Fumbling in the Dark

I've had good control of my saving and spending for nearly two years now. I still make poor choices now and then, but they don't have the consequences they would have a decade ago. A decade ago, I was in debt. Today, I am not.

That's one of the advantages of being debt-free: when you do something dumb, the repercussions are not as severe. But I remember a time when each bad choice brought me closer to the brink.

Fumbling in the dark
Night Lights by jdroth -- hey, that's me!During the 1990s, I had a spending problem. I was a compulsive spender. It's not that I just bought books and comics and compact discs. I spent money on everything. I wanted everything. I had a house full of Stuff, most of which sat unused. I was filling some emotional void by buying.

Saying that makes it sound as if I were aware of the problem. I wasn't. I had a vague idea that my spending was out of control, and carrying $20,000 in maxed-out credit cards was certainly causing me stress, but I didn't know how to stop. Every time I paid one card down a little, I'd find some reason to buy something new. A small part of me knew that I had a problem, but I could not stop myself.

When I look back now, it seems as if I were fumbling in the dark. My wife would tell me how she was saving for retirement, and the idea seemed impossible to me. Because we've always kept separate finances, I would marvel that she had several thousand dollars in savings. I had nothing. I had no savings account. And my checkbook usually had less than a hundred dollars in it. (Sometimes the balance was negative!)

Although I knew I had a problem with debt, I continued to spend without thinking. Worse, sometimes I would spend with thinking. I'd be out with friends and they'd want to go for drinks or go see a movie, and I'd do it, even though I knew I couldn't afford it. I'd do it, even though I knew my stomach would be in knots next time I saw my account statements.

As I spent compulsively — as I accumulated debt — I had no concept of proper money management.

I'm a smart guy. In high school, I won a national award for my “business math” skills. Were you to set me down and tell me, “If you spend more than you earn, you will continue to have debt,” I would have understood you intellectually — but I would have kept spending.

I read about budgets, but never used one. I had Quicken for my computer, and I would use it from time-to-time, but mostly I didn't track my money. There were months at a time when I didn't write anything in my checkbook register. I operated on a sort of voodoo finance system, where I sort of knew how much I had in the bank, but not really.

I had no idea what I was doing with my money. I had no financial goals.

The zeroth stage
Last month, I wrote about a theoretical “third stage” of personal finance, a place one reaches after mastering the basics of money management. At the time, I posited the stages of personal finance might look like this:

  • The first stage of personal finance is learning the basics: understanding compound interest, reducing debt, beginning to save.
  • The second stage is putting the basics into practice: choosing to live frugally, saving in earnest, and pursuing financial goals.
  • The third stage — the “what next?” stage — comes after we've mastered the fundamentals. It's at this point that we begin to ask “why?” Why are we continuing to save? All of our debts are paid, so what's the point? (There certainly is a point, but what is it?)

I've thought about this a lot over the past few weeks, and I've realized that there are at least two other stages that I didn't include. The fourth (and final) stage is Financial Independence, as defined in Your Money or Your Life. This is the point at which you have “enough — and then some”.

But there's also an earlier stage, one that comes before the first stage. In the system I'm trying to define here, a person enters the first stage of money management when she's decided to take control of her life, is learning about the basic concepts, is paying down her debt and beginning to save. What comes before that?

Before that is the zeroth stage of personal finance, where a person doesn't exercise any sort of financial skills at all. Often, he isn't even aware that he should do so. He uses money without thinking. And, more often than not, he lives reactively, spending in response to things outside his life.

My behavior during the 1990s? That was all part of the zeroth stage.

Thinking out loud
During the month of March, I'd like to explore the notion of these stages of money management. Each Sunday I'll write about the next stage. It's a sort of thought experiment.

Generally my articles at Get Rich Slowly are polished and have a point, but these posts may be rambling. They're a chance for me to think out loud, and for you to help me refine the concept of money management “stages”.

What do you think of my model? Am I missing steps? Are the stages not as clearly delineated as I would like to believe? What step are you on right now? What challenges do you face? These are the sorts of things I want to talk about this month. It should be an interesting discussion.

Even if nothing else comes of this, I've realized over the past few weeks that my goal in life is to help as many people as possible escape the zeroth stage of money management. If I can help more people to join me in the third stage, that would be awesome.

More about...Psychology

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Funny about Money
Funny about Money
11 years ago

Interesting concept.

I think I’m in the fourth minus .5 stage: Got to where I thought I had enough and then some, but then watched it disappear in the tanking economy.

Not back at the beginning (yet…), but certainly not going to achieve the “why” of stage three: which for me was to quit trudging in to work.

Don’t know how that would fit in with the staging scheme, except possibly to consider whether under some circumstances a person might backslide or be knocked back to a prior stage.

Another Aaron?
Another Aaron?
11 years ago

Great Idea JD. Maybe the financial stages should be numbered -1 to 3 instead of 0 to 4. It just seems appropriate that the number should say something about the financial and mental states of each stage.

Rian
Rian
11 years ago

I don’t have any thoughts on the zeroth stage, but I do have a thought about the fourth stage. I suspect the fourth stage can be quite scary, because people who have struggled with money in the past are reluctant to start spending more simply because they’re afraid to fall into old spending habits.

Compulsive saving is a defense against compulsive spending.

Just a thought.

Chett Daniel
Chett Daniel
11 years ago

J.D.,

I really believe it takes some type of crisis or life changing event to get who are in the “zeroth” stage as you call it to take action and move forward. The problem is as bloggers we share information, we have to find a way to use that to help people change the psychology of why they spend money and then help them change their behaviors. That’s a tough challenge. I will follow this discussion closely as I have been wondering essentially the same thing.

ObliviousInvestor
ObliviousInvestor
11 years ago

Sounds like a good plan to me. I’m of the opinion that the best stuff comes out of delving into new ideas, “thinking out loud” as you put it.

I know that when I do that, 2/3 of what I write isn’t so hot, but the other 1/3 ends up being my most insightful stuff.

Nancy L.
Nancy L.
11 years ago

While there are people who are completely clueless about finances and are in a true “Zero” stage, I think more often the issue is the attitude that one has in a given stage. For example, I fully understood the concept of delayed gratification and of spending less than you earn. I just refused to put it in practice in my own life. If I wanted something, I got it right away, and worried about paying for it later. But even as I did this, I knew it was the wrong thing to be doing. It wasn’t until I was ready… Read more »

Sarah
Sarah
11 years ago

Great idea to post about financial intelligence levels! Right now we’re at level 3 and throwing money at a high yield savings account that isn’t so high, in preparation for buying our next house.
Zeroth is where we used to be!!! Funny how foolish it seems now!!

Aim
Aim
11 years ago

Very interesting. I needed to hear this, and will be tuning in throughout March!

Jim_W
Jim_W
11 years ago

JD- Your stages may align with psychologys’ human motivation theory/model Maslow’s Hierarchy.

http://www.abraham-maslow.com/m_motivation/Hierarchy_of_Needs.asp

Jorge
Jorge
11 years ago

I like the idea of stages, it makes a lot of sense to me. There is an old framework, I’m not sure where it comes from but it has to do with the stages of ignorance:

– first, you don’t know what you don’t know
– second, you know what you don’t know
– third, you know everything you need to know and are keeping abreast of new info

Seems to me there is some sort of a parallel there somewhere…

Linda
Linda
11 years ago

Tangential to Chett’s comments, you might want to include something on how we think about money at various ages in our lifespan also. I think perhaps more of us at at a true “zero” stage at age 20 than at age 50, although some people have money maturity early. I do believe my relationship with money has changed as my life maturity has increased, and they are related.

Jenna
Jenna
11 years ago

I agree with the above posts. Personally, I am in stage 2, putting my new attitude and knowledge into practice. All consumer debt paid, but still have student loans. Chett’s post hit it on the nose for me. What changed me and I still find fascinating is the psychology of spending, consuming and having stuff. Why do Americans in particular feel the need to upsize,upgrade,consume and literally stuff ourselves and homes with crap? I also think that our society has created a bunch of “self entitled” monsters. When we are in the 0 stage, we think we deserve it all… Read more »

Michael Neumann
Michael Neumann
11 years ago

I like the “stages” idea. I guess I am at the 3rd stage, the “frugality” part. Alot of people would say I am there and working on it all the time. But, I fail when it comes to food/eating. I hate to cook, I am 39 single, (40 this month, ouch) and it is so much easier to eat out than to learn a skill (cooking) that I hate doing. any thoughts?

racy
racy
11 years ago

Lee Eisenberg’s book, The Number, explored alot of these concepts. From the inner jacket: “How much money do you need to secure the rest of your life? Do you know what your number is? Do you know how to think about it? Do you know what you want to do with it?”

katy
katy
11 years ago

I think (for me) there is a step between 2 and 3; you’ve got the basics down but try to increase the income and allocate it better; put aside money for charity.

I could be fumbling in the dark too!

Jenni in NC
Jenni in NC
11 years ago

We are also in the 3rd stage… like comment #1 (Funny about Money) I worry about falling back to the 2nd stage… DH was laid off mid-January (construction); we knew this was likely and saved accordingly… We have $25k in E-fund (HY MMA @ our credit union) roughly equal to 18+ months of all expenses for after unemployment runs out… The only debt we have is our mortgage, and DH has not filed for Unemployment as he’s been able to find work for friends and friends-of-friends doing handyman & carpentry work… That said, we’d like to NOT have to spend… Read more »

Tyler Karaszewski
Tyler Karaszewski
11 years ago

I’v gotten myself into a strange position where I feel a lot more like I’m in the zeroth stage, back where I was in college, instead of in the third stage, where I’ve been for the last year or so. Th strange thing is I did it by *saving too much*. It sounds ridiculous, but it’s because of the way I’ve saved. I have a lot of money tied up in accounts that I can’t access. My 401k, for instance. I also have a lot of money being tied up in an Employee Stock Purchase Plan. It’s a fantastically productive… Read more »

Lizz
Lizz
11 years ago

In 2006, two very important things happened to me: I turned 18, and I discovered Get Rich Slowly. Though I’ve read every post, I’m not sure I’ve ever commented, and I wanted to chime in that J.D. and this blog are probably solely responsible for introducing me to the ways of personal finance – Turning on the light, so to speak, in such a way that I was no longer fumbling in the dark. Once that light was on, it was still my responsibility to keep my eyes open to what I was doing with my money, and I wasn’t… Read more »

James
James
11 years ago

JD, this post came at the right time for me. I’m 29, I’m in school full time (I got a late start). I’m living on campus, away from my home town, and I hit a financial aid snag this term that I just learned about. Now I’m faced with two months left of this term, and then a summer of limbo. I hope to get a job over summer, my class schedule won’t accommodate one now. I’m completely stressed. The money I knew I’d be getting, I spent on credit for things like gas and groceries. I can make my… Read more »

Tina B
Tina B
11 years ago

JD- I would like to hear more about your wifes part in your reformation, if she played a part? Did she ever bail you out? or did you never ask her to? I would imagine if you had a spouse that was always covering your shortfall you’ld never learn.

J.D.
J.D.
11 years ago

@Tina B (#20) Kris played a role in my reformation, but sort of indirectly, I guess. She was always encouraging me to make smart choices, and she put her foot down on my most egregious stupidities. Mostly she was a good example, although one I didn’t understand. She never bailed me out, and in retrospect, I’m glad for that. But I never asked her too, either. I need to make it clear that even when I was deficit spending, I never neglected my obligations. I never missed a payment. I was never even late on a payment. But for about… Read more »

Ross
Ross
11 years ago

JD – Check out the crown money map – http://crownmoneymap.org

It follows the same concept of stages going from living paycheck to paycheck to being financially free, although it focuses more on each action that you will need to take. I think you are going a little bit further though, and I am excited to see what you come up with for the “zeroth” stage. What is next for those of us who understand money and are already practicing frugality and personal responsibility?

Michele
Michele
11 years ago

Not everyone goes through each of those stages. It seems you are taking it from a perspective of someone who started adulthood in debt or not knowledgeable about money and finances. I grew up with parents who were smart with their money. So technically I was in stage 1 when I was 5 years old or so and opened my first passboook account. Since that age I always managed my money well. When I got out of college, I started saving toward buying a home right away. A year later I started saving toward retirement. I have always saved part… Read more »

CJ Smith
CJ Smith
11 years ago

I think I did the stages in a strange and twisted order. I knew my “why” (stage 3) from the start: financial independence and financial security! I want to retire some day. Low to no debt, healthy savings, and sound investments will be the only way I’ll ever achieve that. But stage two took some serious work for me, and as for debt, I’m still working on a mortgage. Like Funny about Money in comment 1, I’ve also regressed in a way. I hated my well-paying career so much that I threw it away, and I’m now in school full-time,… Read more »

KF
KF
11 years ago

Be careful with that fourth phase! The norm in America is to constantly redefine what “enough” means so that we are never content, we never stop wanting and “needing” more, and we constantly feel entitled and deprived. “Enough and then some” can mean just about anything. In America, it’s possible to earn very little, meet your truly basic needs, and still have “and then some” for all sorts of extras like travel if one chooses to live frugally in other areas of life (as you saw with your friend who passed away). It’s equally easy to take on a huge… Read more »

Steven
Steven
11 years ago

I would say that I am at stage 2 right now. I have learned the basics of money management for stage one and have begun to change my lifestyle to live more frugally and am saving money on a regular basis. I was able to pay off my last credit card the other day and have been working hard to unbury myself from all of my debts. I have created a list of life goals and am proactively working towards accomplishing them. I started my website to help inspire other people to do the same. I am very new at… Read more »

Greenman2001
Greenman2001
11 years ago

Your personal story is a very engaging one, JD, and I enjoy hearing it. But in all the times you’ve told it, you’ve never talked about the moment that you changed your thinking and your behavior. I’m interested in hearing about the exact moment you moved from stage zero to stage one, and actually succeeding in changing your behavior in a meaningful, lasting way. One reason I’d like to hear about that moment is that I think that, where your physcial fitness is concerned as you’ve described it at Get Fit Slowly, you’re still at stage zero. You make a… Read more »

Matt
Matt
11 years ago

For me the Third stage came first. I was able to reach the point where theories began to form about what money means and why people spend it as they do, and that set the motivation for the other three stages. The point was to financial mastery as a whole, not separately to getting out of debt and to getting rich.

ML
ML
11 years ago

It’s interesting that you wrote about buying stuff to fill an emotional void. “I was filling some emotional void by buying.” Now, instead of hoarding stuff, like comic books and DVDs, you’re hoarding cash. Are you still trying to fill “some emotional void?” I’m curious about this because I’m in a later stage of saving, where I’m trying to figure out what the right balance is, both a literal savings balance and the more metaphorical work/life balance. When you’re comfortable with yourself, when your wants are simple and your work is fulfilling, how much do you need to actually have… Read more »

Katrina
Katrina
11 years ago

These are going to be great. Go ahead and think out loud — you’re onto something your approach is very organic. We all need that, and you’ll stumble upon some great discoveries.

Mark
Mark
11 years ago

I really like how you’ve called it the “zero” stage. It already implies that you’ve done nothing toward any sort of ‘money control’ in your life.

However, as one person pointed out above – perhaps a ‘-1 stage’ is needed. That one is reserved for those that have gone wildly out of control and are already at – or very near – the brink.

The zero stage would be reflective of the total available cash – about zero. Never saving but not deep into debt either.

Charlotte
Charlotte
11 years ago

Very interesting concept. I am not as far along as you, I am debt free and just beginning REALLY saving but when I think about the economy and how unstable my husband and my positions at work are I don’t think I would be able to sleep at night if I were still at the zeroth stage. Right now if we lost our jobs we could get by with unemployment and our odd jobs that we like to do. We have some money in savings that we could sustain a bit past unemployment running out if we were having trouble… Read more »

Rose Fox
Rose Fox
11 years ago

Your stages talk about skills, but not about motivation. As you point out, it’s entirely possible to have the know-how without the give-a-damn. I think for many people, the turning point from 0th to 1st stage isn’t learning what to do but experiencing some emotional or psychological shift that makes them a) believe that there is such a thing as the future and b) care about the future more than the present. Without that shift, all the money smarts in the world won’t put a penny in your savings account.

Kerry
Kerry
11 years ago

Hi JD & everyone else – I’ve been subscribing to your blog for about two months & I really enjoy it. I have a question though (Bare with me!) I am a student teacher working 40 hours a week in a school, not getting paid, I work two extra jobs and am getting married in May. I’ll be finished with my teaching certificate then, as well. My fiance is a full time student and will be one for the next 3 years (convinced him to go back to school – almost through his first year, yay!) I know it will… Read more »

Regina
Regina
11 years ago

I am very thankful to have been graced with a husband who has a balanced life when it comes to money. I was the zeroith of the zeroisms – with a drug problem. I’m thankful, everyday of my life, for his insight into my being. He didn’t leave me, and now we are rebuilding our family. Thank our Lord and Savior Jesus Christ that our finances are not ruined. Throughout my “problems” we worked. Hard. He managed money – wonderfully. There is HOPE guys. Whether it be drugs, shoes or “control” of the money (because it’s your Savior,) you can… Read more »

David
David
11 years ago

I’d like to see more posts about the stages.

I would bet that most of your readers are somewhere in stages 0-2, so it would give us something more we can relate with.

You should be proud of how much you’ve helped people…I’m on the cusp between stage 1 and 2, and you were the spark that started my turnaround.

I’m sure there are at least a thousand other people who could say the same thing.

JK
JK
11 years ago

I definitely agree that there is a “pre” first stage that, unfortunately, most people fall into because of their lack of financial literacy. I believe the transition from that stage to the first stage is the hardest of all, and why many never begin to improve their finances. I definitely look forward to reading the fourth stage (and the zeroth).

Gustavo
Gustavo
11 years ago

For more than 2 years I kept track of every dime I was spending, but I didn’t use that information. At certain point, in the past few weeks I realized that my system was far from efficient (as I would love to think). I realized I was always spending more than I earned but fortunately I always had some unexpected income which helped me to balance the books. In January there were no extra income and tons of bills. My balance went below zero. Fortunately, I realized the problem and started a budget, in February. I’m excited about taking full… Read more »

Snowballer
Snowballer
11 years ago

Great post. I can so empathize, I’ve got tons of book knowledge that I just didn’t use for years. JD, your story and mine are all too similar, the only difference is you’re doing better than I think I probably ever will! It wasn’t that long ago I realized I was out of control. I realize now, that suddenly, I am just not the same person and I don’t ever want to be that other person ever again. So I’d say I’m probably pulling out of that zeroth stage. I’m in stages one and two simultaneously, stage one taking the… Read more »

Sarah
Sarah
11 years ago

I am kind of curious about how in your post you said you had a house full of stuff, now that you are making better spending decisions, do you find it more liberating to have less stuff to deal with? I’m also curious if all your stuff ever gave you problems with keeping it orgainzed, or put away. I know that free spending can lead to massive clutter, that’s one of the problems that we face, and though we are in stage two, and pretty muh always have been, that’s still one of those monsters that we can’t seem to… Read more »

indio
indio
11 years ago

JD, What you are describing is known as a capability maturity model, which is fairly commonly applied model in business and technology. Stage 0 is chaotic – no controls in place, no vision or direction. Stage 1 is Reactive – fire fighting mode, solves discrete problems as they come up (eg car breaks). Stage 2 is Proactive – controls and tools in place. Stage 3 – business aligned or have a vision of how to save the business money or run efficiently. If you want to learn more about and apply it to personal finance it was originally developed by… Read more »

Nicki at Domestic Cents
Nicki at Domestic Cents
11 years ago

You’re doing your job well 🙂 Your site has been an encouragement to me as I’ve been doing my best to quit the ‘fumbling’ and be purposeful with my finances.

Keep it up. I’ll be reading.

ldk
ldk
11 years ago

Interesting post….we are 38 and at the ‘now what’ phase and finding it the most difficult. We are debt and mortgage free and will have “enough-plus” saved inside of 5 years. Paying off the mortgage and student loans, starting businesses and learning to save and invest has definitely been a priority…now what? Will enjoy reading your thought process as you struggle with the same question.

Sundance
Sundance
11 years ago

Any encouragement out there for those of us with (expensive) teenagers? Seems like many in your post are single or two income earning adults. This fall I took a higher paying job in hopes of putting half my paycheck toward debt reduction. This fall we had a 13K home equity loan. Despite lots of belt-tightening on the part of my husband and me, we STILL have the same balance on the loan. Braces, car insurance, sports fees…we can’t get ahead! Anyone else been there?

Wealthier Every Day
Wealthier Every Day
11 years ago

I could have written that post myself, down to the details about having Quicken but not using it. And not balancing the checkbook? I did that for a long time as a method of avoidance. Seems as though, depending on the person, you enter what you call “the stages” from a different route. Therefore, rather than a zeroth stage, perhaps it’s identified as a “source stage.” There are those who enter from a position of strength – they’ve never had debt and just manage their finances properly from the get-go. There are those who enter with debt and are essentially… Read more »

Michele
Michele
11 years ago

I completely agree with the poster who mentioned backsliding. Twice now I’ve watched my scrimping and saving dissolve into dust after a layoff.

sai
sai
11 years ago

J.D.! The conceptual framework of the three stages of personal finance is excellent. When reading, it instantly makes the reader slot himself in his current stage and then think of the next level to aim for. I’ve become conscious about my finances four years back and am now, probably at the second stage.In the inital days, I concentrated on educating myself but didn’t involve my spouse in the learning process. My present challenge is to get her to learn these concepts so that she can appreciate my efforts in the direction of financial independence better. And thank you for the… Read more »

Ben
Ben
11 years ago

J.D., I think you should write a post on how exactly you and Kris handle your finances together and the pros and cons. When I saw above that Kris loaned you money and you payed it back, it sounded weird because my parents always used the “combined” money model. Anyway it sounds interesting and probably lets each of you feel a little more independent in your finances.

Sundance
Sundance
11 years ago

Still hoping for advice from other parents on how to pay off debt with kids in the house. I’d like to add that the expenses we’re incurring are not extravagant and we’re encouraging them to get summer jobs, etc. We do not over-indulge our kids. As a matter of fact, my 16 year old cracked up one of his teachers lately explaining the woes of being the only one without a cell phone. He said, “My family is practically Amish!” 🙂

Tyler Karaszewski
Tyler Karaszewski
11 years ago

I agree with Ben that accepting a loan from your wife and paying her back sounds strange. It’s just not the way my marriage works. In general, I pay for everything in the house. I’m in charge of earning the money and paying all the bills. My wife does work though, part time, and covers a few things herself. The biggest is a student loan she still owes some money on, but she also pays for her own gas, and her own cell phone bill, and for her clothes and such. If I were to get into a situation such… Read more »

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