Quick quiz: what do the following statements have in common?
- I don’t like used cars. I don’t want to buy somebody else’s problem.
- Maybe I could live in the house for a few years, and then rent it out.
- I don’t need professional advice. I know what I’m doing.
- He’s rich, so he can afford it.
- Maybe when I’m in my 60s, I’ll be able to afford that.
- The government / my parents / my spouse should just take care of me.
- I’ve worked hard for this money. What if the market tanks, and I lose it all?
These statements highlight the way emotions drive our decisions about money, time, careers, real estate, and lives.
- I don’t like used cars. I don’t want to buy somebody else’s problem. – Fear.
- Maybe I could live in the house for a few years, and then rent it out. – Hope.
- I don’t need professional advice. I know what I’m doing. – Arrogance.
- He’s rich, so he can afford it. – Contempt, Self-Doubt.
- Maybe when I’m in my 60s, I’ll be able to afford that. – Envy, Hope.
- The government / my parents / my spouse should just take care of me. – Fear, Hopelessness.
- I’ve worked hard for this money. What if the market tanks, and I lose it all? – Fear.
Greed, Fear and Hope
There’s a cliché that says the two most powerful emotions when it comes to managing money are greed and fear.
But no one thinks of themselves as “greedy.” No one wakes up in the morning and says, “Time to screw the poor!” Greed is a more subtle force.
Likewise, not many people recognize fear as one of their driving emotions. Fear is like a tooth cavity: you don’t notice it unless the situation is already out of hand. It’s either hidden or it’s unbearable.
Fear expresses itself in small ways:
- Wanting to a new car “in case” your eight-year-old car breaks down. The engine is making funny sounds, anyway. Or is it the timing belt? Whatever.
- Avoiding the market because you can’t stomach the possibility of losing. You worked hard for that!
- Staying in your 9-to-5 job forever, not because you love your job, but because you hate the idea of unstable income. Besides, you get “paid vacation” days!
- Disparaging people with wealth, because you’re “sure” they “must have” trampled others to achieve their success.
“I’d rather be happy than rich.” That’s your fear talking. You’re not sure if you have what it takes. You’d rather avoid trying.
You rationalize this fear though an illogical idea — that happiness and wealth are contradictory.
Hope is Not a Plan
A third emotion drives many of us: hope. Hope talks when we say:
- I’d like to live in this house, and rent it out when I “trade up” or move away.
- If I put money in mutual funds, it will go up over the long run. Right?
- I think my product/service is good enough to sell.
These are great sentiments. Hope is wonderful. But hope is not a plan.
You know what is a plan? Math.
“Oh, no. Not math!” — Yeah, just hang with me. This ain’t no fancy-pants calculus. It’s simple arithmetic.
Crunch the numbers. You want to live in your house, and later rent it out when you move away? Fine. Make a spreadsheet. Create different rows containing different assumptions for your vacancy rates, maintenance costs, management fees, insurance, taxes, and rental income. Run the numbers on scenarios A, B, C, and D. What’s the best case? What’s the worst case? Can you live with it?
You want to simultaneously pay down your debt and put some money aside for a rainy day? Okay, run the numbers. What’s the consequence of putting money aside? How does that translate to added interest costs on your debt? Peace of mind is worth something – but how much? What’s your number? How much will you pay for that peace of mind?
Financial conversations are filled with emotional language. I have found that a solid spreadsheet is a source of comfort, particularly when I am undertaking risk or making a high-dollar decision.
That doesn’t mean that I’ll always make the decision that earns or saves the most money. Peace of mind, after all, does have a value. But with a spreadsheet, I can quantify that value.
We can never remove emotion from our financial choices. But we can manage our emotion through math.