Personal finance may appear simply to be about numbers, where you have to spend less than you earn, where you have to save a bit for a rainy day, and where you have to use your credit card sparingly; but I am convinced that personal finance is often more about psychology than it is about mathematics.
Everyone knows that you have to spend less than you earn but, as someone once suggested, it’s very much like one’s physical health, where we all know what we are supposed to do, we just have great difficulty doing it. In fact, running your finances compares well with losing weight. In theory, it is easy, but in practice it can be extraordinarily difficult. For weight loss, all you have to do is eat a balanced diet and exercise, and to be healthy financially you just have to spend less than you earn.
In both of these cases, however, we are constantly tempted. You visit a friend who serves you a home-made muffin. You know you shouldn't eat one, and you may even know how many kilometres you will have to run to burn the calories off. But they look so delicious that you decide to eat one now, enjoy it, and worry about it later.
Unfortunately, too many people take this approach to their finances. You have a budget in place, and you are going to stick to it. Just when you have announced to all “No more credit card debt for me”...something happens. A great bargain comes up - it could be a cell phone, computer hardware or software, motor vehicle, etc. - with exciting new features. You don't have R10 000 (or even R1 000) to spend on something you don't really need, and you have no idea where the money will come from if you put it on your credit card. But sometimes these things get the better of us, and you find yourself in debt (again).
As with losing weight, the best way to combat these sorts of impulses is discipline and goals. Financial goals serve as constant reminders of what you hope to achieve, and give you extra determination not to fail. When you reach for that new cell phone, you'll think to yourself "If I buy this, I won't be able to pay all of my debt off by next year as I had planned. In fact, I will be even deeper in debt!" And hopefully, after thinking this over rationally, your hand will move away from your wallet or purse. While you will not be able to show off your new item, you won't be experiencing anxiety over how to meet this month's credit card payment, either.
If the above approach has not worked for you, then it may be worth your while to begin giving some attention to the psychological barriers that keep you in debt and unhappy. If this is the case, it will be important for you to learn tactics that reward you psychologically so that you will feel much more inclined to meet your financial challenges head on. I discovered an example of such a tactic on the blog: Get Rich Slowly. The author used to spend almost indiscriminately and, as a consequence, was always in debt. On a regular basis he would decide that he wanted to clear the debt, and would begin the process. Time and time again, however, he would lose interest, and plunge back into debt. Finally, he decided to leave the debt treadmill once and for all, and began what he calls "debt snowballing." He looked at all of his debts, and paid off those debts with the lowest amount due first, dedicating all of his extra income to doing so. This way, he was able to eliminate a number of debts in rapid succession. And although the Snowball approach to getting rid of debt is mathematically suboptimal, seeing his debts disappear one by one really motivated him and kept him determined to clear out all of his debt entirely.
The psychological moral of the story is that an individual is rewarded with very positive feelings about knocking out his/her smaller debts. It may be mathematically suboptimal because you would save more money by paying off the highest interest rate debts first, but you lose the psychological benefit of seeing one of those debts disappear. While suboptimal, for many it is the optimal solution because it helps them overcome their debt. It may not make mathematical sense, but it does make sense psychologically.
The next time you have difficulty with your personal finance, be it spending less than you earn or saving towards something, try some psychological tricks and you may find that it is more effective in the long run.
ALISTAIR MORK-CHADWICK M.Soc.Sc(Psych)(UKZN)M.Ed (Natal) is a counseling Psychologist. He can be contacted on (033) 330 7973.
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