DW and I were talking about how personal finance can be easy in theory and hard in practice. I think the reason is that theory, like language, occurs in two steps. Passive and active. Understanding and speaking. Passively, yes, sure we understand that we should spend less than we earn, that we should save money. Actively, it is harder to translate thought into action.
One problem is that many people are more focused on method than on motivation. Give us 10 easy baby steps to riches, a list 200 sure fire ways to save money, or the easy way of dollar cost averaging an index fund, but lo and behold. People will pick the few items on a list that seems convenient to them but which considered as single items do not make much of a difference. For example, they may start using CFLs or turn the lights off, but this is unlikely to cause a huge change in the budget.
The problem is that the motivation is not aligned with the actions.
A very simple way to think about personal finance, and this is really all you need to learn, is to think of yourself as driving a car towards a destination. Let’s assume the car is an automatic. Then it will have an accelerator and a brake. For every action, you take, you have to stop and consider this: If I do this; if I engage in this activity am I pressing the accelerator or the brake?
Sadly most consumers are pressing the accelerator and the brake equally hard. Some even think that the point of earning money is to spend it. No wonder they’re not going anywhere.
To get ahead, you must either press the accelerator harder or ease on the brake. Apparently lots of people are not fully aware of just how hard they’re flooring the brake. Therefore try this exercise. Every time you touch something, ask yourself whether this item has accelerated your income or whether it has decreased your savings.
If it has accelerated your income, good for you. But ask yourself whether you could have gotten something with more oomph in it? Similarly, if it has decreased your savings, ask yourself whether you could have done without it or used something you already had?
Again, this means, for every decision, you must verify whether this is an accelerator decision or a brake decision. Once you start thinking in those lines it becomes much easier to avoid sitting on the brake.
Originally posted 2008-03-20 07:20:02.