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“It’s good to have money and the things that money can buy, but it’s good, too, to check up once in a while and make sure that you haven’t lost the things that money can’t buy.” - George Lorimer
In an earlier blog post, I wrote that many of our personal financial problems have the characteristics of mysteries rather than puzzles. They are marked by ambiguity. They not only lack a definitive end-goal but are also without clear-cut solutions. Just consider these common financial questions:
- How much money will I need to retire comfortably?
- How can I become more financially secure?
- How can I save money regularly?
- How can I pay back my debt in a reasonable amount of time?
The right answer to each of these questions, of course, is that there is no right, precise answer. There are many possible answers. They are all complicated. None can be contained within a sound byte.
The answers depend on a host of factors that are unique to each individual. For example, having ten times your annual income saved by the age of 67 is recommended by financial experts. But most people's incomes fluctuate from one year to the next, so it's not clear which baseline to use. And many people retire happily with far less money, and others feel deprived even with ten million dollars. What’s more, as our own needs, desires, and aspirations change over time, the answer to this question will also change.
Given the complexity, what are some effective ways to deal with challenging, open-ended financial mysteries?
1. Pay sustained attention to the financial challenge.
When people are faced with any difficult problem that poses a potential threat, they tend to distance themselves from it. They engage in what psychologists call “cognitive escape.” Cognitive escape is particularly harmful to financial challenges because money plays a starring role in our lives. Every day that the money problem is ignored, it grows in size and seriousness. The more effective approach is to pay consistent attention to earning, spending, saving, investing, and giving activities in our lives. This involves understanding the principles and best practices behind these activities and keeping up with new information. Another significant aspect of paying sustained attention is to understand and monitor our own financial situation (what our income is, how much and what types of debt we have, how we spend our money each month, etc.) month after month.
2. Make progress every day through actions big and small.
Open-ended, life-long goals can rarely be achieved with one specific game plan. What is needed instead is an acknowledgment that the effort involved in making progress will be ongoing and multi-pronged. Many small and big actions will contribute to our progress. For example, every time we say “no” to buying an unnecessary garment to add to our overflowing wardrobe, or “shop our refrigerator or pantry” instead of ordering take-out, we are contributing to our financial security. The beneficial effects of such actions are two-fold. First, they have the concrete benefit of saving money. However, their bigger value lies in orienting us towards a lifestyle with sustainable personal finances.
3. Cultivate habits that support progress.
Supportive habits are the most potent antidote to life-long challenges including financial ones. Every behavior that we perform regularly contributes to progress, and also lays down the behavioral scripts that lead to habit formation. For example, in their influential study of millionaires, Thomas Stanley and William Danko observed that millionaires and their spouses tend to have disproportionately frugal consumption habits throughout their lives, even after they’ve become wealthy. They also spend considerable time and money reading books and learning new skills. In other words, they’ve cultivated habits that support wealth accumulation.
4. Revise and adapt the target and indicators of progress as circumstances and the environment change.
What makes significant financial challenges mysteries is that they evolve over time. For instance, setting a specific retirement savings goal is difficult for most people because it’s impossible to predict future events. If someone lives into their late nineties, for example, they’ll need far more money in retirement than a person who doesn’t live as long. To address this concern, a person who’s in good health at the traditional retirement age of 65 may decide to work a few additional years to increase their accumulated savings. Similarly, a significantly smaller nest egg would be needed to retire in a lower-cost foreign country compared to an expensive US state like New York or Connecticut. Because financial challenges are moving targets, both the means of making progress and the measures of judging how effective that progress is must be adapted along the journey.
5. Don’t let setbacks discourage you. Shrug them off and get back on track.
One of the more robust findings in psychology is that when individuals experience a small failure in their pursuit of a goal, they tend to lose their motivation, say “what the hell,” and then behave in counterproductive ways. For instance, if an individual who has decided to reduce their debt fails to make a debt repayment once, they may abandon their goal entirely and fall back to spending imprudently. In the financial domain, it’s easy to get off-track because there are so many temptations and alternative uses for the money. How to avoid this? Research suggests that a good way is to pick small sub-goals or tasks that contribute to making progress in the financial challenge. This turns attention away from the failure and sets up the person to achieve small wins and get back on track.
