Psychology

The headlines at the end of the day Monday read:

Wall Street Sees Worst Day in 7 Years

That was followed by a 120+ point rise on Tuesday, and then a 400+ point drop on Wednesday. Ouch! Several people in my office were talking about taking all of there money out of stocks in their 401k and putting it into bonds or a money market account. And then….

And at the end of the day Thursday?

US Stock Market Rallies Most in Six Years

Now, I am certainly not predicting a rally here, as I have mentioned previously that I cannot predict the stock market ups and downs. No one can. Not you. Not me. Not the so-called “experts”. Haven’t some of the companies that employ these “experts” been going bankrupt lately?

While things don’t look too good right now when it comes to the underlying economics of this country, I don’t know how much further it is going to go down, or if and when it will start to climb steadily again. But what do the pros do in the midst of all this economic turmoil? They go shopping. In Warren Buffett’s case, they go shopping for other companies.

But what can regular people like you and me do?

Don’t stop contributing to your 401k.

Be smart with your money and spending.

Find ways to increase your cash flow.

Eliminate Credit Card Debt.

Above all, don’t panic! I do know, that if I had moved all of my money from stocks to a money market account in my 401k yesterday, I would feel much worse today than I do now. And since I don’t plan on retiring for at least 25 years (maybe more), I am likely better off not trying to time the market. It would be nice if the stock market went up gradually and slowly over the years, without any wild swings. People would feel a lot better. Unfortunately, it does not work that way.

Teaching kids about money involves several aspects. First, kids generally learn about the face value or denomination of money, usually when a parent or relative gives them a few coins, and may explain that a penny is 1 cent, a dime 10 cents, etc., and what each is worth relative to one another. 10 pennies is equal to a dime, 5 nickels equals a quarter, and so on. Later on, but they do not have to necessarily be in order, kids learn that money can be exchanged for goods, such as when a parent might explain that in order to get a toy that the child may see in a store, or on TV in a commercial they (or you) must exchange money for the toy. A little later on usually, kids learn that when they receive money, they can save that money up to buy something they want. They may not have enough money at the time, but if they save up money they receive, one day in the future they may be able to buy that certain toy or item.

Unfortunately, this is where a child’s education about money sometimes ends, even into adulthood.

The “real” value of money, in essence, is that it can represent future opportunity and freedom. Money should not only be thought of as a vehicle to purchase things, but as having value to allow one to make choices in life that one would otherwise be unable to make without it, have the means to take care of oneself or family, and have the freedom to make choices that being in debt does sometimes not allow us to make. Often, we are constrained by financial obligations and all of those things we must have and save up for, that we do not realize we are limiting opportunities and the freedom of choice when it comes to our lives that financial freedom can bring us. Not having enough money can limit our job choices, where we live, and what we do with our lives.

How do you teach kids about the value of money ?

• Start them saving early-Give them an allowance starting at a young age, and get them used to saving money-just for the sake of saving.

• Teach them not to save just to spend- If they save money for things, instead of saving for their future, it will be difficult for them to realize the freedom money can give them in the future. Making them save a percentage, and not taking every cent in the piggy bank to buy a new toy or game, is a good idea.

• Stress the importance of choice and freedom- saving money for education, experiences, etc., as opposed to materialistic things. It’s not always about things. Sometimes having money in the bank allows you to do things you would not be able to do without money.

• Use real life examples- Explain that if they buy the new Star Wars toy, they won’t have any money left. This will limit their choices in the future.

• Let them make mistakes, but point them out so they learn from them. It’s OK to let them make mistakes, but try to teach something when they do.

• Teach them to be generous- All the money in the world won’t buy friendships, relationships, or love. While money can be an important tool, relationships with people are more important in the grand scheme of things.

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If you work in a typical American office (hopefully not too much like the television show “The Office“), especially one in a city with an NFL franchise, you probably are familiar with the office football pool. Certainly, they are extremely popular come Super Bowl time.

For those not familiar, a football pool is a grid with 100 squares, with numbers going across the top and down the side, one team is assigned the row and one team assigned the column numbers. You buy a square by putting your name in one of the boxes. The numbers along the sides are not picked until after the squares are filled, so no one can pick the good numbers (like 3, 7, 0, etc. for football scores) ahead of time. At the end of each quarter, the last digit of each team’s score determines the winner. The squares usually cost $1 or so, for $1 the payout for each of the 4 quarters would be $25.

Is it a waste of money or just harmless fun?

I tend to fall on the side of harmless fun on this one. During a regular football season, there are only 16 games, 20 if you count preseason (which we usually have in my office) per year, and at $1 a square its not too much money. It can make an uninteresting football game, such as a blowout, a little more interesting, similar to how fantasy football has you watching teams you normally would not watch. The odds aren’t too bad, realtively speaking, 1 in 100. Compared to playing the lottery, I don’t think it’s too bad. A regular lottery player probably plunks down $100+ per year, if not more, and the odds are far, far greater. (The odds for the Powerball are 1 in 146,107,962)

That being said, you do have to watch how many of these $1 here and $1 there items you have in your life. If you have too many of these, they can add up to significant money. Having a few indulgences in your life however, can be a good thing. Not too many people can be perfect with their spending habits, and being too strict can sometimes become difficult to stick with. Having a little fun here or there can keep you from getting burned out and hopefully keep you on the right track.

When I was younger, there was always something I wanted to buy. Whether it was a new bike, a polo shirt (the polo brand, of course), or some other gadget, there was always something on the list. Now, I did save my money and pay for these things myself, so I guess my parents did teach me the value of working hard and saving my money to get things I wanted. In my teens, I was really into cycling, so I had to save up my money to buy a new road bike, and then of course, a new mountain bike. But my problem was, even into my late 20’s, was that I would save up to buy things, and would never really save for the future. I was never into really extravagant things. I have never bought a new car, but I would save up my money to put a down payment on the used car that I wanted, and then I would buy it, financing the rest.

Over the last few years, I have changed, and my spending habits have also. You can probably chalk a lot of it up to maturity, although my wife might disagree with that. But it wasn’t until about a year or so ago that I really started to consciously try to adopt frugal habits, or to get by with less when and where I could. It’s not that I don’t spend money, but I really don’t spend much money on things for myself. I try to make things last as long as possible, fix things when I am able to, and do without things if possible. I am perfect? No. But by making the conscious decision to not spend money on things I don’t really need, it has made life much more satisfying and enjoyable. It has also allowed me to make much more progress towards my goals of debt reduction, saving for retirement, and building wealth than I would otherwise be able to do.

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I am very fortunate to have pretty short commute to work, a little less than 3 miles each way. I basically live and work in the suburbs, although I am just a few miles outside of the city limits. This allows me to get to work and back in about 10 minutes each way, sometimes less depending on the traffic. But with all of the talk about “gas guzzlers”, and trucks and SUV’s being part of the “oil crisis” problem in this country, I got to thinking about whether these big vehicles with relatively poor gas mileage are the biggest part of the problem, or does the length of a person’s commute have something to do with it? In a lot of cities, it is pretty common to have a round trip commute of 50-60 miles (25 to 30 miles each way).

So how does lower fuel efficiency compare to the distance we drive?

If I drive 6 miles a day at 20 mpg and someone else drives 60 miles at 40mpg, what is the fuel and cost comparison? Using my commute as an example, compared to a longer commute.

6 miles/20MPG = 0.3 gallons x $4/gal = $1.20

60 miles/40 MPG = 1.5 gallons x $4/gal = $6.00

So someone who lives 30 miles away burns 5 x as much gas as I would, even if their car gets twice as many miles per gallon.

So should someone who chooses to drive a gas guzzler but only uses 1/3 of a gallon a day be blamed and vilified as part of the problem, when someone else in their fuel efficient car uses 5 times as much gas a day?

It is definitely something to think about. Life is about choices. One person may choose to live in the suburbs, someone else may choose to live in the city. You have certain reasons that you might hold as important for doing so, such as cost of living, better schools, etc. Someone else may like to live close to work so they don’t spend 2 hours a day driving. Sometimes it is about money, sometimes not. But I definitely think that the suburbanization of America is probably at least as responsible for our addiction to gas an oil in this country, and our subsequent problems.

When I was younger, I feared different things at different times of my life, from the fear of the dark as a kid, to the fear of rejection when talking to girls when I was a teenager. I guess I ended up growing out of most of those, however. I guess I really don’t have too many fears these days, but I do worry about some things, so I guess you could call those my fears. In the not to distant past, I have worried quite a bit about money-related issues, so many of my fears had to do with or can be relieved by proper attention and planning with my finances.

What are your biggest financial fears?

I could list many more that you may or may not have, but you can see how many of them relate to money. For each of the money related “fears” listed above, one can take positive steps to insure they happen or don’t happen, to achieve the desired result and alleviate your fears. Planning for your future can eliminate much of the “worry” about these issues.

What positive steps can you take to alleviate those types of financial fears?

Afraid of losing your money in the stock market?- Develop a diversified portfolio and invest for the long term.

Afraid of becoming disabled and not being able to work and earn income? - Look into purchasing a disability insurance policy .

What are your biggest financial fears? What steps can you take to alleviate those fears?

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I have become a firm believer in eliminating unnecessary expenses and adopting frugal practices. Not wasting money or resources seems like a good thing to do to me, both personally, for my bottom line, and for society in general. I am also a big believer that one should try to maximize your income. Making more money is always a good thing for your bottom line, provided it does not adversely affect your health, family life, or relationships, etc.

So which is more important or better and which one should people focus on?

Well, both. I do think one should eliminate unnecessary expenses and spend money wisely. But…

Increasing your income has the greater potential to improve your bottom line. Why?

Suppose you make $50,000, and your essential expenses (food, shelter, heat, taxes, etc.) are 60% of your salary or $30,000. This means you are left with 40%, or $20,000 that you might be able to trim. Some of these expenses might be considered pretty important to you as well. If you were to able to trim that $20,000 by 50%, you might knock down $10,000.

Now suppose you make $50,000 and you increase your income by 50%. That would be an additional $25,000.

Now, you could make the numbers say whatever you really want in the above example, but my point is that at some level you are limited in the amount you can decrease your expenditures. Most people need food, clothing, shelter, heat (and probably air conditioning depending on where you live), and many people have to provide this not only for themselves but also for their families.

If you had zero living expenses, you could not reduce them any more, obviously.

Your salary or income, on the other hand, theoretically is limitless. Now, it is unlikely that you can end up adding a billion dollars a year to your net worth, like Bill Gates or Warren Buffett can. But, you can certainly make large gains in your salary or income, by getting a better job, getting promoted, starting a side business, investing, and so on. So which one should you focus on? Both. Limit your expenses as much as possible, and work on ways to increase your cash flow and earn additional income. But the one with the greater potential is making more money.

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Part of developing a strong or burning desire to improve your finances, as I discussed yesterday, involves determining your motivation for achieving your financial goals. Another part of the equation in achieving your financial goals is employing key principles or traits for achieving these goals. Taking well known keys of success and applying them to your finances can help you achieve your goals. By implementing them, they can become regular habits and help you keep your desire to achieve the financial life you want very strong.

Key Traits for Achieving Your Financial Goals

Belief- Do you believe that you can achieve the financial situation that you want? The lack of belief can be very limiting to our behavior. If you don’t believe you can do something, it is likely you will put very little effort into it, and you may not even try. If you do not believe you can swim across a river or stream, would you even jump in the water?
Persistence- Being persistent in achieving goals means being repetitive with your actions. Making smart money decisions on a daily basis, paying off debt on a regular basis, and investing through ups and downs in the stock market are all examples of being persistent with taking positive steps to improve your finances.

Taking Action-You can wish for something all you want, but it takes action to actually achieve a goal. Just wanting to be financially independent is not enough. You must take positive steps in the right direction to arrive at your destination.

Visualization- Do you have a clear picture of what your goals look like? Whether it is a $0 credit card balance, seeing you child graduate from college, or a retirement home on a lake, visualizing these goals on a regular basis can keep them fresh in your mind and give you a clear picture of the goal you are trying to achieve.

Self-Discipline- Doing those things you know will improve your personal finances, even when you’d rather be watching TV, hanging out with friends, or doing something else takes self-discipline. Forcing yourself to focus on your financial situation, and seeing the results, will help increase your desire.

Refusal to Give Up- Don’t let setbacks or failures in achieving your goals cause you to quit or give up. The fact that you raided your emergency fund for $1k for car repairs will make little difference on whether you achieve your goal for 20 years from now, as long as you continue along the right path when it comes to your finances. Once you quit, you will never achieve your goals.

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It would be great if, once we realized that our finances were out of whack, we could flip a switch and change all of our bad spending habits, instantly pay off debt, and start accumulating wealth. Unfortunately, money, as well as life, does not work this way. Bad habits are hard to break, paying off large amounts of debt can be akin to an endurance sport, and reaching financial independence can take the better part of a lifetime. In this day and age, with instant access to resources via the computer and friends and family via email, text messaging, and cell phones, sticking it out for the long haul can be difficult. Motivating yourself to spend wisely and pay off debt can be hard as well. Developing a strong or burning desire can become necessary to make smart money decisions over long periods of time. Determining your motivation for achieving your financial goals is very important, as well as employing key principles of success to achieve your financial goals. Below are several sources of motivation you can use to help develop a burning desire to improve your financial situation, whether it be spending wisely, eliminating debt, or planning for financial freedom. Tomorrow I will discuss key traits for achieving financial success.

Sources of Motivation for Achieving Financial Goals

Self- The person you will be tomorrow when you wake up is influenced in part by your actions today. Similarly, the financial decisions you make today will influence your financial situation tomorrow. By defining the financial situation you want in the future clearly, you can remind yourself when making money decisions that the choices you make today will shape the situation you are in tomorrow. Where do you want to be financially in 5, 10, 25, or 50 years? Do you want to still be struggling, or do you want to be financially independent? Do you have clear ideas and goals? The future starts now. Are you satisfied with where you are financially now?

Family- Your wife, children, other family, or even friends can be a powerful motivation tool for achieving financial success. Who depends on you to take care of them? Even if you are not married, will someone depend on you in the future? Do you want to be able to pay for your children’s college education? Who will take care of the people that depend on you if you were no longer there? Should something happen to me, I would want my family to be comfortable, and my wife to be able to take care of the kids. Since my wife is a SAHM, and I am currently the only one earning income, that could be difficult if I do not get my finances in order.

Helping others- Living in a city that was devastated by a hurricane and flooding, I have become much more empathetic towards the problems of others. When a see an elderly man or woman struggling to rebuild their house nearly 3 years after hurricane Katrina, I wish there was something I could do to help them. Due to my current financial situation, I am not able to do very much in the way of donating money. I would like that to change in the future. Are there times you wish you could help someone financially, but are unable to?

Check back in tomorrow for Part 2, Key Traits for Achieving Your Financial Goals.

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