Beating Broke

Personal Finance from the Broke Perspective

Are You a Financial Pessimist?

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A few weeks ago, I shared that we’re all financial optimists, and it’s hurting our bottom line.  Like many, I’m guilty of thinking that my experience is common of most people.  Because I’m a financial optimist, I assume many people are, too.

How Financial Optimism Affects Our Finances

We’re digging our way out of some serious debt, and part of why we have that debt is because of financial optimism.

Four years ago, we took out student loan debt so my husband could finish his Ph.D.  We knew once he finished the long haul of finishing the degree and then completing a two to three year post-doc that finally he would begin to make a good salary.  That’s still true today, but we’re slowly trudging that long path.  Two more years until the post doc is over.

What we didn’t anticipate in our financial optimism is how long the road would be and how painful these years of low income and high student loan payments would be.

But I digress.

Financial Pessimism Isn’t Much Better

Clearly I shouldn’t have stated “we’re ALL” financial optimists because the comments on the post made me start thinking about the flip side–financial pessimism, which is nearly as bad as financial optimism.  Financial optimists make their decisions based on a bright future that may or may not come.  (That’s how we justified taking out $30,000 in student loans.)

Financial pessimists often make their decisions based on fear and assumptions of what might go wrong in the future.  Though this seems like a much better place to be than a financial optimist because the pessimist is protecting what they already have, it’s not really.  Pessimism can stagnate your growth.

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My friend’s dad (I’ll call him Tom) inherited $100,000 when his uncle died.  (His uncle had never married and didn’t have children of his own.)   Tom had never seen that much money at once, and the idea of putting it in the stock market scared him.  He was afraid he would lose it.  Instead, he promptly put it all in a 10 year CD and earned a measly amount of interest.  Plus, that money was locked up for years!

His fear and pessimism cost him money.  Yes, he kept the money safe, but it was unavailable for 10 years, and he only made enough to cover the cost of inflation.  He didn’t let the money work for him and grow because he was driven by fear.

Financial pessimism can also cause you career stagnation.  Elizabeth has been at her job for 20 years now.  She finds the job exhausting; over the last few years, more and more people were cut from the staff, but those positions were never filled.  Elizabeth is now doing the work of several people; she often doesn’t get to go home early enough to see her young children before they go to bed.  She wants a change, but she’s afraid that she won’t find a job that pays as well or has such good benefits.  Her fear leaves her stuck in a position she doesn’t like, working too many hours, counting down to retirement that is another two decades away.

Financial optimism can hurt your bottom line by giving you confidence to spend money you assume you’ll make in the future.  Financial pessimism can hurt you because you’re often fueled by fear which can cause stagnation and limit your financial growth.

What do you think is the best strategy to remedy financial optimism or pessimism?

 

We’re All Financial Optimists, and It’s Hurting Our Bottom Line

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Are you an optimist or a pessimist?

Do you see the glass half full or half empty?

No matter your answer, I have a secret for you.  We’re all financial optimists, and it’s hurting our bottom line.

Don’t believe me?

I didn’t expect you to.

You might say, my finances are a mess.  I have debt; I’ve pulled money out of my 401(k).  I’m definitely not a financial optimist.

But, I’d argue that you are.  When you look into the future, you don’t see bankruptcy and years of the same financial mess.  You likely think that eventually things will get better, and you make decisions based on that.

If your financial situation isn’t that bad, you’re probably even more of a financial optimist.  Say you’re getting ready to buy a house, and you know that your limit is a house that costs $250,000.

You find the perfect house.  The problem?  It costs $270,000.  Still, you decide to buy it, even though you know you can’t afford it.

What do you tell yourself?

  • It’s in a good neighborhood, and the house will appreciate.
  • In just a few years, inflation will make your now nearly unmanageable payment much smaller, and paying it won’t be such a hardship.
  • You’re just starting your career, and in a few years you’ll be making a lot more money, so the house payment will be easier to afford.

Sound familiar?

Just a few years ago, millions of people thought their houses would appreciate, and then they were caught up in the housing crisis.

Houses don’t always appreciate, but we optimistically think ours will.

[Tweet “Houses don’t always appreciate, but we optimistically think ours will.”]

Sure inflation will make your house payment more manageable, but you’ll have other expenses in a few years that you’re not thinking of because you’re thinking optimistically.  In a few years, maybe you’ll have a few kids to fill that house, and they’ll cost a lot of money.  You’ll be spending more on food, health care, transportation and day care, just to name a few things.  Suddenly, having a manageable house payment doesn’t really make a financial difference because you’ll have so many other expenses competing for your money.

If you’re lucky, your career will soar, and you’ll make more money, but that doesn’t always happen.  You might get laid off and have to find a job that pays less.  You or your spouse may decide to quit so one person can stay home with the kids.  Or, maybe you do get raises, but at the same time your health care premiums go up every year so your pay essentially stays stagnant.

Of course, thinking optimistically is beneficial to our mental health, but for our financial health, recognize that thinking optimistically hurts your bottom line.  When you get ready to make a large purchase like a house or a car, don’t forecast into the future.  Determine if you can afford the item now, in your current situation.  If you can, you’ll tie up less of your future money and benefit from this.  If you can’t, it’s best to pass it up.

Earning > Saving

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Saving is a finite solution. You can only save so much, can only be so frugal. Your power for earning is unlimited with the right resource (you), the right tools (knowledge), and the right force (hard work).  That isn’t to discount saving.  Saving is an important part of the equation too.  But, because of it’s limited ability, it can only be so much a part of your overall wealth and financial independence equation.  Do you know what limits savings’ ability?  Your earnings. You can only save so much as you earn.  If you only earn $8 an hour, you can only save $8 an hour.  Far less, really, because who can live on $0 an hour?  Not many.  So, the more you make, the more you can save.

There’s another side to that, even.  The more you make, the more ability you have to make more.  That’s the root of the old saying, “It takes money to make money”.  While you can actually make money without having much money, the more money you have, the more opportunity you will find to earning more money.

Earning > SavingIncreasing your earnings isn’t always an easy equation to solve, though.  Many people feel like they’re trapped in the job they have, the payscale they’re in, and the life path they’ve chosen.  Not at all true!  Your earning potential is unlimited if you combine the resources at hand and improve the ones that aren’t.  You’ve already got you.  Increasing you knowledge of the work you want to do is pretty easy as well.  It just takes a bit of time, and some crafty searching online.  Pretty much anything you want to learn about is available online.  Heck, there are even entire sites dedicated to free college courses.  All you need is to dedicate some time to learning whatever it is you want to learn.  You can find that time by taking it from some of your TV watching time.

Follow all that learning up with some good old fashioned hard work.  That’s it.  Just hustle a little.  Unfortunately, there isn’t any magic formula for that one. I don’t know how to motivate you to work.  I don’t know the right things to say to you to make you want it.  You’ve got to provide that part.  If you can’t find the motivation to pull yourself away from American Idol for an hour to learn something, or work on making yourself a better earner, there’s just nothing that I can do for you.  You’ve got to find that part for yourself.

But, listen.  If you’re capable, like me, of getting your finances under control; of learning how to keep a budget, pay your bills on time, and learn from mistakes, there’s no reason you can’t learn how to earn more.  You CAN learn how to do something you want to do.  You CAN learn how to make yourself more marketable.  And you CAN earn more.  And, if you do, you WILL tip the scale in your direction.  You’ll start to earn more.  You’ll be able to save more.  And you’ll find that opportunities will present themselves to you.

How are you going to improve yourself today?