What better way to start off the New Year than in New York with the TODAY Show? Despite the 18 below windchill whipping through the city streets, I had a blast with Sheinelle Jones and Craig Melvin discussing the most damaging forms of debt, the top two budgeting apps, the best kinds of checking accounts, how you should respond to market highs–and lows–and how best to stay motivated to turn those financial resolutions into long-term habits!
Click HERE or on the box above to watch the segment.
Have you ever noticed how likely we are to share our financial success stories, yet how hesitant we become when sharing our financial failures? Furthermore, have you picked-up on how we tend to attribute our success to our own brilliance but our failure to outside circumstances beyond our control? If it goes right, we credit ourselves, but if it goes wrong, it’s not our fault.
This syndrome is so common, psychologists have given it a name—the Fundamental Attribution Error—and while we’re inherently averse to recognizing it in our own behavior, it’s the likely culprit in most dysfunction in the realm of personal finance. But while we might have this innate self-centric orientation, there is something we can do to reconcile our perception with reality. It’s a little practice called TRUTH. It often hurts, but it always helps.
Truth has been around for several millennia, but we humans have a nasty habit of running from rather than toward it. Embracing it is often humbling, but incredibly freeing. A good friend of mine, Carl Richards, has become a model for truth-telling in the financial industry. He’s a well-renowned and brilliantly creative advisor who expressed the truth of his own financial missteps to the world in a New York Times article entitled “How a Financial Pro Lost His House.” He received almost universal support for coming clean, except, interestingly, from the financial planning community, where reviews were mixed and skewed toward condemnation rather than grace. It saddened me, but it didn’t surprise me from an industry built more on perception than truth. Fortunately, Carl is undeterred in sharing his story and inviting others to the truth party, to amazing effect.
So, what truth do you need to embrace? Start small. Admit that you weren’t actually a stock maven for buying Apple in the low hundreds—you just love your iPhone (or maybe it was an iPod back then). Then, take a bigger step by acknowledging that you’re not a real estate mogul for buying your house a year before (or after) your now underwater neighbor; nor is he a financial imbecile.
Or has your fundamental attribution error suffered an inversion? Maybe you’re positioned on the less green grass, suffering from one or more of the punishments doled out by the Great Recession. You wonder, now months or years unemployed, whether you only ever had a job because you were lucky and are meant, instead, to be an employment reject. “Maybe I just don’t have anything to offer society, even my family.” You imagine your short-sale, foreclosure or bankruptcy as a lightning bolt punishment from the cloud-bound Overseer. “What did I do to deserve this?” These scripts that run through our conscious and subconscious minds are no more true, and are often a great deal more damaging than financial narcissism.
If it sounds like I may have experienced some of these errors in judgment personally, it’s because I have, and I don’t know anyone who has taken the time to engage in some honest self-analysis in this arena who has determined themselves immune, unscientifically proving the fundamental nature of this attribution error. An interesting admonishment designed to help us live closer to the truth comes from Martha Beck in The Joy Diet, where she recommends we “create and absorb at least one moment of truth each day.” Philosopher Dallas Willard suggests—“Earning is an attitude. Effort is an action.”—and seems to find worth in the latter but little benefit to the former. Would you, then, consider taking less credit for your successes and failures, instead applying that labor to the work of simply making better (financial) decisions?
This is the fourth exercise in a series designed to walk you through an entire financial plan. The exercise is embedded in an Excel spreadsheet you can download and save for personal use. You can find the backdrop for the exercise HERE or just jump right in with the instructions given below:
If you refer back to the Personal Balance Sheet you created, you will have already compiled your debt information in the liabilities section. Next to each liability, put an “X” next to bad debt and a check mark next to better debt.[i] Then, transfer the bad debt to the Debt Elimination App available on our web site and customize your Debt Elimination Plan. List the debts in the order in which you will pay them off. If you want to get that ball rolling faster emotionally, take Dave Ramsey’s advice and pay your cards off in order of smallest to largest balances. If you want to save the most in interest payments, list the debts from the largest interest rate to the smallest.
When you make that last payment, celebrate! Take your next month’s payment—a significant chunk of cash flow that you’ll now be able to plough into more generous budget categories and investment for the future—and throw yourself a party. Invite family and close friends who’ve supported you throughout, and enjoy the peace of mind that comes with being debt free.
If you don’t have any Xs on your Debt Audit because you only have better debt, you need not put yourself through a financial boot camp, but deliberate over the debt you do have and consider whether or not a debt repayment acceleration plan may be right for you. If so, use the Debt Elimination App to plan your course of action.
Click HERE to access the app!
[i] There is no “Good Debt”—just “Bad Debt” and “Better Debt.” Bad debt is debt on ANY depreciating assets, including automobiles, but especially things like furniture, appliances and unsecured credit card debt. Better debt is debt on appreciating assets, like homes, education and businesses…within reason. If you’re curious how to differentiate between the two in your specific situation, email me at tim[at]timmaurer[dot]com.
In this special September of guest posts from four noted authors and bloggers on money and life, you’re in for yet another treat. J.D. Roth is an accidental personal finance expert. For over five years, he’s been writing about smart money management at Get Rich Slowly. He’s too humble to tell you himself, but his blog was chosen by Time magazine as one of “The Best Blogs of 2011.”
He’s the author of Your Money: The Missing Manual (O’Reilly Media, 2010), the personal finance columnist for Entrepreneur magazine, and a regular contributor to Time’s Moneyland blog. Really, though, he just wants to write about travel, but he’s been kind enough to give us a synopsis of the most potent lessons he’s learned as a personal finance blogger.
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Last weekend, I attended my twenty-year college reunion. In 1991, I graduated from Willamette University with a degree in psychology (and a minor in writing). I also graduated with debt. Not student loans—I was fortunate enough to have earned scholarships to pay my tuition—but something far worse: credit card debt. Yes, it’s true. I was one of those proverbial college students who was suckered into a life of debt by credit card offers in the student center. By the time I graduated from college, I had three credit cards, and was desperate for a job to make my payments on them.
And so it began. For the next five years, I accumulated more and more credit card debt, topping out at over $20,000 before I got fed up and cut up my credit cards. Even that wasn’t enough to stop me from spending. I borrowed from family and friends. I took out personal loans. By 2004, I’d acquired over $35,000 in consumer debt. It wouldn’t have seemed so bad if I’d used this $35,000 to pay for medical bills or to start a business. But I didn’t. I used the money to buy computers and comic books and other crazy stuff.
My story isn’t unique, and I know that. Lots of people make dumb mistakes. But when you’re living the dumb mistake, you feel all alone. You feel helpless. When you’re in debt, it feels like you’re drowning, like you’ll never make it to shore. Here we are in 2011, though, and things have changed. Seven years ago, I had over $35,000 in debt, and I was falling further behind every year. Today, I have over $35,000 in savings — and I pull further ahead every year.
How’d I do it? Well, I didn’t win the lottery, and I didn’t rob a bank. Instead, I spent several years making small, subtle changes. I learned how to live a frugal lifestyle, cutting back on the things I didn’t really need (like cable television). I discovered the debt snowball, a sort of mind game that allows people like me to finally pay off their debt instead of just wishing they had. I started to save for emergencies, for retirement, and for fun. I worked long hours to bring in extra income. All of this was hard work, but it paid off. In December 2007, I became debt-free, and I’ve remained so ever since.
Along the way, I’ve written about my progress at Get Rich Slowly, my personal-finance blog. I’ve shared my triumphs and my failures. Because let’s be very clear: I’ve made many mistakes over the past few years. Even today, I still do dumb things with money. These mistakes used to get me down, but that’s not true anymore. Now I know that the mistakes actually help me learn.
After more than five years writing about money, I’ve learned quite a bit just from personal experience. I’ve also learned by talking with my friends and neighbors, and from exchanging e-mail with hundreds thousands of readers. My financial education has come from their stories. What have I learned? Here are some of the most valuable lessons:
What makes personal finance interesting to me is the personal side of it. We’re not robots. We’re not computers. We don’t make financial decisions based solely on logic. Instead, we allow passion and emotion to sway our decisions. Don’t believe me? What are your hobbies? How much do you spend on them? How is that logical? Do you have pets? Children? Do either of those make much financial sense? And have you ever loaned (or borrowed) money from a friend or family member? How did that work out? Was that a situation you evaluated solely with logic?
I feel fortunate to be debt-free today. I intend to remain that way for the rest of my life. But that’s not enough for me anymore. I want to help others become (or stay) debt-free. To that end, I’ll continue to write about money at Get Rich Slowly (and various other places around the web). There’s a lot of practical information out there about the nuts and bolts of personal finance, but I feel like there isn’t much written about the mental game of money. That’s too bad. Because ultimately, it’s mastering this mental game that’s most important.