By Janice Carter
Do you, or have you ever struggled with your finances? There is lots of information about the nuts and bolts of finance. If that’s what you’re looking for, read no more. If you’re interested in the emotional side of finances that propel us, read on. I want to make it clear that I’m not a financial expert. I’m simply a single, financially independent woman who’s sharing some basic lessons. I recently created a spreadsheet of my expenses and income of the past 3 months. I nearly had a heart attack when I saw the numbers. I had no idea I was spending such an exorbitant amount. Do you know exactly where your money goes each month? Do you know exactly how much you’ve spent in the past month?
As I analysed my spreadsheets, I felt stressed and panicked. I didn’t want to face them. Appealing to my artistic nature, I colour coded segments in pretty pinks and purples in an attempt to make the numbers appear more palatable. It did not work. In an attempt to both educate and soothe myself, I started reading “Smart Cookies.” I was surprised and comforted to know that these successful women struggled with their finances.
The “Smart Cookies” experiences made it clear that, at times, it’s the emotional underpinning that drives us into financial crashes. Originally, I had believed I was simply limited by my creative mind and limited financial education. Well, that is true. However, the bigger issue was that my emotions were obstructing my ability to make wise decisions with my money.
Without realizing it, I had been on autopilot, recreating my mother’s relationship with money. She referred to the money she earned as “fun money.” Her income went towards fun things such as family trips, excursions to broadway shows and shopping trips. My father’s income went towards the mortgage, utilities, car payments and other necessitties. It worked for my mother, but not for me. Until I took a close look at the spreadsheets of my income and expenses, I wasn’t aware of the fact that I was making poor decisions because I was viewing my earnings as “fun money.”
Behavioral economics studies how people make financial decisions. The origins and development of behavioral economics is explained by Psychology to Save You From Yourself, a National Public Radio podcast. Created by the collaborative efforts of economics professor Richard Thaler and Israeli psychologists, Daniel Kahneman and Amos Tversky, it argues that the human animal is hard-wired to make errors when it comes to decision-making, and therefore people need a little “nudge” to make decisions that are in their own best interests.1
It turns out that whenever you are exposed to a number, you are influenced by that number whether you intend to be influenced or not. This is why, for example, the minimum payments suggested on your credit card bill tend to be low. That number frames your expectation, so you pay less of the bill than you might otherwise, your interest continues to grow, and your credit card company makes more money than if you had not had your expectations influenced by the low number.2
Questions to “nudge” you to make wise financial decisions:
1. Do you know exactly what you earn and spend. Collect your receipts and bank statements from the past 3 months and do the math. Get a clear picture of your spending by breaking the numbers into categories (e.g. eating out, clothes, groceries, etc.)
2. Is there a pattern to your spending?
3. How did your parents handle their finances?
4. What did your parents teach you about money?
5. Have you ever had a financial disaster? If yes, what did you learn from it? How can you avoid repeating this?
6. What financial successes have you enjoyed? How can you repeat this?
7. Set financial goals based on what lifestyle you would like to live.
8. What do you want your life to look like in 5 years? 10 years?
Once you’re aware of what’s holding you back, you can mind your money and reach your financial potential.
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