Money is more about mind than it is about Math

This is the first of a fourteen-part series that explores the core tenets of Get Rich Slowly.

I had a group of old high-school friends over to the house last weekend. As the daylight faded and the cool of the evening settled, we sat around a blazing fire talking about life. We shared the good things we've done over the past twenty years — and we shared the bad. Inevitably, the conversation turned to money.

  • One woman confessed that she's a shopaholic. When she feels stressed, she buys things. To prevent her husband from finding out, she's the one who pays the bills.
  • Another woman has more clothes than she will ever wear. Her closets are packed so full that she's begun to pile new purchases on the floor — but still she buys more.
  • One of my friends admitted that he's sunk thousands of dollars into online videogames. After his divorce, he spent years addicted to his computer. (He's now turning things around: He quit gaming cold-turkey and is re-discovering friends and exercise.)
  • I told my own story of how I used to buy books and clothes and compact discs compulsively. “I'd bring them home and never use them,” I said. “I just liked the act of buying. It gave me a sense of power, I guess.”

Each of us had a story about how we'd done dumb things with money. In every instance, these dumb things were the product of some psychological or emotional impulse. We weren't acting rationally. We're smart folks — when we were in high school together, we were in the college-prep classes together — and we understand the mathematics of our choices, but we make them anyhow. Why?

Because smart money management is more about mind than it is about math.

The Psychology of Money

For years, the “expert” advice on personal finance has assumed that we act like machines, that we will always choose the mathematically optimal option. I've read countless personal finance books filled with advice that is technically correct, but which forgets the role our minds play in making financial decisions.

When discussing this notion — that financial success is more often influenced by personal psychology than by mathematical ability — I frequently cite Dave Ramsey's debt snowball. It's the perfect example of what I mean.

Critics of Ramsey are quick to point out that the math of his method doesn't make sense. Going strictly by the numbers, it's better to pay down debt by starting with the obligation that has the highest interest rate. The critics are right, of course, but they miss the point. In most cases, if we were being rational, we wouldn't have accumulated the debt in the first place. Most of the time, debt isn't a math problem — it's a psychological problem. Because of that, Ramsey's method — pay off the lowest balances first — makes more sense. It allows quick wins, which provide positive reinforcement, which provides a motivation to continue.

Here are some of the many other ways in which our minds play a role in money management:

  • Any time we loan money to family or friends, emotion plays a role. And inheritances? In the past year, I've had three people tell me nightmare stories about families that have disintegrated while fighting over a parent's estate. These are psychological and emotional battles, not battles about math.
  • Marketing (and advertising) is the science of persuasion. It purposefully influences our spending habits — even if we think it doesn't. When we reduce our exposure to advertising, it's easier to spend less.
  • I am in constant awe of what parents spend on their children. They want what's best for their kids, and most of them aren't afraid to pay for it. But it's not rational to buy clothes at Baby Gap instead of at Goodwill.
  • A lot of financial planning is about teaching the client to take emotion out of investing. Too many people make investment decisions based on psychological reactions to the economy and the stock market. It's these emotional reactions that cause people to buy high and sell low.
  • Every financial goal we set is based on our personal psychology, on emotion.

There's a burgeoning body of research that explores the many ways in which money management is more mental than mathematical. “Behavioral finance” and “behavioral economics” are explored in books like Why Smart People Make Big Money Mistakes — and How to Correct Them [my review], Why Smart People Do Stupid Things With Money, Predictably Irrational, Nudge, and Your Money and Your Brain.

Take Back Your Brain

We can never completely remove the emotional and psychological aspects of money management. Nor do I think we ought to. We're humans, not robots. But I do think it's important for us to reduce the negative emotional financial decisions as much as possible. Here are some of the best ways that I have learned to combat poor choices — to take back my brain:

  • Reduce exposure to advertising. Many people believe they're unaffected by advertising. Many people are wrong. As much as you can, avoid advertising. Watch less television (or watch it in a way that cuts out commercials). Skip magazine ads. Use an adblocker for your browser. The less advertising you see, the less you'll be persuaded to buy things you do not need.
  • Avoid temptation. When I was paying off my debt and trying to reduce my spending, I forced myself to stay away from book stores and comic shops. I knew that I lacked discipline. Rather than put myself in the path of temptation, I steered completely clear of it. If you're tempted at malls, stay away from malls. If you often succumb to peer pressure, don't go out for drinks with your friends. Stay away from the things that tempt you.
  • Automate. One of the best ways to trick your mind is to simply take it out of the equation. If you find it difficult to make smart financial choices, remove the choice. Sign up for auto-billpay. Set up an automatic monthly transfer from your checking account to your savings account. If you have access to an employer-sponsored retirement plan, take advantage of it. When you make things automatic, you cannot be sabotaged by emotion or psychology.
  • Practice mindfulness. When you're tempted to make a purchase, pause. Take thirty seconds to ask yourself if you truly need the thing you're about to buy. If it's a big purchase, force yourself to wait thirty days. Track every penny you spend so that you become aware of your weaknesses.
  • Read. Better education has helped me fight some of my mental flaws. The more I read about stock market investing, for example, the more convinced I am that making regular investments into index funds is the only way that I'm going to be a successful investor. It takes the emotion out of the equation.

I'm not sure what will happen with the friends I saw last weekend. Maybe some of them will continue to make the same financial mistakes. Maybe some of them will turn things around. But I do know this: The answers to their problems will not come from a better understanding of compound interest or another explanation that it's important to spend less than you earn. While these concepts are important, they're purely mathematical. In order for my friends to manage their money, they need to go beyond math — they need to master their minds.

This is the first of a fourteen-part series that explores my financial philosophy. Other parts include:

These are the core tenets of Get Rich Slowly. I intend to publish a new installment in this series every Monday.

More about...Psychology

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heyu
heyu
10 years ago

Very interesting post. Looking forward for the rest of the series!

Mike Piper
Mike Piper
10 years ago

“The more I read about stock market investing, for example, the more convinced I am that making regular investments into index funds is the only way that I’m going to be a successful investor. It takes the emotion out of the equation.” Bingo. Not only do index funds make sense from a mathematical standpoint, they make sense from a psychological one as well. With index funds, it’s easy to understand (and have confidence in) what you own. Personally, I invest in the world economy. And I’m overwhelmingly confident that, over time, that economy will continue to produce goods and services… Read more »

Martin
Martin
10 years ago

The biggest part of any issue is realizing you have a problem, be it with money, drugs, the way we deal with others, etc. We don’t often come to that realization without something external forcing us to realize it, because typically the way we’ve been doing things to date has been “working”, no matter how disfunctionally it’s been limping along.

So until you get something making you think about things differently, you tend to march the same path, even if it’s become a deep rut leading you right towards the edge of a cliff.

Gordie Rogers
Gordie Rogers
10 years ago

Spending money and eating food are the hardest addictions to overcome because you still have to do them to survive. You can’t just give up either one of them completely like you can with drugs or pornography.

I believe one way to look at it is to say that over-spending and over-eating are the addiction, not spending and eating.

Anyways, thanks for the thought-provoking post. I enjoyed it a lot.

Foxie@CarsxGirl
10 years ago

This is looking like a great series, so I do hope you follow through J.D.! I’m hoping to be aware of all my money habits, good and bad, before I start making more than I am now. That way, I can monitor the bad ones, work on the good ones, and hopefully end up better for it in the end. The hardest thing to remember is that I haven’t even gotten started yet, really!! (I realized last night that I do try to act like I’m much older than my age, but without all the stuff that goes with it… Read more »

B
B
10 years ago

All decisions are psychological, financial decisions included. They are not more psychological than mathematical; that’s an odd thing to say. Behavioral economists wouldn’t and don’t say that. They also wouldn’t suggest that shopping at Baby Gap or using the debt snowball isn’t rational. Classical economists would say that though, and they’re the ones who use strict assumptions about economic man. Behavioral economics shows us that the assumptions underlying classical economics are not realistic given how humans behave, but not less rational; it’s simply not the model they prefer.

jolyn@budgetsarethenewblack
10 years ago

You hammered this nail on the head. So many people feel like going on a budget is GIVING UP control and taking away all the fun. It is so the opposite. Budgeting is GAINING CONTROL and allowing us to feel true, long-term joy in how we spend the money we earn instead of a short-term rush and long-term regret.

JonasAberg
JonasAberg
10 years ago

While most people tell you that automizing is the way to go, I actually prefer to do everything myself. I feel more in control when I make payments and pay bills manually.
I have no problems with it either. I have both a long term and short term plan and stick to it extremely well.
Maybe I’m a control freak but it works best for me this way.

Aniruddha
Aniruddha
10 years ago

Nice one JD 🙂

I liked the ways you suggested to be in control of things like staying away from Ads and controlling the temptations.

Tyler Tervooren
Tyler Tervooren
10 years ago

Jonan (#6),

That’s an interesting perspective, because I feel exactly the opposite in my own situation.

I’m a recovering control freak and when I switched to automating my finances (auto bill pay, auto savings transfers, etc.) I was able to increase my savings rate by nearly 100%.

Of course, it didn’t start out like that and there were some bumps in the road along the way, but after switching over, it became much easier to gradually bump up my savings rate.

Rob Bennett
Rob Bennett
10 years ago

You re so right on in this post that it’s scary, J.D. You get it that in the spending area advertising appeals to our emotions and our emotions, not our logic, control our decision-making. I ask that you open your mind to the idea that the same phenomenon applies in the investing area. Passive Investing is the product of the marketing departments of the big mutual fund companies. There has never been a time in the history of the market when valuations did not affect the long-term value proposition of stocks and there never will be one. We need blogs… Read more »

rdzins
rdzins
10 years ago

I have to agree with the eating part, I lose a lot of money in the grocery store. I have a hard time with following a list and sticking to it, even though that is what the experts say to use. I guess I am a “good deal” freak. The grocery store is my weakness. I say I am only going to buy these items but I come out with much more and I have spent more than I planned, most items that I bough were excellent sales but I just can’t seem to get over the grocery budget part… Read more »

Linear Girl
Linear Girl
10 years ago

@rdzins – Maybe it’s time to try the Eating Down the Fridge challenge. I think Kim O’Donnel coined the phrase (currently at culinate.com and trueslant.com). The point is to skip grocery shopping for one week and just use what you’ve got on hand in the refrigerator and your cupboards. You don’t stock up ahead, just start from wherever you are. Instead of buying ingredients for a meal you’ve planned, you plan meals around the ingredients you’ve got. The benefits are saving a little money, challenging your creativity for cooking, and reducing the waste of things that might otherwise be thrown… Read more »

thebeave
thebeave
10 years ago

Right on! The 80/20 rule applies; 80% BEHAVIOR, only 20% knowledge.

Advertising and Marketing companies (especially credit card companies) KNOW this. Take a look at the documentary ‘Maxed Out.’

Food for thought…

Nancy L.
Nancy L.
10 years ago

I once read a great article about changing habits. (I apologize that it was so long ago that I have no clue how to find it) It said that we learn not to touch hot stoves because the result–a painful burn–has zero positive reward for us. But with other actions that are just as obviously bad for us, such as being irresponsible with money or eating foods that we know are unhealthy, there is actually some emotional or physical upside to the action, which is why it’s so difficult to break ourselves of those habits. The trick to changing a… Read more »

Ann
Ann
10 years ago

Great start. Will you be looking at how to take emotion out of financial decisions?

Martin
Martin
10 years ago

It all comes down to having a clear-cut and detailed operations plan ahead of time. When you have a detailed method for managing your budget (like the envelope system) or your investing (like an allocated percentage of various index funds that you rebalance once a year), it’s much easier to do the right thing than if you had no plan at all. Thinking about it in the heat of battle is what causes people to go astray. If you’re at the store looking at that merchandise, but you don’t have a clear budget and you don’t know how much you… Read more »

JakeIL7
JakeIL7
10 years ago

@thebeave: Usually I think you are right, but in the PF world that changes depending on what “stage” you are in (as defined by JD). At first, its alot more simple math (no way to get around your income having to exceed your spending, right?) then its almost all mental (not spending, changing lifestyle, etc.), then its more balanced (though the math becomes harder :))

I applaud JD’s article, but we *all* have to remember that you just cant take the math out of it.

Dustin | Engaged Marriage
Dustin | Engaged Marriage
10 years ago

This article summarized many conversations I’ve had with my broke friends! While my family has followed the path advocated by you and Dave Ramsey, many of our friends have allowed their emotions and their “I want it now” attitudes to run their life. Don’t get me wrong, we’ve made plenty of immature financial mistakes along the way. But today we are debt-free (other than our mortgage), sitting on a sizable emergency fund and getting ready to buy our next car for cash. I actually just wrote a blog post giving guidance about buying your first house. I fully expect to… Read more »

Denise L
Denise L
10 years ago

I love the debt snowball concept, which I first read about on GRS. My husband didn’t quite get it at first but hey, I pay the bills;)

Nowadays, I’m “practicing mindfulness” regarding my purchases…I only wish I didn’t get into the pattern of “retail therapy” years ago! What a dangerous phrase!

cory huff
cory huff
10 years ago

I had to automate my bill paying, or I never would have caught up on paying them. I’m often either too lazy/frustrated/busy to pay my bills – thank goodness for automated systems!

ebyt
ebyt
10 years ago

All good tips, JD. And it is so true regarding the debt snowball. I only had 2 debts (now paying down the second), but I found that eliminating the smaller one faster really gave me the boost I needed to tackle my larger, higher interest debt. I find the less debts you have to worry about, the easier it is. And I 100% agree with the idea that if people were rational, they wouldn’t get into debt in the first place. I find avoiding temptation works, too. One thing I like to do is leave my credit cards at home.… Read more »

Ranjan
Ranjan
10 years ago

The big learning from your post is that just having adequate knowledge is not enough to manage your money. You also need to be aware of your attitudes, values, motives, self confidence to manage your money.

The question I have is: “What would be the attitude, motives, values competencies for effective money management?

I can think of a few like risk taking ability, ability to analyse opportunities, long term orientation, etc.

David@DINKS Finance
10 years ago

I used to spend a decent amount of money when I was stressed about things. For example, night before the ACT I went to a few stores and spent about $60. Not a ton, but some of it was unnecesary. Now I try to recognize this and control it. Instead of going and buying a bunch of stuff, I might just treat myself to a chipotle burrito or a DQ Blizzard and go watch a dvd I bought but never used. The key is to identify our habits with money and control them. Not necesarily cut them out (tho I… Read more »

Kevin
Kevin
10 years ago

JD – I’m surprised that you would encourage people to use and adblocker with their browser. If too many people do that, how will you earn a living? I’m not being sarcastic and I’m not trying to be rude. But you don’t charge your readers so how else can you earn money? (Of course I have to admit, I’m a daily reader and I never click through any ads. I hope this doesn’t make me a free-loader!!)

Cindi C
Cindi C
10 years ago

This is the quality writing and deep thinking that will take you from blog to book. Books are something we return to again and again because of the depth of their truisms. Blogs don’t always hit that high a mark. Keep up the strong writing!

Debbie M
Debbie M
10 years ago

I’m glad you look at emotions as well as math. But in my case, I didn’t get into debt because of irrationality; I did it because of ignorance. I didn’t realize there were alternatives. It never occurred to me it could be possible to go to college without student loans. It took me a while to learn that ten-year-old cars can be reliable. That thrift stores have just as many things I like as malls do (not many). That certain kinds of things can be fixed instead of trashed. That some things we pay others for aren’t that hard to… Read more »

Aline
Aline
10 years ago

Great post, JD! We each recognize ourselves in what you’ve written. My strategy is to stay out of clothing stores – if I feel I “need” something I write it down to shop for at a later date. Generally when I look at the list later, I no longer have a desire for the item. It’s truly about mind games – if we can disrupt the thought patterns we have, we can triumph over those thoughts/desires. A recent trick of mine is to ask myself, will having this item make me feel better about myself? Will not having it make… Read more »

Penny
Penny
10 years ago

You are so right about the advertising.’ I consider myself an intellectual, immune from cultural pressure. However, when we moved into our current home, it still had cable television. I never realized how much advertising affects you, even when you KNOW what the point of advertising is. I would be watching television, see a pizza advertisement and crave a pizza. Fortunately, it was turned off a few month after we moved in. Now I wonder why I just didn’t leave it off or disconnect it…. Currently, we have no cable and the thought of paying for television causes shudders up… Read more »

Dad
Dad
10 years ago

I am amazed at how much less I desire stuff since we cutout cable. We’ve gone without TV for almost a year now and I have no desire to buy anything! Thank goodness my wife grocery shops!! 🙂

Remove the ad’s and you will be shocked at how much they were controlling you…

April
April
10 years ago

Great post. I hope more people start to understand that it’s not as easy as “stop buying” or “stop eating junk food.” The sooner they get that, the sooner they’ll be on the right road.

Matt Ainslie
Matt Ainslie
10 years ago

Good post; I especially like the point that debt is most often a psychological problem.

Have you visited the personal-finance website Five Cent Nickel? Just came across it and it seems pretty good.

http://www.fivecentnickel.com

Craig
Craig
10 years ago

A lot of money is the mindset, the whole act of shopping is a created mindset, and then buying more expensive items. that is where big money is spent on marketing.

Sceptor
Sceptor
10 years ago

JD,
I’m glad to see this type of article. This is exactly what we need to hear in this consumption based society. Nothing wrong with consumption but we need to pay attention to what we buy.

Keep up the good work.

Tyler Karaszewski
Tyler Karaszewski
10 years ago

I stole this paragraph from Arron Swartz’ blog (http://www.aaronsw.com/weblog/). He in turn is quoting “General Theory of Employment, Money, and Interest” by John Maynard Keynes: “Consumption – to repeat the obvious – is the sole end and object of all economic activity.” What are we making things for if not to use them? People can either be put to work making things for people to use today or making things for people to use tomorrow, but that tomorrow “cannot be pushed indefinitely into the future.” After all, an hour of labor cannot be “saved” and put into a bank for… Read more »

Stephen
Stephen
10 years ago

we live in a service society – that is most jobs rely on consumer spending, like comic books, togo foods, cellphones, books, clothing, magazines, etc.. Most if not all consumer spending is derived from wants, as opposed to needs. What happens to our economic axis once most spenders switch to savers?

ebyt
ebyt
10 years ago

@Kevin (#25): I thought ad blockers only banned pop-up ads. I don’t think JD uses any pop-ups. Your post reminded me that JD does rely a lot on advertising income… maybe I will click his ads more often to show my gratitude for his site 😉

In my opinion, advertising in general affects everyone – no matter what people say. You can control what you buy, however. I got myself into spending trouble in the past, but I have wised up and only buy what I really want, and know when to stop.

Brenda
Brenda
10 years ago

Heh.. it’s so true that removing the ads removes the temptation. I haven’t owned a TV for 5 years now, plus I use Ad Blocker on my browser. I don’t go to the mall unless I absolutely have to (like for an eye appointment at Sears). I get almost no advertising, and thus, I buy very little. I also track every penny I spend, which is extremely helpful (everyone should do this.. it’s very eye-opening).

Great article.

Jenne
Jenne
10 years ago

“But it’s not rational to buy clothes at Baby Gap instead of at Goodwill.” Having just had to break down and do some real kid shopping after several years of just Goodwill and hand-me-downs for the kids. Actually, sometimes it *is* rational to do so, if it means getting the kid 3 decent outfits that go together instead of piddling away $3 and $4 at a time buying a selection of used clothes that send you shopping some more to make up outfits. I’ve never used Baby Gap but we did make a run to Children’s Place for stuff that… Read more »

Garry - thisimprovedlife
Garry - thisimprovedlife
10 years ago

Great post. I certainly agree about taking back the brain. If we can train our minds to block out adverts and be mindfulness about any purchase, then I think we are well on the way.

Financial Samurai
Financial Samurai
10 years ago

Nice post JD. If you haven’t read “THE NUMBER”, go for it. It’s a great read, and talks all about the mind of money.

The longer I live, the more I realize education is key.

Cheers

Tyler Karaszewski
Tyler Karaszewski
10 years ago

@ebyt (#37):
Your assumption is wrong. Adblockers for web browsers prevent most ads from loading even in the original page. When loading images for a web page, the adblocker will check to see if they come from a long list of known advertising sites, and if so, will simply not display the image.

JC
JC
10 years ago

Great post! I’m looking forward to the next 12, too.

Bgirl
Bgirl
10 years ago

Actually, buying children’s clothing retail isn’t a bad idea, if you do what my sister did. At the end of each season, she’d go to Baby Gap and buy the kids t-shirts or turtlenecks…in the size she knew they’d be in the following year, and put them away. She’d pay $3-5 for a brand new t-shirt at the Gap in August/September, to be used the following spring/summer. She also knew what day of the week the various stores would rotate and mark down their stock. So if she saw something she liked on the front rack at full price, she’d… Read more »

quinsy
quinsy
10 years ago

@Jenne 39: All you have to do is buy BabyGap items FROM Goodwill! That’s the trick. When you shop at thrift stores, you don’t buy stuff just because it’s cheap. You find high quality items that also happen to be cheap. That’s the beauty of it. It’s not like other things where you have to buy something expensive to get good quality. I shop almost exclusively at thrift shops and 90% of the items I buy are brands like Gap, LL Bean, The Limited, etc. Most thrift stores have huge racks of every color clothing. So I’ve never found that… Read more »

cathleen
cathleen
10 years ago

@quinsy 45:
I don’t have kids but I’ve noticed that the thrift stores in my area (notably Goodwill) have outrageous prices! You can do better by buying on sale at places like old navy, gap, target, etc. I’m in SF Bay Area, btw.
I do know that your money goes toward vocational training but just making a point that prices vary around the country…

Slackerjo
Slackerjo
10 years ago

I’ve always wondered, before the days of credit cards, lines of credit, payday loans, over draft protection if people had these same “addictions.” Would there be a closet full of clothes, or daily trips to the mall or a gaming addiction. I mean, when the well is dry, it’s dry. Right?

Penny
Penny
10 years ago

Yardsales, my people, yardsales for children’s clothes and others. I nearly had a heart attack when I walked into the Motherhood store and the cheapest thing on their clearance rack was twenty dollars. I went to a yardsale and bought several pieces for two dollars per piece. I don’t see paying a lot of money for something I’m only going to need for a few months at a time or something that a kid is going to outgrow or destroy in even less time.

ebyt
ebyt
10 years ago

@Tyler (42): Interesting! That must suck for those relying on advertising income.

Robert
Robert
10 years ago

Frugality is a mindset–a very shaky one at that. You have to have the mindset or it just won’t work. Great post.

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