FSS Newsletter :: May 2003

Money Matters :: Can You Really Solve Problems with Money?

"Money," Justin Mamis writes, "is much like sex, in that it distorts our senses."

The concept is dead-on in a myriad of ways. It is the basis for the huge proliferation of credit cards at every level of society. (If you're not spending it now, you're not really spending it, right?) It is the reason that payday Fridays bring such a sense of weight-lifted relief to the financially-stressed among us, when in fact the relief is only temporary. It is the reason that glossy-eyed car buyers are only too willing to extend auto loans out over periods of six years and beyond - well beyond the financial safety net provided by manufacturers' warranties, and well beyond any hope of maintaining positive loan-to-auto-value ratios.

There are larger-scale, societal instances of this "money distortion" idea also. Many times, without recognizing it, we as human beings impose a sort of "good life / good money" disconnect - meaning that if you don't have or make what you consider to be "good money," then you don't have, cannot have, your own "good life." Thus, your opinions of the life you lead, and your reactions to that life, are distorted simply by your opinions of how much money you have to spend and how much money you are bringing in. In fact, "good life" and "good money" need not be related at all. Both are simply perceptions, and perceptions are not static. If we can change our perceptions, we can change our definitions of "good life" and "good money" and can more easily travel the road leading us to both.

On a smaller scale, as written above, is the "money in hand' distortion. The truth is that often, if the money isn't right there in front of us, any amount of it doesn't seem as "capable" (if it's income) or as "damaging" (if it's outflow) as it really is. And if the money is right there in front of us, the amount can actually seem more "capable" (if it's income, as in the paycheck-example above) or more damaging" (if it's outflow) than it really is.

Here's an experiment to try: Go buy fifty dollars' worth of groceries; pay for it entirely with cash. Then, a week or so later, buy another fifty dollars' worth of groceries, but pay for it with a credit card. In which instance did you shop more carefully? In which instance did you buy more necessities, and in which instance did you buy more "frivolities?" Whether or not spending the cash "hurt" more is irrelevant (although usually it does); the important thing to recognize is that the groceries which you knew would be paid for with cash were much more likely to be chosen carefully than were the groceries purchased with credit.

In this instance, the amount of money spent was probably nearly the same, yet the care with which the money was spent was probably not. That is yet another form of monetary distortion.

So is it advisable to start paying bills entirely in cash? No, not in most cases. In an electronic society like ours, when we shop all we see are the racks and aisles of things we want - followed by some numbers on the price tag or the check or the credit-card receipt. And numbers (prices) viewed this way are just abstractions; it's only the stuff we want - and our wants themselves - that are immediately tangible.

If, however, we can simply train ourselves to gauge prices and incomes in terms of something real - in terms of actual dollars and cents, in terms of actual hours of work required to pay the item's cost - then we can make some progress toward overcoming distortion at this level.

It is this endless set of distortions that inevitably leads us toward the most common financial landmine in existence: Vulnerability. If you regularly spend more each month than you bring in (i.e., you can't get through most months without using credit cards at least once, and you can't pay them off at the end of the month), then you're vulnerable. If you make minimum payments on credit-card or other installment debts and watch the balances either hold firm or increase, then you're vulnerable. If you have no savings to speak of, you're vulnerable. If a one week illness would mean a negative balance in your checking account at month's end, or a larger credit-card balance, then you're vulnerable. It's only a matter of time. Life and its many misfortunes are lurking just around the corner.

We must learn to think in concrete terms of what we need, what we have, and what we have left. This is of paramount importance. It is why the necessity of spending plans cannot be overstated.

It is why we must understand the capabilities of money - money that is, after all, in itself totally powerless. It merely sits there, either flimsy and green or shiny and silver. Only with our actions and intentions behind it can it be beneficial, neutral, or disastrous.

Consider: Do you really want that new $400 stereo receiver, or do you want the extra strand of safety net that the $400 would provide if it were saved away? That $400 might become another chunk in your emergency fund, or it might buy you $423.60 worth of freedom from credit card debt ($400 plus 5.9% interest for one year). It might put you $400 closer to being free from a student loan, or $400 closer to being the outright owner of your home and/or the property it rests on.

Many folks would label the decision above as one of "money
intelligence," and in a way they're correct. But so very much of what we call "money intelligence" has so very little to do with the spendable green stuff itself. As Philip McGraw, Ph.D., (aka television's "Dr. Phil") is so fond of reciting, "You can't solve money problems with money." What he means is that money problems are really "capability of money" problems, and they generally originate above the neckline: They stem from our attitudes, our opinions, our desires, our self-control, our discipline, our passed-down values. In short, the financial trenches we've thrown ourselves into were shoveled out by our own behaviors. We bought the $400 stereo receiver without regard to its necessity, its affordability, its " in-place-ability" (what our money might have better purchased in place of that receiver). Over time, those spending patterns and lifestyles pushed us over the edge, and down. In this sort of hole, all the 100% pay raises and all the tax breaks in the world won't fix the overriding problem. Without behavioral change, more money might come in your life, but "more than more" money will always find a way out the door. And n'er the twain shall meet.

Where does all this leave us? Well, it leaves us with ourselves. Because, in the end, the capability of money is determined in large part by one thing, and that one thing is discipline. And where our money is involved, discipline means choosing to do what ought to be done - what your intuition tells you that you should be doing.