The Psychology of Money – Why I Failed With My Own Finances

This is a real conversation I had a few years ago, and I think it nicely introduces the moment I began to really realize I had screwed up:

Me: “Hi! I’m Graeme. Pleased to meet you!”
New acquaintance: “It’s nice meeting you! What do you do?”
Me: “I’m a Financial Planner at ‘ABC Bank'”.
New acquaintance: “Well, you can’t be very good at it or you’d be retired by now.”

Needless to say, this was not an introduction that was well received by me, and that night I went home fuming. Although my new acquaintance became a good friend of mine over time, in that moment his comment really stung.

What was this guy on about? I was only in my mid forties! I was way too young to be retired!

But in reality, he had touched a nerve. Here I had spent most of my career helping and counseling others on their finances and investments, but deep down I knew that my own were in shambles. I was deeply in debt, I had very little in savings, and I was constantly anxious about the future and my prospects.

How did I end up here? What was wrong with me? Didn’t I have the inside track on financial success by virtue of my chosen career?

Let’s Get This Straight – It’s Not About The Math

So often in the personal finance and financial independence communities, advice and conversation is math focused. We discuss savings rates, withdrawal rates, spreadsheets, the fastest way to pay down debt, the fastest way to build savings and a myriad other topics that, in the end, boil down to yet another analysis of the math and functionality behind whatever is being proposed.

But here’s the thing: most people get math. As an accredited financial planner, I certainly did. I had tons of training and experience in financial math. Calculating loan amortizations, bond yields, P/E ratios, tax liabilities, compounded investment returns and more is easy for me. I have completed hundreds of comprehensive financial plans that include debt repayments, investment yields, savings rates, pension income streams, estate valuations, retirement drawdown assessments, tax estimates and so much more. Math is not my problem.

And math isn’t a problem for many, if not most, of the people who end up in financial trouble. When I think back to the clients I had over the years that were in poor financial shape, there were doctors, teachers, lawyers, realtors, accountants and business owners. One was even a marine biologist.

So what’s the deal? Why do these people so often fail to effectively manage their money?

Psychology As An Operating System

Humans can be thought of, in some ways, as being like a computer. Our psychology is like the operating system that other applications (such as ‘marriage’, ‘work’, ‘relationships’) operate from. The behaviors that result from these applications are like the output from a computer. In order to have high-quality output, both the application and the operating system need to be working well.

For instance: if marriage is like an application, the application can be improved by getting marriage counseling. But if the operating system (a person’s psychology) is bad – perhaps the individual tends to be domineering, angry, distrustful, or resentful – the marriage will never have high-quality output. It will likely never be a fully successful relationship. The behaviors will never be satisfactory. To be a success, both the application and the operating system need to be improved.

Managing personal finances is an application as well. Delving into functional and math-based subjects will improve the application to the extent that the recipient is learning something new about the process of managing money. But if the psychology – the operating system – is faulty, success in achieving satisfactory financial behaviors is unlikely.

How Psychology Impacts Real-World Behavior

I have written previously on how credit cards influence us psychologically to drive purchasing behaviors. This is a critical understanding for anyone wanting to control their spending, and really highlights the link between psychology and action.

However, the biggest and best-known real-world example of applying a fix to the psychological operating system I can think of is Dave Ramsey’s “snowball” approach to paying off debt.

What Dave does so well is understand that the key thing that keeps people in debt isn’t a misunderstanding of the math behind interest payments. It’s the psychology of facing a seemingly insurmountable mountain of debt in the first place. The snowball approach teaches people a debt-repayment system that addresses this common psychological barrier. This helps them to be more successful in building positive debt repayment behaviors.

Of course, from a math perspective, the snowball approach is sub-optimal. But everybody knows that. And yet people still insist on writing articles discussing that very topic. Some strenuously argue that paying highest-interest debt first is the only way to go, all other considerations be damned, because it’s the most mathematically-efficient approach.

But that’s like tweaking a computer application for efficiency while ignoring the fact that the operating system has crashed.

Computer Crash

A True Story of a Fully-Crashed Psychology

Years ago I had a husband and wife who were clients of mine. More than a decade before I met them they had built their own house. It was truly a labor of love for them. When they started they were probably in their forties and the plan was that this would be their retirement dream home.

The challenge was that by the time they came to see me they were in their fifties and had only modest retirement savings, along with a large mortgage and maxed-out credit cards and lines of credit. Despite both having solid middle-class incomes, they were not at all prepared for a retirement that was rapidly going to be upon them.

These were well-educated people with good jobs. They had been told by many people they were heading for trouble and they wanted me to fix it for them. We had many conversations about their circumstances, and the problem was clear: over the years they had spent, by their own estimates, more than $1-million on their house, which had been appraised as being worth maybe $330,000.

Further, they were still spending every penny they could earn or borrow. More than a decade after starting the house it still wasn’t fully finished and now they were looking at renovating some of the original rooms that were already done. Additionally, everything that went into that house had to be the best of the best.

After completing a financial plan, reviewing their home appraisals and showing them exactly where they were headed, they understood everything I presented and agreed it painted an accurate picture. They got it. They knew they had a problem and we all agreed on what the problem was.

And yet, nothing changed. Their love for that house, their vision of retiring happily and living in it until their last day on earth was so powerful, they were unable to act on critical information they knew to be both accurate and beneficial. It was sad. And there was nothing I could do about it.

It was a flawed psychological base that prevented them from applying the information that could have put them on the path to something better. What made it even tougher is that they weren’t even happy. It was like they had resigned themselves to the fact that they were unable to change even though they knew they should, and their present circumstances were a source of considerable stress.

My Own Psychological Impairment

So what about me? What was the glitch in my operating system? In truth, I think there were three:

First, I grew up in a stable home where money was never an issue. It wasn’t talked about and I always knew we had enough. That attitude carried on into adulthood, even though my circumstances were very different from my parent’s.

Although I only had modest income, I always assumed I would have plenty. I didn’t worry about leaving jobs, moving, carrying too much debt or being lackadaisical about my career. After all, we always had enough, didn’t we?

Second, I always accepted that what the people around me did was “normal”. I lived in an area where recreation was a big deal. It seemed everyone had a boat and an RV, went skiing all winter and played golf all summer. They lived in big houses and went on big vacations. I lived that life too because, well, isn’t that what everybody does?

Thirdly, I now recognize I had an unusually strong immediacy bias. I got an enormous emotional reaction to things that happened in the present, and had a very difficult time in valuing and appreciating what may happen in the future. For me, buying now was way more satisfying than knowing I had something put away for tomorrow. Logically, I knew that was wrong. But my emotional and psychological impulses were way stronger than any logic.

Fortunately, with age and personal experience dealing with negative outcomes came a change in outlook. Now I more instinctively appreciate having solid plans for the future. Having learned to hate the consumer mindset, I’ve stopped embracing what others consider “normal”. For a lot of my life I was walking a financial knife edge that I now want no part of.

I have, to a degree, successfully patched my operating system.

Results Not Excuses

Making Practical Application

So why am I fessing up like this?

I want people to understand that if you are in a position to help others, whether you are a writer, a blogger, an advisor, or whatever the situation may be, you need to address psychology before functionality. A person can have all the functionality in the world – I certainly did – but if the emotions and motivations and rationalizations are broken, the functionality won’t help. Functionality likely won’t change behavior.

Lastly, if you are struggling financially yourself, try to understand the psychology that may be impairing your ability to improve. Talk to a trusted friend or counselor. Decide what you want for your future and work to bring your thinking in line with your goals. If you can do that, your actions are bound to follow.

Important Disclaimer: the information above is for general informational purposes only and does not in any way constitute an offer for the purchase or sale of any security and is not intended to be considered comprehensive or personalized financial or investment advice. assumes no responsibility for the use or application of this information. Always consult a tax, investment, or other appropriate professional before adopting any new financial strategies.

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2 thoughts on “The Psychology of Money – Why I Failed With My Own Finances”

  1. Great post with integrity and honesty. The psychology of money and finance is such an interesting topic. It’s amazing how a person’s background and exposure to financial topics when they were younger, affects them and their initial approach to finance-related behavior.

    Well done post!

    • Thanks for this, Matt. I actually held off on writing this for quite some time as it is a source of some hard feelings on my own part.

      Hopefully it can help some folks avoid making the same mistakes.


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