.
Interaction with the tools can be improved through gamification - making them more fun to use. This needs to be done but even there, the basic construct - what I call the "framework" - behind what you're doing with your money has to change in order for you to get different results.
Getting control over your money SHOULD BE about getting control over your money, not focused on what you have to give up. Being in control feels good. It is empowering. What little pain might be a part of that process is overshadowed by the positives. Control only happens, though, when there isn't fear in looking at the numbers / raw data.
MINDFUL AND ACCEPTING
The most important and toughest hurdle is to change how you think about your money choices.
That starts with clearly understanding your current situation - what I call "Being Mindful." As Peter Drucker said, “What gets measured, gets managed.” The corrolary to that is you cannot manage what is not measured. Measuring your current situation is part of the role of the Personal Financial Management (PFM) tool ... and frankly, it only will work if you use it every day.
The second part is to be "Accepting" of your situation. Those spending decisions you made yesterday weren't "bad" and they weren't "good," they just were spending decisions. You CAN always improve upon them no matter how good they were and it is that mindset that will start you on the path of improving your Wealth Health.
If you can't be both Mindful and Accepting with your money, all the strategic thinking and self-disciplined, consistent intentions will more than likely wind up leaving you exactly where you find yourself today.
I think we're all better than that.
We are working on a new version of our Cash Flow Hydrant™ tool - contact me today if you're interested in learning more.
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