If Personal Finance Is Easy, Why Isn’t Everybody Rich?

Last fall I wrote an article describing how to get out of debt. Debt elimination involves three steps, I said: stop acquiring new debt, establish an emergency fund, and implement a debt snowball. A visitor named ST recently left this comment about the piece:

Seems that this post is about putting “overcoming your faults” over good financial sense. If you cannot equate credit cards with cash, that's your problem.

If you think the advice here is good financially, it seems that you should go into therapy instead. Go into more debt in order to figure out how to live within your means by dealing with what's making you act irrationally. A good friend of mine did that: therapy, then got a new job, then went to the bank and got a 6% loan to cover all her debts and paid off all her credit cards, starting with the highest interest (like any one with sense would do).

If, on the other hand, you're in debt because of extenuating circumstances or college is just too darn expensive, then do what all the books say. Make a budget, consolidate debt, use 0% offers, use the one credit card with a 0 balance as it is cheaper than cash. You'll get out of debt years faster than with this tripe. Come on, that bit about the “lowest balance,” is just inane. Why not do a balance transfer?

I get comments like this from time-to-time. “This stuff is easy,” some complain. “Why do you people have such a hard time with it?” These people are right — personal finance is easy — but I think they're missing an important point. While the concepts are easy, their implementations are not.

Human beings are complex creatures. Some of us are highly logical. Some of us are emotional. Most of us fall someplace in between. We rarely make decisions based on optimal paths; more often, we choose what makes us happy in the short term. I'm not saying that this is the right thing to do — it's just what happens. For those who routinely make financial decisions based on emotion, it can be difficult to turn things around.

Complaining that personal finance is easy and “why doesn't everyone do what they ought” is like saying that running a marathon is easy so why can't everybody run one? Most of us understand how to prepare for a marathon — eat right and run a hell of a lot — but few of us have the dedication and mental fortitude to complete one. However, with a little discipline and some hard work, most people can complete a 10k race.

It's the same with personal finance. It's easy to say, “To build wealth, you must spend less than you earn”, but it's another thing to do it, especially over the long term. In some ways, building wealth is more difficult than running a marathon. Training for and completing a marathon takes months. Dedicating yourself to a sensible financial plan is a lifetime process.

If personal finance were really as simple as understanding the math, we would all be rich. But it's not. And we're not. That's why I think any small financial victory is important. That's why I run this web site, and why I share whatever tips I can find.

I always say “do what works for you”. Some people are able to succeed by paying high-interest debt first. But some people — myself included — have only been able to succeed by trying another approach. The approach may not be best from a mathematical viewpoint, but I believe that any method that actually helps you meet your goals is better than one that doesn't.

More about...Psychology

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bornbad
bornbad
13 years ago

Also, a lot of people grow up with bad financial role models, which makes it difficult for them to ever learn financial responsibility.

Sho
Sho
13 years ago

Your point is an important one– behavior change is difficult. Is there a companion “Get [goal] Slowly” blog for fitness or weight loss? It’s “easy” to lose weight– in theory (exercise more, eat less and better)… but we’re not hardwired to do so.

Carisa
Carisa
13 years ago

If that reader thought your advice was so stupid, why are they reading this blog? Hehehe.

Nathan
Nathan
13 years ago

I agree in large part with the comment that this post was based upon. Personal finance isn’t that hard. I though I partly agree with your marathon/10k analogy, I think it needs to be changed, and here’s why. Most people act in ways that get them into debt before they realize it. I agree, not everyone can or wants to run a marathon, so they line up for the 10k. But that’s assuming they’re all on neutral ground, for a vast majority of people, by the time they even realize they want to run a 10k, they’re 20 miles behind.… Read more »

Nichelle
Nichelle
13 years ago

Might I add… Personal Finance (and weight loss, like mentioned above), is simple. It’s not easy. I think we know what is required to have wealth (or to lose weight), it’s just not easy to apply your knowledge. It’s definately something that has to be made a priority in your day-to-day life.

Nick
Nick
13 years ago

I agree completely. Getting out of debt is 5% financial principles and 95% psychology. Thats why for the VAST majority of people tricks like the debt snowball work very well. Yes financially it makes better sense to pay off the highest interst rate first. But psychologically, getting a few small wins along the way builds confidence, which keeps you on track. If personal finance was really as easy as just knowing the difference between a good decision and a bad one, there would be no long-term debt except mortgages and student loans. People know that spending more than you make… Read more »

J.D.
J.D.
13 years ago

Personal Finance (and weight loss, like mentioned above), is simple. It’s not easy.

Excellent, Nichelle. This is actually the distinction I was trying to make, but which I did not fully articulate: the distinction between simple and easy. I skirted the dichotomy, but wasn’t able to phrase it as clearly as you have. Bravo!

Sam
Sam
13 years ago

The process of getting out of debt is simple just like the process of losing weight is simple. Sadly lots of folks in this great country (the vast majority of people, even so called ‘rich’ people) live pay check to pay check with little savings. Also, the majority of the population is overweight. I think the reason behind debt and weight is really the same – its very easy to eat junk (fast food and the like) and its very easy to get and use credit and debt. Look at a poor neighborhood, you see fast food, pawn shops, check… Read more »

Liz
Liz
13 years ago

From someone who is overweight and also in debt, the theories of weight-loss and debt reduction are those that I inherently “know”, but I did find difficulty in applying. Why? Because for several years I was in a massive state of depression, where I couldn’t forecast into tomorrow, let alone next week. Why save money, and why worry about the future, when you don’t think you have one? And I think there is a person above that hit that nail on the head – what has helped me has been going to someone to get that cleared up first, before… Read more »

Liz
Liz
13 years ago

(and a quick PS – thanks to the debt snowball, I’m $3000 closer to my goal of paying my debt off. I think that’s pretty good, considering everything that is going on. I would have never thought of doing that until reading this blog, so thanks!)

Argonautica
Argonautica
13 years ago

I thought the smallest balance debt snowball was ludicrous…until I tried it. After all, the numbers just didn’t seem to add up- why not pay down the highest interest debt first? But I tried it anyway, mainly because I was listening to a lot of Dave Ramsey at the time. I started last October and paid off a handful of smaller balances totaling around $10k in the first few months. In the six months since, I have paid down a larger, slightly higher interest balance nearly $20k with about the same yet to go. Paying off those smaller balances had… Read more »

Shaine
Shaine
13 years ago

I think that criticism for paying off the lowest balance first is purely academic, probably less practical, because it overlooks the fact that

YOU ARE STILL PAYING OFF DEBT.

It’s like arguing whether losing weight by running is better than losing weight by reducing calories. Some people prefer one to the other or both. The end result is that you lose weight.

Similarly, paying off the lowest balance or highest interest gets one closer to the ultimate goal, getting out of debt. Personally, I prefer small victories leading up to the big challenge.

Adam Ferguson
Adam Ferguson
13 years ago

I’ll admit that I also sometimes wonder how people run into so much trouble. I’ve got my share of debt from school and a car, but I’m managing it fine and saving a ton.

On the other hand, I’ve seen people around me go down in flames because they choose to ignore the problem, or just can’t get a grip.

Regardless, at the end the day it’s hardly worth becoming belligerent about it.

J.R.
J.R.
13 years ago

I think a large potential problem with the original skeptics post involves a lack of behavior change on the part of the person with debt. Let’s presume that a person made a few fiscally poor choices, or accrued some debt out of ignorance, or during a certain period of their life. They decide they want to change the course of their fiscal life, and want to dig themselves out of debt. Good, everything has to start somewhere. Now, if they take the skeptics advice and use some debt consolidation (presuming they can get it), and continue to use balance transfers,… Read more »

icup
icup
13 years ago

“People know that spending more than you make can’t work mathematically, but people as a whole are overwhelmingly swayed by emotions.”

Yes, and, not only that, but the whole debt system is set up to obscure the fact that you are spending more than you earn. For the most part, people don’t think in terms of the big picture, they think in terms of payments. That car costs $25000? oh my, I can’t afford that! Oh wait, the payment is only $400 a month? well, I *have* to have a car, so I might as well treat myself…rinse, repeat, debt.

Jared Harley
Jared Harley
13 years ago

Most of us understand how to prepare for a marathon – eat right and run a hell of a lot – but few of us have the dedication and mental fortitude to complete one. However, with a little discipline and some hard work, most people can complete a 10k race. To continue your analogy to the debt snowball: Like everyone has said, financially it makes more sense to knock down the high interest first, and then work your way down. That’s like running a marathon and then saying, “The rest of these races will be easy!” Rather, a normal person… Read more »

joshuat
joshuat
13 years ago

I’ll bring up Dave Ramsey, since he is the biggest advocate for the lowest-balance debt snowball. He gets comments like ST’s all the time, or his callers do. His advice? Ignore advice from broke people. And, if broke people are making fun of your financial plan, you’re on the right track. I will go out on a limb and say that ST is broke, since he probably follows his own advice of borrowing money to pay off borrowed money. “I pay it off every month!” Right? Remember, Dave Ramsey went completely bankrupt and is now a multi-millionaire (he has said… Read more »

bocabrian
bocabrian
13 years ago

the biggest failure is personal finance spends to much time on saving not on creating…you cant save your way to riches…. top line (revenue) cures all… if you have enough income seven or eight figures a year, that solves a lot….

People should focus on how to increase earnings not saving their way to financial freedom!!!

bocabrian
bocabrian
13 years ago

spending money is the only way to make money!!! college, grad school, specialized/ valuable degrees (e.g., CPA), and/or starting your own business

other examples are real estate, stock market

sally
sally
13 years ago

To follow up the weight loss/debt reduction analogy, despite having a series of decent but not great paying jobs, I have never had the slightest problem living way below my income level with no temptation whatsoever to buy a new car (mine is 10 years old) or a big TV or daily $4 coffees or much of anything at all. I am just not tempted to spend money and accumulate materials goods. I don’t even think much about going shopping. On a monthly basis, the only store I go into is Wal-Mart for food and necessities and occasionally a t-shirt… Read more »

Clever Dude
Clever Dude
13 years ago

I trained for and completed a marathon, and I think I’d rather manage my finances than train for another marathon.

However, I’m both managing my finances well AND training for another marathon. They can both be done, but you need the motivation, fortitude and skills to accomplish both.

As a side note, I’m about 45 overweight, but I completed the Marine Corp Marathon last year.

[ this is jerry ]
[ this is jerry ]
13 years ago

incredible insight, jd. great post.

Wesley
Wesley
13 years ago

Agreed, great stuff. These comments are unbelievably personal. This blog affects many people in a very positive way (I’m a big fan). Keep up the good work!

James Kew
James Kew
13 years ago

@Shaine: no, it’s not moot. Yes, you are still paying off debt — and knocking out the small balances first may have very positive psychological effects that encourage you to stick with it — but by attacking low balances rather than high rates first you are paying more overall to get debt-free. A more valid analogy here is driving from SF to LA in (a) a Prius, (b) a Hummer. Both will get you to your destination; but one will cost you more than the other. But again — and I really think this is a running theme on GRS… Read more »

Jennifer Lynn
Jennifer Lynn
13 years ago

Many people forget how tightly intertwined financial management and psychology are.

As a small example, I personally find it empowering to stash away upwards of 20% of my paycheck each month. Psychologically, I realize I’m making a wise choice over the longterm. Many of my friends squirm and can’t wrap their minds around it though. Yet once they’ve tried it themselves (and gotten over that knee-jerk psychological hump of ‘oh, it must be so hard and depriving!’), they’ve become big fans of paying themselves first as well!

=^..^=

Moneymonk
Moneymonk
13 years ago

“If personal finance were really as simple as understanding the math, we would all be rich”

It’s not math it is attitude towards money. If you respect money you will not live above your means. Live that way you can on your paycheck nothing more.

But there are truly some things that are out of our control, you can budget and stay out of debt all you want. But once a emergency happens such as medical bills you are facing a financial hardship

Shaz
Shaz
13 years ago

If personal finance were easy, we’d all be rich. If weight loss were easy, we’d all be thin. We all know that. What I find a little offensive in that commentors note is saying that his idea was the only way to go. Just like with weight loss, one strategy is not going to work for everybody and I believe it’s arrogant to the point of willfully ignorant to think that way.

beloml
beloml
13 years ago

Personal finance, like dieting, is simple, but not easy.

Brenna
Brenna
13 years ago

In order for someone to become rich, the mindset has to be there. Anyone can say they want to be rich but the person should make finances an integral part of every day life. Saying you want to be rich is one thing and doing things to make you reach the goal of becoming rich are two different things. I’ve always told my husband that I want us to become financially free in 3-5 years. I believe in it and we have made that a core value. We have student loans and credit card debt as well as different savings… Read more »

J.R.
J.R.
13 years ago

bocabrian Says: June 8th, 2007 at 9:14 am the biggest failure is personal finance spends to much time on saving not on creating…you cant save your way to riches…. top line (revenue) cures all… if you have enough income seven or eight figures a year, that solves a lot…. People should focus on how to increase earnings not saving their way to financial freedom!!! spending money is the only way to make money!!! college, grad school, specialized/ valuable degrees (e.g., CPA), and/or starting your own business other examples are real estate, stock market This is not true at all. You… Read more »

Liz
Liz
13 years ago

//@Shaine: no, it’s not moot. Yes, you are still paying off debt – and knocking out the small balances first may have very positive psychological effects that encourage you to stick with it – but by attacking low balances rather than high rates first you are paying more overall to get debt-free.// But that is the whole point! As someone who is in debt, who attempted to pay off my higher-interest loans first, I wasn’t getting anywhere. Tell me to pay the smaller ones off – well, heck, $2K isn’t that much! I can do that! I tell you, I’ve… Read more »

Dave
Dave
13 years ago

Great post. I enjoy these “psychology of money” postings because I feel they deal with the true reason most people can’t save money.

Could you suggest any good books that deal with this.

Ron
Ron
13 years ago

I think another very important point is being missed. Kids today (people in their 20’s – I’m old) are taught terrible money management advice in school. Case in point: My children are being “taught” that the way to go to college is to take on massive debt through student loans. When I explained to them that they could also go to school full time and work full time (or alternatively, work part time but graduate later), exit college, degree in hand and no debt to repay, they look at me like I have two heads. It has been an up… Read more »

db
db
13 years ago

I think part of the issue here is a definate lack of compassion on the part of the commentator.

People get into debt for lots of reasons (like they gain weight for various reasons.) It’s not always simple neglector irresponsibility, and besides even if it IS such — what is more important is that people are trying to turn their situation around.

DB

Shaine
Shaine
13 years ago

@James Agreed, it is about personal choice. Some prefer to travel by Hummer and some travel by Prius. One will definitely cost more than the other. What matters is that you get there rather than stay where you are. Just as there are those who slavishly follow financial gurus, there are those who slavishly follow the math, as if we did math when we got into debt. You have to realize that many people do not do anything to get out of debt because they don’t know how to “do it right”. How much more will it cost to do… Read more »

beanspants1
beanspants1
13 years ago

i’m not so sure i agree that personal finance is at all easy. i would say it’s incredibly difficult, and you have to make choices based on data that is not at all intuitive. for example, most people work to minimize their monthly payments at the expense of paying more over time. that you should pay more up front to minimize *total costs* is not intuitive. I mean, doesn’t minimizing monthly costs help you spend less than you earn? doesn’t paying the minimal balance on a credit card also help you spend less than you earn? secondly, people are more… Read more »

Nacho
Nacho
13 years ago

I see lots of people going for the pay-the-smallest-debt-first strategy, and I wanted to chime in for the other side. I’m a very logical and analytical person and for that reason I see it strange that you would chose an suboptimal path when the “right” choice is relatively clear. The problem is financial, so the solution should be financial. If the problem is psychological there can be psychological answers. For example, maybe you can view your debt in a different format. Instead of thinking “I have 4 credit cards I owe money too”, you can view debt as “I owe… Read more »

m.g.
m.g.
13 years ago

Hmm. Well here’s something for you on psychology vs. mathematics that will probably make y’all scream. Every week we make a cash withdrawl from checking for our savings. We have a box where we stash our cash, and every couple months or so will eventually deposit it into savings. Sure, I’m missing out on a little bit of interest, but it sure is fun every week to count all that cash! We get to, almost literally, watch our money grow. We could just as easily do electronic transfers, but there’s just something about the weekly routine of counting the bills,… Read more »

Minimum Wage
Minimum Wage
13 years ago

I have to disagree; I think it’s unlikely that personal finance knowledge can make a person earning minimum wage rich. With any significant debt, a person earning minimum wage might not even be able to get out of debt.

Jeff
Jeff
13 years ago

I think more often than not, the Debt Snowball gets people out of debt faster than paying the highest interest rate first. Why? Because it takes advantage of people’s irrationality. Once people get rid of one or two of those little worry points (debts), they attack the others with gusto. They “cheat” by paying more on their debts than they planned. They pay pay early, and thow in extra money when they have it. Suddenly, not buying that shiny new X doesn’t feel like deprivation, it feels like strategy to get where you want to go. It all begins and… Read more »

SP
SP
13 years ago

@Dave @ Accidental FIRE says Here’s a list of some of the “psychology of money” books I have read: When Money is the Drug by Donna Boundy Making Peace with Money by Jerrold Mundis Taking Stock by Benjamin Blech Mind Over Money by John W. Schott Investor Therapy by Richard Geist Investment Madness: How Psychology Affects Your Investing and What to Do About It by John R. Nofsinger Credit, Cash, and CoDependency by Yvonne Kaye How to Get Out of Debt by Jerrold Mundis Overspent American: Why We Want What We Don’t Need by Juliet B. Schor The Paradox of… Read more »

JohnK
JohnK
13 years ago

I think the comment about minimum wage is getting off the topic. Whether you earn $12,000 a year or $100,000 a year, both people still have to do one thing first: Live within their means. Until you do that, you can’t get a handle on your finances. Obviously, its easier with more money, but some people still buy bigger houses and more expensive cars then they really need. While it might be a different kind of “struggle” compared to someone who has very little, both still have to work on it. One of the big reasons many lower income people… Read more »

A Tentative Personal Finance Blog
A Tentative Personal Finance Blog
13 years ago

What has worked for me was to consolidate my debt and pay off the smaller amounts first! Debt free and living large! Well, not that large, but happier.

Minimum Wage
Minimum Wage
13 years ago

I have never gone to a “mint to own” (sic) place, but I suspect that it just might be a bit cheaper in the long run to buy a washer there than it would be to use laundromats.

The Digerati Life
The Digerati Life
13 years ago

Great points. Finance is one of those things that is “easy to learn and know” but much tougher to execute. It’s tougher because of the sacrifice and delayed gratification that are rooted in good financial habits and which aren’t naturally inherent in human behavior.

Sam
Sam
13 years ago

Our broker has told us more than once that we are not making the smart financial choice by paying down our debt at the expense of not fully funding our IRAs (we are fully funding our 401ks). I agree with our broker it makes more financial sense to fully fund our IRAs but instead we are paying down $55,000 in debt this year and half of that debt (grad school debt) is at 3.5%. Could we earn more by fully funding our IRAs vs. paying down $26,000 in grad school at 3.5%? Yes. Are we doing so, no. Why? Because… Read more »

plonkee
plonkee
13 years ago

I wonder if some of this is to do with the way people get into debt in the first place. For example if its taken you a long time to generate significant debt then it can be quite hard to realise that its happening. And you’ll need lots of psychological tricks to stop yourself from doing it.

On the other hand if you got into debt not through continuous overspending, but a one-off event – like college, unemployment etc there might be less of a psychological component to your debt and so you can just do it the simple way.

Nick
Nick
13 years ago

The main point is to do what works. For many people, myself definitely included, running a net worth calculation is SCARY. Looking at a mound of debt is SCARY. It is just flat out intimidating to most people. They (I) usually just don’t know where to start. Starting with the highest rates first makes the most sense, but the chances of following through with it for the average person are very low. It IS psychological. There is usually a reason that account has a high rate, late payments, etc. You already have a history of fighting that balance and failing.… Read more »

Howard
Howard
13 years ago

I think both the person who responded and you have important points. In the short term, it’s best to find something that makes an incremental improvement. If paying off the lowest balance motivates someone to move beyond not paying at all great. The responder is also correct, however, that in the long run, therapy, coaching or personal growth methods might help improve even beyond this. For some people, being unable to delay gratification or do some of the psychological things necessary to take the optimal financial approach represent personality traits that the are fine with. For others, it may be… Read more »

Sandra, Washington, DC.
Sandra, Washington, DC.
12 years ago

I’ve watched family for years. They are so ignorant. I know it isn’t easy, but not even trying to change their behavior? Please.

They do the same crap all the time. Then, they come try to borrow money from me. I make less than a lot of them, and had more children.

Most of the time, I say no, except in extreme emergencies.

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