By John D. Buerger, CFP MSFS a financial advisor on NerdWallet's Ask an Advisor.
Jim and Janet were beyond frustrated when they first came to see me. They were not happy, and money was the reason.
Janet’s first comment to me was one I’ve heard dozens of times, “I don’t get it, John. We make good money, but we’re really bad about spending it. After 20 years, we have no savings, a small 401(k) and mountains of debt. It’s a giant, hopeless mess, isn’t it?”
My response started with, “I’m sure it could be better. You’ll have to make some changes.” She was visibly skeptical when I told her those changes aren’t that difficult. “But first,” I added, “the most important change you’ll have to make is to stop punishing yourself about it.”
You’re wired this way
Beating yourself up over past financial mistakes is like getting mad about the color of your eyes. Here’s why:
The human brain has two basic systems. The first is your emotional and subconscious limbic system. It makes more than 80% of daily decisions (and research suggests more than 90% of your financial choices) without you being aware of what it is doing. This system only cares about two things: (1) to seek immediate pleasure and (2) to avoid pain.
The other brain system is more rational and logical, but it takes longer and uses more energy to do its job. It can also handle more complicated tasks like abstracts, computation and problem solving.
Hating on yourself
You are going to be impulsive and emotional when it comes to spending money. It’s only natural. Your brain making all those spending decisions is wired for that.
When you do manage to consciously review a money choice, it won’t look rational, and your rational system is likely to deliver a scathing critique.
“We’re doing a review of your latte purchase yesterday. It doesn’t compute. If you bought one of those every day, we’d be out $1,511.10 in a year. Coffee isn’t worth fifteen-hundred dollars. Are you a caffeine addict? Have you no self-control? Don’t ever do that again. If you do and I catch you, I’ll really get mad.”
Why budgets don’t work
Since your subconscious emotional brain system only cares about seeking immediate pleasure and avoiding pain, it will make sure you never consciously review another latte purchase again - at least not for a very long time. It can do that, too, since the limbic brain system controls which information the conscious, rational system gets to see - the psychological version of the fox guarding the hen-house.
This is why budgets don’t work for most people. Working a budget usually comes loaded with hard conversations full of pain, sacrifice, self-discipline, a splash of guilt and a heavy dose of judgment.
The death spiral
As your financial choices get framed in this “good” vs. “bad” game, they tend to become more destructive while you feel less and less in control over your money, your happiness or your life.
What’s worse is that you, like Jim and Janet, build subconscious defenses against getting back that control. You argue with your spouse about what they’re doing wrong (more judgment) and/or give up all hope of fixing the issue (short of the long-shot that you might win the lottery which research shows doesn’t help, either).
And most hide from professional help. For every Jim and Janet who come to me, there are probably 20 couples who are in denial or just give up.
Stop hating on your financial life
Break this death spiral. It’s really not that hard. Here are five steps you can take to get started:
- Understand that financial decisions are made because that is how you are wired, not because of a lack of financial smarts, willpower or self-control.
- Work your way back to financial control one spending decision at a time. Be aware of where that money went. Your subconscious, emotional brain system doesn’t do abstracts ... and swiping that credit card is an abstract. Online cash management tools are great for this. Find one that works for you and use it every day.
- Avoid judgment. Forever strike the phrase “bad decision” from your vocabulary. It is what it is and that is all ... but ...
- It can always be better. Work towards incremental improvement.
- Think in terms of “substitution” rather than “sacrifice.” “Where can I spend the money where it would do better?” is a lot easier for the limbic brain to handle than “I shouldn’t have spent the money.”
John D. Buerger, CFP MSFS is a Wealth Coach and Financial Planner in San Luis Obispo, CA. John’s specialty is cash flow management tools and techniques as well as changes in spending behavior. John’s firm, ALTUS Wealth Solutions, is an independent Registered Investment Advisor firm registered with the state of California.