Properly Managing Money Is Obvious(ly Hard to Implement)

In considering all of my thoughts regarding properly managing money, I can only be guaranteed of one thing: None of my thoughts are unprecedented. No one will ever win a Nobel Peace Prize for their economic contributions in advancing human knowledge revolved around the thesis of “Spend less than you make.”

It took a lot persuading for me to finally take the leap to start FinanciallyFitz. Not only was I going to spend a lot of time creating content and building a website, I was going to be spending that time diving into extremely complex topics of “Get Out of Debt”, “Budgeting”, and so on. They are so complex that one of the prerequisites in understanding is 4th grade math.

Is this your first time on the site? I’ve already played out this exact scenario hundreds of times: “Thanks for taking the time to share common sense, Luke! I am now a lot more of the exact same as I was before I entered.”

common senseBut here is what I have noticed – the vast majority of people who blow of this information as “common sense” are not making it common action. There are bigger fish to fry, like making more money and advancing up the corporate ladder. We don’t have time to devote energy to obvious information.

The irony lies in the fact that the only obvious thing is that we can’t implement obvious information. People are in debt, which typically means they spend more than they make. Most people don’t have an emergency fund. People buy houses when they should rent. They invest when they shouldn’t invest, or don’t invest when they should.

Just because something is common sense doesn’t mean its application is common. Just knowing how to do something is not enough. As Tony Robbins has said, “Knowledge is not power…it is potential power.”

As you peruse FinaniallyFitz, you may notice I talk a lot about money. I’m actually not interested in money. I’m interested in the psychology that motivates people to behave in certain ways. Money is just a tool that allows us to easily track one’s behavior. It can’t lie.

Why Intelligent People Do Stupid Things?

This is the million dollar question regarding anything. How can people be so intelligent yet so dumb?

I’m talking about other people, of course. Not you.

We both know a lot of people who smoke. Not one of them is still holding onto the belief that smoking may help them lose weight. They know the consequences (intelligent)…and look the other way (dumb).

We know people who follow horoscopes. We know people who don’t believe in evolution. We know people who text while they are driving. We know positive psychologists who are depressed. We know finance professors who are broke. We know doctors who are overweight. We know people who don’t treat other people as they want to be treated.

Some of us are intelligent. Some of us are not intelligent. All of us are irrational.

Is this because the human species is stupid? No. It’s because humans are remarkable. We just do stupid things.

We are filled with emotions, faith, experiences, irrationalities, opinions, etc. that shape our daily actions and beliefs. Humans are not calculators. They are not bank statements. They are not computers.

Is it rational of me, as a catholic, to believe that the Eucharist is the body and blood of Christ? No – not from a scientific perspective at least. But I choose to view it through the lens of faith, not science. (Same reason some choose not to believe in evolution, for example.) Why? Because it makes me a better person to have that faith. I’m a human, and I have that luxury to choose.

But don’t mistake that luxury as always being beneficial. It makes us terrible decision makers.

Knowledge vs. Irrationality

We possess a grandiose ability to talk ourselves out of (or into) anything. A yearly physical can be next year’s physical. Retirement savings can be postponed a little bit. Getting out of debt can start after this vacation. Starting a book can wait until tomorrow. I will start eating healthier after I eat this entire tub of ice cream.

The problem with our irrational thoughts is that we are live within the boundaries of theory. Theory is useful in giving us parameters in which to make decisions. However, theory is based on contemplative and rational thinking. We behave irrationally in an environment that is only set up for rational behavior.

socialTake for example retirement savings. Social Security was not intended to constitute the entirety of U.S. workers’ retirement income. There has to be another source of income. It used come from defined benefit or pension plans, where an employer (sponsor) promises a specified monthly benefit on retirement that is based on a predetermined formula.

Those days are long gone. Competition is too stiff to bear the risk and costs of pensions if other companies are not willing bear the same. Standard economic theory suggests this is perfectly fine. Not only will companies not be subject to the high costs and risk of pensions, but it will also give the employee greater flexibility in deciding retirement options.

What is the result of this flexibility? People do nothing. They don’t save. They don’t invest. They are given money, so they spend it. What was rationally thought of as more freedom actually became more constraining to the inherently irrational employee.

Did the employees just not know about the importance of retirement savings? No. They simply chose not to do anything. The financial responsibility was too easily overtaken by our irrational behavior to satisfy current wants in the name of forsaking long-term needs.

It’s extremely hard to motivate people to do something now that won’t be realized for another 30 years, like retirement. We can use objective tools to project our potential retirement savings. Save this amount, for this long, with a conservative rate of return and you will have this much in a certain number of years.

It’s math. It’s not like it’s someone’s opinion and we don’t know if we should trust them.

And we still don’t do anything. Admittedly, there are a lot of variables and things that are out of our control. But that should have no bearing on our decision making! Yet it does.

From Information to Transformation

The underlying experiment of FinanciallyFitz is this: How to we take simple information and put it into simple action that creates positive transformation.

More education is not the answer.

Money is the common denominator that links all of us together, and because we use it so frequently we fall into a fallacy that we are experts with it. The reality is that we are incredibly stupid in handling it. We do not really understand how money works. How we think we are managing money is often different than how we are actually managing money.

This is why I am not interested in theory. I am more interested in why you aren’t properly managing money and, if you are, how are you doing it? How can we get people to defy human nature and cultivate enough motivation now for a reward in the future?

Take a step back…

Ask yourself, “Is this common sense my common action?” If it’s not, what good is common sense? It might as well be rocket science (willing to bet not many rocket scientists are reading this) so at least you have an excuse not to do anything with the information.

Follow a budget, then got out of debt, then build an emergency fund, then start investing, and then start building wealth. It’s only obvious if you’re doing it.

“Don’t search for the exotic until you have discovered the basic” – Jim Rohn

Question: Why is managing properly managing money so difficult? How do you take common sense and make it common action?

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7 Comments

  1. Pretty great post. I simply stumbled upon your blog and wanted to say that I have truly loved surfing around your blog posts. In any case I will be subscribing in your feed and I am hoping you write again very soon!

  2. The problem is that emotion and logic don’t always line up.

    I heard a story about a very smart, very successful man who was in his late 40s and still hadn’t saved a cent for retirement. He knew he should but just didn’t.

    Someone finally sat him down and kind of grilled him. It came out that his dad had died shortly after starting an IRA. So there was this mental block.

    Most people’s cases aren’t so dire, obviously, but the issue is that it can be hard to use logic in the face of overwhelming emotion. I know I need to eat better to lose that weight. But it usually takes a specific goal (cough, cough, FINCON, cough, cough) to get me to start really controlling the calories and start doing a little exercise. Because as much as I’m unhappy being overweight, that donut just sounds soooooo good.

    And similarly when my ADD husband really wants something right this second, it’s hard to think about the future. He generally needs a concrete goal to keep him on the straight and narrow.

    Like you said, sometimes the obvious thing to do is obviously not working.
    Abigail @ipickuppennies recently posted…Things a specialist shouldn’t do: laughMy Profile

  3. I think the way you phrased the problem (it’s hard to get anyone to act for 30 years down the line) helps you define solutions.

    As I see it, there are three solutions:
    1. Shorten the timeline significantly (that’s primarily the FIRE camp)
    2. Build systems that make it easier to act in your long term interest than in your short term interest.
    3. Hybrid of 1&2

    I am in the third camp because I believe that under pressure people don’t rise to the challenge, instead we resort to training. However, if our training has always pushed us, then under pressure we will push ourselves too.

    • Hi Hannah – you’re exactly right. Those are great suggestions. The balance between now and later (exercising, dieting, saving) is often overcome by building systems where we “do the right thing for the wrong reason.” It takes preparation, but it makes it much easier to not neglect the future. Thanks for stopping by!

  4. I do think financial ed is needed. We still need to teach children and students these basic concepts. I don’t think they are being discussed or being seen in action in many homes. As these children get older and begin their financial lives they don’t have any behavior to model handling money after. I agree 80% of handling money is behavior/mindset, but it starts with the mastering of the basic knowledge first.
    Brian @DebtDiscipline recently posted…Interview Series: Income SurferMy Profile

    • Agree 100%. Why don’t we do that in schools and at home? IMO, I believe most think it’s too basic. It’s too trivial. Too obvious. Too personal. However, reading Beowulf will really get you ready for the real world.

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