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Personal Finance is All Behavioral

26 August 2010 5 Comments

Why do most people suck at personal finance?  By personal finance, I mean of course, the overall make up of one’s financial situation including their habits, their debt, their savings, their investing, their spending, etc.  So, why do people suck so badly at it?

Is it because they don’t know enough stuff?  Definitely not.  Because the reality is that personal finance knowledge is really basic.  It is common sense type stuff.  Spend less than you earn is not something that only college graduates can grasp.  It’s not about knowledge.

It’s about behavior.


When we repeatedly do something, it typically becomes a habit.  We have bad habits and good habits.  Much of our personal finance situation is driven by habits.  Here are some of mine (good and bad):

  • I tend to crave coffee on the way to work, and I tend to satisfy it
  • I don’t usually buy alcoholic drinks when I go out to eat – this significantly lowers the cost of eating out
  • I automatically transfer money into various savings account each month
  • I tend to tithe each month
  • I wear my clothes / shoes for a long time and get plenty of value from them

These habits are not about knowledge, but more behavior.  While I have some negative financial habits such as buying coffee on an almost daily basis, some have worse consequences than others.  For example, I don’t tend to feel the need to go buy a new car and assume a huge car payment.  $50 on coffee a month is better than $300 on a new car each month.  So, we all have various habits, but they definitely differ in degree of consequences and results.

Action Step: Take an inventory of your habits and list out the consequences of each one


When it comes to improving our finances, what is our motivation?  I would guess that some of the motivating factors for improving our financial conditions might be:

  • Lifestyle
  • Materialism (sometimes referred to as “keeping up with the Joneses”)
  • Retirement
  • Stress (removing stress)
  • Family

For me, my motivations are definitely lifestyle and definitely family with probably a little bit of each of the others.  What are your motivations?  Why do we care?  Well, when trying to convince someone to take various steps to improve their finances, motivation is an important factor.

For me, someone writing a blog about this topic, this is something I think about greatly.  Why should you care about the economy?  Why should you care about learning how to invest?  Why should you care about how to create another income stream?  You should care about all of the above because there is a real connection between these things and the things you want in life.

Action Step: Add your comment to this article explaining what motivates you and your finances

Social Aspects

The social aspects of money are very interesting.  This is bigger than just your lifestyle and being able to fund it.

Isn’t it interesting how when someone you know is making more money than you how it makes you feel?  You get a feeling inside you that they are better than you (whether they are or aren’t is irrelevant).  If he’s not better than you, how come he’s making more money than you?

While we all can agree intellectually that one’s pay doesn’t define the person, it’s hard to ignore the feeling that this awareness that I’m describing brings.  Part of our motivation with regards to money is to feel superior to others.  Admit it.

Are you trying to keep up with this guy?

Are you trying to keep up with this guy?

Furthermore, the idea of Keeping Up With The Joneses is entirely social.  We see what others have and we covet these things and we want to be able to show them off in a similar fashion.  Part of our motivation with regards to money is also to be able to show off the results of money – there is no easier way to show off the result of money than by our things.

This is the kind of conversation that I think more people identify with rather than conversations such as “5 Ways To Save Money On Buying Groceries.”  No.  Money is more personal than this.  Money is social and it is behavioral.

Action Step: Identify the social motivations that push you to want to make more money.  Do you think they are harmful or positive motivations?

Ok, now we’re getting somewhere.  I look forward to your feedback.  RSS readers, don’t be lazy.  Come to the site by clicking here and add your comments.


  • AaronA said:

    This is a wonderful idea for 20 somethings: think through what is important; PLAN. Quite fortunately, I adopted saving 15% of my monthly income when I started my career with a Fortune 500 company many years ago. I was 58 years old when my wife's breast cancer came back, so I was financially able to quit work and stay home with her during the last two years of her life. Fortunately, I have never again been forced to work, and at 67 years of age, moved to Barcelona . . . ONLY because I began saving & investing at age 24!!!!!

  • Luke said:

    My friend told me last night that he was getting a promotion at work. The first thought that went through my head was "Dammit!". Because as it stands he makes marginally more than I do, but he'll be well above me after this (and we're just naturally competitive with each other). But he hates his current job, so after the initial reaction I'm truly am happy for him.

  • andrewbpaterson said:

    Great post…you really hit the fundamental issue with respect to PF, that it's behavioural!!
    Personally, I am motivated by not having to work anymore so I can spend time with my family. If I decide to work (part-time) at this point, it would be to give us extra income for travel.

    Jacob's diagrams are simple, but very effective: http://earlyretirementextreme.com/cash-flow-diagr

  • tmgbooks.com said:

    The point of this article is very interesting to me and always has been so; I eanred my undergrad degree in psychology.

    TO: Money Saving Ideas: Your motivation is shared by countless others – the desire to escape the rat race! I achieved total financial independence and quit my job. Soon after, I discovered that there were some aspects of that job that I missed – mostly the interactions with co-workers and, as hard is this might be to believe, some of the routine!

    But I also figured out that I didn't need a full-time job to get my fill of those aspects of work that I missed. So, I went to work part-time, three days a week. I ended up teaching personal financial management at the college-level in an adjunct position. This allowed me to teach wothout much of the attendant stress and responsibilities of a full-time gig.

    Working part-time was a perfect fit for me! And the money I made was actually enough to pay the bills so my savngs just kept growing. I wrote a book about it; the name of the book is, THANK GOD IT'S WEDNESDAY!

  • nana said:

    What motivates me is to one day own a business that seeks to bring change in the lives of others.