Psychiatrists say that realizing that you have a problem is the first step towards solving it. Maybe, but in my financial experience, what comes after recognizing the problem is more important.
After all, there’s no shortage of people who will tell you, loud and clear, when you have financial troubles. Overdue bill notices will come in, your checking account will be overdrafted, credit cards will be denied because you’ve reached your limit, you’ll be turned down for a loan, etc. So, when it comes to money, realizing you have a problem isn’t very difficult. It’s solving the problem that seems to throw people.
Psychology definitely plays a role here. Even after people realize they have a problem with money, they engage in behaviors that seem to actively avoid addressing the problem, and actually make that problem worse. Here are seven examples of those counterproductive behaviors that I’ve observed:
- Procrastination. I put this first because I consider myself a recovering procrastinator, so I know how destructive it can be. Most problems in life tend to get worse if you put off dealing with them, but with money there is an explicit cost to delaying – it’s called interest. Putting off coping with debt is like leaving a taxi with the meter running. That’s why doing nothing about your money problems is not simply a neutral position – it means you are making things worse every day you fail to act.
- False progress. I knew a woman with money trouble who saved every piece of aluminum foil to be reused. It gave her a hands-on sense of drastic economizing, like during an emergency. In the scheme of things though, the cost of a roll of aluminum foil was just a drop in the bucket compared to the financial problems this woman had, and what’s worse is that after a couple weeks of this dramatic scrimping she felt she deserved to reward herself with something like dinner at a restaurant. The lesson here is to beware false progress – actions that seem to be addressing the problem, but which don’t make a material difference and are not part of a larger plan to get your finances on track.
- The “my turn” approach. This is a trap that couples fall into. Money is tight, but Mrs. Jones decides she deserves a trip to the spa. Mr. Jones observes that, and figures if she deserves a trip to the spa, then he should get tickets to next week’s NFL game. Now, of course, it’s Mrs. Jones’ turn – and they take turns driving themselves deeper into debt. For couples, financial responsibility takes the cooperation of both spouses, and the best way to foster cooperation is to set a good example.
- Hiding the problem. Another problem couples run into is when one doesn’t fully own up to the extent of a problem. I know a woman who would consult her husband for help only when a credit card had reached its limit and she couldn’t keep up with the minimum payments. What she wouldn’t mention is that she had three other credit card bills that were almost as bad. Solving money problems requires a plan that works towards an endgame, and to know what that endgame is, you have to know the extent of the problem.
- Misplaced anger. Sure, you can get mad at the credit card company and refuse to pay them on time. But when your account incurs late fees and your interest rate gets jacked up because of your poor payment history, what have you really accomplished?
- Skillful juggling. I know people who take great pride in shifting balances among credit cards, taking advantage of zero interest balance transfers and always using the card that still has credit available. In the end though, all this activity is just lateral movement – it doesn’t get you anywhere. In fact, opening too many new accounts can hurt your credit rating, resulting in higher interest charges.
- Waiting to be forced. For any or all of the above reasons, too many people fail to take action until they are forced to, but being forced means you have fewer options. At that point, interest and fees have added to the problem, credit cards are maxed out, and damaged credit makes new borrowing either more expensive or unavailable. Facing the problem before you are forced to means being able to address it on your terms.
Perhaps it’s no surprise people act this way, when you look at the example our government has set. For how many years has it been clear that the federal budget deficit was getting out of hand? And for how many years have both Democratic and Republican leaders failed to address it?
Take that as motivation to address your own financial problems more constructively. You’ve always known you could do better than those guys in Washington; prove it by getting your own budget under control.