By Tim Herrera
Like a lot of Americans I was very late to the game, in large part because there’s no formal system in place to teach us how to manage our money. There are tons of invisible forces working against us, and the end result is that being good or bad at money is sometimes viewed in moralistic terms or as a measure of someone’s character.
And that’s nonsense! Personal finance management is a concrete, learnable skill, just like driving a car or throwing a baseball. We just have to get beyond the structural and cultural roadblocks that prevent us from talking about it.
That’s why today we’re launching Personal Finance Week here at Smarter Living. Every day this week we’ll publish an article to teach you about managing your finances, with everything from tools to help you budget to a look at the psychological impediments that prevent us from addressing our problems in the first place.
Tim Herrera: So, uh, why are so many of us so bad at money?
Kristin Wong: So many reasons! It’s an intimidating topic because we have no idea where to start, and it’s hard to talk about money because it’s such a taboo topic. We’re discouraged from bringing it up at a young age, and we’re taught that it’s impolite to ask how much someone makes or how much they have saved. It’s hard to learn about something when no one talks about it openly. Combined, this all makes it easy for us just to ignore money altogether.
TH: What’s the first thing you’d tell someone who knows they’re bad at money and wants to get better?
KW: Ask yourself why you want to improve in the first place.
Most of us approach it this way: We’re getting older and it’s time to be a responsible adult, which means getting our financial lives in order. I think it’s more effective to actually ask yourself specifically why you want to be better with money.
Do you want to travel more? Move into your own apartment? It’s important to frame your relationship with money this way, because otherwise it’s just a chore. The first step is a mind-set one — figure out your why. From there, the first practical step is to track your spending. And I don't mean just budgeting, but actually writing down every single thing you spend money on for, say, a month. Most of us think we know what our spending looks like, but you might be surprised at all the stuff you’re tempted to buy when you force yourself to write down your purchases.
TH: What’s a good system to track spending? What do you use?
KW: I use good, old-fashioned pen and paper. I keep a small pocket notebook with me and write down my purchases. And I go a step further and I write down the stuff I’m tempted to buy, any notes about how I feel when I want to spend money impulsively, and any habits I notice. It sounds very touchy-feely, but learning to be good with money has so much to do with learning to manage your habits.
TH: Are there any apps or services you like in particular?
KW: For budgeting and managing money in general, I’m a big fan of Mint. They’re probably the most popular option because they have so many fun features that make it really easy to keep track of your spending. I’ve never used these myself, but for tracking I’ve also heard people recommend Expense OK and ExpenseKeep.
Wirecutter, a New York Times company that reviews and recommends products, picked You Need a Budget as their top budgeting app, and I’ve also heard wonderful things from users of YNAB.
TH: O.K., so first we need to figure out why we’re trying to improve our finance game, and now we have some tools for tracking our funds. You talk a lot about building better money habits, but how do we do that?
KW: It helps to understand our cognitive biases around money and the weird ways our mind can work against us when it comes to money.
The concept of anchoring is a good example. It’s a bias where we rely too heavily on one piece of information to make decisions. So, for example, let’s say you’re at a restaurant and you see their featured menu is a $20 cheeseburger. You think, “Whoa, who would pay $20 for a cheeseburger?” Then you see a cheeseburger for $15 and you think it’s a good deal, so you order it. But it’s not actually a good deal, it just looks that way compared to the $20 anchor. We often think we have more control over spending decisions than we actually do.
Couponing is another example. Some research shows people spend more on stuff when they have a coupon. We get a high from saving money when we coupon, and that makes us feel good, which makes us want to shop more.
Spending is often a really emotional experience, and the most important way you build better habits around money is to understand the emotions that come with it.
TH: How else can we build better habits?
KW: Try to figure out what your money script is, which is basically your money personality.
We all pretty much follow four different scripts, or patterns associated with money, according to Dr. Bradley T. Klontz, a financial psychologist and Certified Financial Planner.
There’s Money Vigilance, which is when you’re super careful with money, and the script we should strive for. After that:
Money Avoidance: When you convince yourself money isn’t important and you don’t care about it.
Money Status: When you equate self-worth with net worth.
Money Worship: When you think having more money will solve all of your problems.
Everyone’s habits with money are going to be different. If you want to improve yours, it’s crucial to understand your relationship with money and how you approach it so you can pinpoint bad habits. If you don’t deal with the emotional side of money management, the practical stuff might not work.
TH: Last question: You’ve become such an expert at money, but were you always that way? What was your path?
KW: Absolutely not! I used to be pretty terrible with money, and to be super honest, sometimes I still am. I overspend, and I could probably stand to save more for retirement.
But I feel much better about money these days because I’ve learned to let go of the shame I associated with it. We sometimes feel so ashamed about our money habits because there’s so much judgment around money! If you’re dwelling on a past mistake you’ve made with money, or you just feel like you’ll never be good at it, you tend to avoid it altogether.
It’s important to let go of those past mistakes and try to drown out the finger-pointing around money. If you can find a financial resource — a book, a podcast, a blog — that makes you feel positive about your relationship with money, stick to that resource and keep learning a little bit about money at a time. Even the “experts” slip up every now and then, because to be bad with money is to be human. So don’t be too hard on yourself.
TH: Thank you so much Kristin! Any last words?
KW: Don’t think you have to learn everything about personal finance overnight. Being good with money is an ongoing habit, so invest the time and energy in learning about it a little at a time.
Illustration by Benedikt Rugar
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Tip of the Week
This week I’ve invited Emem Offong, a UX design consultant in Brooklyn, to share a budgeting trick for Mint that might help you avoid some of the guilt that comes with not spending your money the “right” way.
After years of attempting and failing to use Mint as a budgeting tool, I realized the frustration I felt came from the sheer number of categories Mint imposes on users for nonrecurring expenses.
My monthly budget could easily reach 15 to 20 categories, some which of which — like “restaurants” — are almost impossible to predict because they change each month depending on my social calendar. Setting spending goals for nonrecurring expenses like that can be near-impossible, since you never know if this is going to be “$50 on entertainment” month or a “$250 on entertainment” month.
So to simplify my budget, I split my expenses into only two categories:
Recurring expenses: This includes rent, gym memberships, savings and the electric bill — things that generally won’t change from month-to-month.
Personal spending: This is everything else, like restaurants, movies, bars, bodega coffee, whatever. By leaving this category broad and vague, I can spend all of the money I’ve allocated for it however way I see fit — guilt-free.
So, for example, say I have $1,000 in “personal spending” for the month. If I’m feeling culinarily adventurous, I can spend $600 eating at restaurants and, as long as I don’t go over my total spending limit, I’m still sticking to my budget.
From there I can track these expenses using tags, like snacks, Broadway shows and eyebrows, allowing me to watch my spending in a much more granular way.
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