For a very long time, I believed money management was a simple matter of knowing math. I thought that the reason why people had trouble saving money was that they didn’t understand a few basic personal finance concepts. I figured, if everyone knew how compound interest worked, they would surely invest money today in order to have twice as much in 7 years.
I still believe that math plays a predominant role in personal finance. However, I’m starting to think more about psychological factors. I noticed that people in debt may be compulsive shoppers. Some people bought comic books and have decided to sell them (see personal goal #8). For others, Magic Cards are the thing. If you find yourself in debt and spending money you don’t have on these hobbies, it may be time to look for a new hobby. I decided to take up writing, which actually makes money. My wife prefers hiking, a very frugal hobby which helps her health.
Some have marveled at how the writers above have made such progress on their debts. Obviously they educated themselves about personal finance and took a series of logical steps to turn their finances around. I would go a step further and suggest that their focus helps them psychologically. Perhaps Ben from Money Smart Life said it best:
When I’m focused on working hard to increase my salary, saving more money, and getting a better investment return I tend to spend less money. I’ve had to work hard to build our net worth, the last I want to do is turn around and spend it away. On the other hand, if I’m not thinking about how many hours I had to work to earn money or what our portfolio returns are, I’m more likely to spend a little more money.
I have seen this in my own personal finances since I started writing about money. Perhaps the key to making the most your money is to do something that keeps your mind focused on the goal rather than some mathematical equation as I originally believed.
Lazy Man has been a lender at Prosper since February 2006. His lending has been written up in the Globe and Mail, Canada’s largest national newspaper. He is the author of the personal finance blog, Lazy Man and Money. He enjoys watching Boston sports while sipping diet cola.