A few years ago, I found myself in the odd position of coaching the second and third-grade girls’ basketball team at my daughter’s school. Odd because I’ve never played the game and I’m kind of foggy on the rules. I had actually signed my husband up to coach because he played college basketball and I had imagined a lovely father-daughter bonding experience. Then he had to work. A lot. A friend with the same idea signed up her husband. He’s a surgeon, and not an avid player either. (Despite being frequently on-call he showed up more than my husband.)
So the good doctor and I listened to the advice of a veteran coach who suggested we teach the girls some plays. For example, the “pick-and-roll” play involved having the forward set a pick on the shooting guard’s opponent, so the shooting guard could roll around to the left, move to the post, take a pass from the point guard and shoot a layup.
This was a little complicated for seven and eight-year-olds, to say the least, but in our first game, they actually did okay. There was only one problem. They had never really learned how to catch a pass.
The more cherished the goal, the easier it is to avoid the frivolous spending that hijacks your long-term plans.
The point guard would pass to the forward, who would immediately drop the ball, which the other team picked up, dribbled down the court and scored. Again and again. (Our opponents were fourth graders who had been playing since kindergarten. One of them, the daughter of a professional football lineman, was about eight feet tall. So they had a slight advantage.) Final score: 35 – 5.
After the thrashing, my husband just looked at me and said, “First they have to learn to catch the ball.”
I thought that was a perfect metaphor for personal finance. I see people do funky things with money all the time, things that make them unhappy and derail their dreams, because they never learned the financial equivalent of catching the ball. So here’s a refresher on four basics of money and happiness:
1. The money has to come from somewhere
I can already hear a chorus of “well, duh” among the readers of this post. But if everyone understood how a purchase in one area of the budget depletes resources from another, no one would ever overspend. Everyone would live within their means, make rational financial decisions, the federal budget would be balanced and bankruptcies and foreclosures would be a thing of the past. But that’s not the reality, is it?
Tracking spending is easy when you pay for everything in cash. But checks, credit, debit, electronic payment, etc. make the trail harder to follow. Toss in payments made quarterly or annually and you have a murky soup of spending.
I use online budgeting software that links electronically to all of my accounts, and lets me set up a budget “envelope” for each category. When I buy the kids new sneakers, the expense shows up in a “transactions” folder. I click and drag it to the “clothing” envelope, and it goes down by that amount, so I know what I have left to spend on clothes for the month.
If I go over budget on clothing (forgot they needed soccer cleats), the envelope goes red by that amount. I have to transfer money from some other part of my budget to cover the deficit, and then cut back on those categories to live within my means.
Bottom line: Find a tool that forces you to manage the money you actually have, versus operating a fairy godmother budget that will somehow magically balance itself.
2. Debt is a fairy godmother
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She will empower you with couture and bling and fabulous shoes—and ruthlessly take it all away at midnight, leaving you standing in rags. Then she will demand you pay her back three-fold for a single perfect night. Do not pay with a credit card unless you have the money in hand to pay for the item before you charge. Do not charge everything and plan to pay it off with the next paycheck. The job market is volatile. The next paycheck may not come.
3. The future will be here before you know it. Know what you want from your money
This rule is about acquiring the stuff you want most in life but can’t pay for immediately unless you’ve won the lottery: a home, a secure retirement, a college education for your kids. These goals require you to start early and chip away month after month for years. The more cherished the goal, the easier it is to avoid the frivolous spending that hijacks your long-term plans. Uncertain or conflicting goals undermine our self-control. So write down precisely what you want, how much you need to save to get there, set a monthly goal and consciously remind yourself of the goal by tracking your progress on a quarterly basis.
4. Habit is everything
Research has found that self-control is weakest among people who had already performed a prior act of self-control. In other words, we only have so much will power. It’s easy to drop the ball if we have to make a half-dozen conscious, deliberate financial decisions every month.
How do you conserve the valuable resource of self-control? Live your financial life on autopilot: have money for debt repayment or goals such as retirement or education automatically withdrawn from your paycheck, or checking account, on a monthly basis. Before you go to the grocery store, check the online circular for sales, and base your menus on that. If you go out to lunch during the work day, lock your wallet in your desk and take only enough money for food. And pack a lunch whenever you can—I know someone who saved his home down payment one brown bag at a time.
In short, habits can make or break your financial well-being. As Aristotle wrote, “…states of character arise out of like activities… It makes no small difference, then, whether we form habits of one kind or of another from our very youth; it makes a very great difference, or rather all the difference.”