Budgeting and Cash Flow
Psychology and Habits of Budgeting
Up until now, this series looked at the techniques for building a budget and making changes to it. Now we will go beyond this into what drives your money decisions and digging into the psychology or money mindset that you have. Why is this important? When faced with choices about your money, you will apply your money mindset or habits to your decision making. If there is something that is not serving you well, it will hamper your budget decisions. If your habits are relatively consistent and mirror your life goals, you will have consistency in how you deal with your money which will make budgeting more effective. This is in effect being the sovereign of your cash flow. Examining your money mindset is optional in that you don’t need to do it to create a budget or realize longer term goals. In what cases is examining your psychology useful? The first case is if your budget is going well in terms of the numbers, but something is not satisfying about it. Another case may be that you are able to balance your budget and pay your bills, but there is a sense of obligation or misery that comes with it. A third scenario may be that you are having issues with your budget and doing all of the mechanical things correctly but can’t seem to make it work. A fourth case may be that everything is going well but you would like to do as much as you can with your money and want your situation to improve.
Psychology of Money and Your Decision Making
Below is a list of tendencies that people have in handling money and by extension these tendencies may show up in how decisions with money get made. The whole budgeting process starts with: What are your goals? What are your priorities? These priorities and goals are shaped by your thoughts and feelings, which in turn are shaped by your experiences and past choices. If you know how you make these choices, it will help you to examine what your money situation looks like. The list below is designed to get you to look at your decision-making process and ask if each item is relevant to you. You don’t necessarily have to change anything, but if you are aware of how you make decisions, it will help you to manage your money.
Are you afraid of handling money? Do you believe it is too complicated? People who fear money and believe it is too complicated will tend to give their power and their money to someone else, and will rely on trust to get their needs met. Oftentimes this trust is based on something external like credentials, experience or something that can be proven. If you inherently believe that you cannot manage your money, you may feel a loss of control over your finances and a lot of worry about your needs being met. Underlying this belief might be a larger one that says, “I don’t want to be responsible for my actions,” or “I am not good enough to manage this aspect of my life properly.” Part of the issue here is the societal belief that you need a university degree to handle money and that money is supposed to be complicated. In school, generally speaking, how to manage money is not taught to any extent, unless you purposefully study it; and in that case, you have to navigate through a lot of theories before gaining enough experience to properly understand what is going on. Most people think of money management as involving difficult calculations such as compound interest, and while understanding compound interest is useful, that understanding doesn’t get at what really matters. If investing can be simplified this way, other aspects of money can also be simplified in a similar way.
Do you deserve money? Is being poor an expected way of life? I have often heard people say, “My parents were not good with money” or “I wasn’t taught how to manage money.” In actuality, very few of us were taught how to manage money in an excellent fashion – many things are learned through exploration, trial and error, experience, and being mindful of other people’s mistakes. It is much easier to learn from someone else’s mistakes than your own – the trick is to remember the lesson learned. The emotional reaction that results from a decision you have made may not be present in a decision that another person has made. You can determine what sort of outcome you will receive in your life, and you can do it any time. Your thoughts drive the whole process, and they can be changed in an instant. Age and genetics are not relevant to this process, and neither is the past. If you feel somehow that you don’t deserve the money, either the money will never get to you, or if it does, you will find some way to sabotage your finances and be poor again. The best examples of financial sabotage are people who blew large inheritances or lottery wins. For most people, this effect comes in the form of lost-job opportunities, botched investments, or simple advice that is ignored in favour of something that has high odds of losing. You do not have to do what was done in the past, and your beliefs are not set in stone.
Is money being spent to make yourself feel good or to feed addictions? Addictions serve to “fill” a hole or desire that you don’t believe you can meet. The addiction can be anything: drugs, alcohol, shopping, dieting, running, internet use, overeating, cell phone use, sex, stock trading, ice cream, gambling, and the list goes on. It is not the activity that is the addiction, it is how you feel when you are doing it. If you do this activity to escape your life or your present situation, or because you are trying to overcome depression, and if there is an obsessive quality where you need more and more of this thing to keep you at the same level of satisfaction, then this habit is an addiction. Since most addictions cost money they will have an effect on your finances. The only way to heal these addictions is to figure out where you don’t feel well and where the programming that is perpetuating these negative feelings is coming from in your mind. Once the initial trauma or thought is discovered, brought to the conscious mind and cleared out, the addiction will not materialize and the financial effect will be eliminated. There are many ways this clearing can be done, but that is far beyond the scope of this series. Addictions are also an example where budgeting would not work, because they would not tell you why you spend such and such on the addictive activity; and since desires are insatiable, trying to hold them back would cause enormous stress and not solve anything.
Did you receive a large inheritance and squander it? Or did you squander a large work bonus or a great opportunity to change your financial situation? If you are not ready to handle the money, getting a large sum of it will likely not do you much good, since your beliefs will create the desired consciousness of lack, poverty or whatever, and you will “lose” the money to re-create the situation where your subconscious believes you should be. Your mind will, in effect, “sabotage” the scenario until it matches the beliefs that are currently present in your mental and emotional states. Further, buying a lottery ticket should be done only for entertainment. If you are buying it to escape your job or because you have dreams of making a big change in your life, this behaviour is a sign of your current state of mind. Even if you win the lottery, chances are you will lose in other ways. Instead of expecting to get rich quickly, make changes incrementally and you will have the freedom you desire.
Do you hoard money? Do you save money at the expense of enjoyment? Is there never enough money, even though you are a millionaire? This self-perceived lack will persist regardless of how much money you make or have. The issue behind this behaviour is believing there is not enough and fearing the loss of what you have. This belief and fear can happen regardless of how much money you earn, how much you presently have or how secure your mode of wealth is. Furthermore, this state of mind cannot be satiated, so it will find other fears to make you hoard even more, to satisfy your state of fear temporarily. The mind is masterful at creating fears, and there will always be another fear if you entertain it. If you require proof of this phenomenon, watch the news or listen to a security or insurance sales pitch; there is always a new way to lose data, have your house broken into, die in an accident, get an illness or have some other drama happen to you. When you purchase some device or take some measure to quell this fear, inevitably another fear will show up.
Do you tend to get into debt frequently and automatically? Do you expect that debt is a way of life and you will never buy things without using credit? Much of this reasoning is conditioning and a resignation that “this is how money is.” The use of debt doesn’t have to be that way every time. There are times when having debt is prudent, but be very mindful of the time needed to pay off the debt, the costs of holding it, and any possible changes to your situation where the debt costs may also change. If you choose to acquire debt, acquire it in a way so that the costs are the cheapest and the time to pay off the debt is the quickest.
Do you feel that money is evil – so you spend it because it is “dirty”? This is a common belief that comes from the saying “Money is the root of all evil.” Another expression that reinforces this idea is “filthy lucre”; however, these expressions are not necessarily true. Money is a tool that allows you to do many things, things that can be either “good” or “bad.” Is electricity evil? You can cook and feed people with it – or electrocute people with it. Are knives bad? You can prepare food with them – or kill people with them. Are cars evil? You can transport people with them – or cause an accident with them. This thinking applies to many things. It is the intention and state of mind that can make money “evil,” but in and of itself, money is neutral. It is okay to be rich and prosperous – it is what you do with that prosperity that determines what effect it has.
Are you buying because someone is telling you to buy? Translated into plain English, this means “I am not good enough,” or “I need to feel as if I belong.” Many of the fashion trends and fads key in on this idea. Peer pressure is also related to this idea. Awareness of how you perceive yourself is reflected in everything you do, including in what you buy.
Is what you are buying really what you need? Or is it an addiction or stimulant? How can you know? How long does the feeling of elation last after a purchase? If the feeling withers shortly thereafter, it is likely an addiction. The purchase is trying to make you feel good for the short term and yet covering up a bigger problem in the long term. Do you need a bigger “hit” or elation after each purchase, meaning you need to buy more and more of the same item to feel the same degree of joy? The underlying reason for why you don’t feel good in the first place is what you will ultimately need to deal with. Does the feeling of satisfaction with the item you purchased grow as time goes by, or is it fleeting and forgotten? Some hints would be if you are still using the product long after you bought it or if you have a closet full of unused items. The recent trend toward decluttering is really an exercise in uncovering – and clearing your habits and state of mind. If you embark on decluttering, be very mindful of how these items got piled up in your residence to begin with and what they signify for you. If you do not understand what is going on in your mind, you will just reclutter all over again. Have you used a certain purchase at all? Can you look back over time and experience joy over the purchases you have made, or do you have no idea what you bought and why? Notice that many of the things people cherish don’t cost much money—like photographs, heirlooms, or items that spark memories. This whole process is part of knowing yourself and what is driving your decisions. The process is to take patterns of behaviour from the unconscious and make them conscious, and then align the conscious and unconscious together so that they act as one or are aligned.