Monday, August 11, 2014
Behaving Your Way to Wealth
I was drawn to this CBS News article about five ways to go broke, because it has so much in common with the behavioral philosophy contained in these bi-weekly essays. Financial freedom, or at least avoiding going broke, is one aspect of a successful life that can be achieved through generally strong behavior in the key dimensions.
The author describes these as five traps that snare us, keeping us from getting ahead, keeping us from financial happiness. Let’s look at them one by one to see the behavioral connections.
1. Focus on looking good is about keeping up with or ahead of the “Joneses,” dressing to impress with designer clothing, buying in to the latest fads to be popular. People who do this are missing out on perspective that reminds us about gratitude for what we have instead of always looking for more. Perspective is also about moderation.
2. Live paycheck-to-paycheck: “Surveys show that virtually everyone who lives above the poverty line has the ability to save $20 a week. But 28 percent of the population has absolutely no emergency fund. Much of this behavior reflects poor discipline, the inability to delay gratification, to save for a vacation, education, retirement or emergencies. We want it all; we want it now.
3. Play the lottery, a system designed to take half the money and spend it on public programs, not on prizes. I’ve pointed out in the past that you get better odds from casinos than from the state lotteries and people still lose enough money to make those casinos very profitable. Faults in critical thinking lead to profitable lotteries, which have been dubbed by some cynics as taxes on ignorant people.
4. Buying on credit is cited here as a mistake, but the mistake is not the use of credit. The error comes when you pay the interest. Using a free credit card, paying it off monthly is smart living. You delay payments, don’t have to carry a lot of cash and get points or bonus cash. If everyone did that, the credit card companies would be hard pressed to stay in business. Economic understanding tells us that the interest payers help support those who use the cards wisely and come out ahead.
5. Being a victim encourages people to rationalize errors, looking for someone else to blame. “If you want to be rich someday, you need to take responsibility for what's wrong in your financial life, learn from it and fix it.”
Not surprisingly the five financial traps reflect the five key dimensions. You may not be able to behave your way to fabulous wealth, but avoiding these traps will help keep you out of financial danger. Likewise, this is true not only about money, but also relationships, health and life in general. When Americans ignore the key dimensions and consistently act in contrary ways, it affects their individual goals and happiness, and it also spreads like a plague through the rest of society. The real solution is found not in government programs or new initiatives or popular self-help books, but in everyone living according to these ideals. Until it happens America will continue to be beset by these familiar crises (retirement, poverty, education, debt, obesity, and the rest) that continuously rotate through the headlines.