At first glance, personal finance is a numbers game.
Write a spending plan. Pay off debt so your net worth doesn’t decrease. Try to increase your net worth through investments.
But when you dig deeper, personal finance is also an emotions game.
Writing a spending plan only works if you’re motivated enough to stick to it. Paying off debt is hard to do because it can cause feelings of shame, it’s frustrating, and it’s often part of a long-haul strategy. Increasing your net worth through investments can be hard when you realize the market fluctuates (and sometimes crashes).
The point is, if you want to win the money game, you have to strike a balance between numbers and emotions. It’s two sides of the same coin. Here’s how you can work both sides and reach your financial goals.
Start with the Numbers
Since numbers are more straightforward, they make a good starting point. So sit down and map out your financial situation in numbers.
How much money do you owe in debt?
How much money do you have put away in savings?
How much money is tied up in investments?
These questions are rated in order of importance. Paying off debt is the most urgent thing you can do financially, as it will free up your earnings for savings and investments. Then you’ll want to build a certain amount of savings that you can access anytime. Finally, you’ll want to put the rest of your expendable income into investments to help it grow at a pace faster than it will decrease due to inflation.
Those are the numeric priorities. Next come the monthly numbers.
How much money do you earn per month?
How much of your money goes out to essential bills?
How much of your money goes out to debt payments?
How much of your money goes out savings and/or investments?
How much of your money goes out to nonessential bills?
Again, there’s an order here. Essential bills (like rent or a mortgage) are your non-negotiables. Next are your debt payments (also non-negotiables). Then come the things that have some flexibility: savings, investments, and non-essential bills (like eating out or cable). If you don’t like any of the numbers you see here (such as the amount going to savings), then you can work with your non-essential bills to change things around. And if the overall numbers don’t work for all your goals, you may want to look at ways to increase your income.
These are the factors that make up your financial picture from a numerical standpoint. And if they sound too simplistic, too obvious, and not at all as easy to implement as I’m making them out to be, there’s a good reason:
Because personal finance goals sound easy on paper, but are much more challenging to accomplish in reality.
Reflect on How You Feel About the Numbers
I used to look at my monthly spending plan first in happiness (this seems easy enough!) and then backwards in frustration (what happened to my money??). My numbers lined up on paper, but something wasn’t adding up in real life. What happened was I planned improperly.
From an emotional standpoint, I crave perfection. I set high expectations for myself because I want to reach my goals as fast as possible. But I didn’t give myself any room for flexibility on paper – which is why I failed to meet my expectations in real life, when the flexibility truly was needed.
It’s not just that I didn’t stick to my spending plan – it’s that I was unrealistic about writing a spending plan I could stick to.
That’s why it’s so important to reflect on how you feel about the numbers. If you’re writing your goals out of a desire for perfection, you could be setting yourself up for failure. And then that leads to a downward spiral that’s emotionally and numerically hard to come back from.
The point of reflecting on your emotions isn’t to go soft on yourself and your goals. The point is to give yourself room where you know you’re going to need it. In my case, I plotted out a spending plan in black and white that had me eating every single meal at home, making every single coffee at home, and never including one-off costs like a trip to the pharmacy to buy things like body wash. But I had my grocery spending plan and bills all plotted out, so it seemed okay.
In reality, I forgot to think about the fact that I work from home, which means I sometimes need to buy a coffee or a lunch just to get out of the house and see sunshine and other humans for a bit. And that, of course, there are times when my groceries include more than just food. I did this to myself because I so badly wanted (emotion) to meet my goals (numbers) faster. And then I completely failed to meet my own expectations. I created a plan that was totally unsustainable in real life.
Don’t do this to yourself. Understand what you need emotionally. Sometimes it’s a win (paying off a small debt even though it’s financially smarter to pay high interest debt first). Sometimes it’s something you enjoy (like buying coffee occasionally so you can sit at a coffee shop). Sometimes it’s something you really need that doesn’t appear to be a need on paper (like an unexpected opportunity, like a trip for fun or a conference for work).
Most of all, remember this: our financial situations can take a toll on us emotionally. Debt brings with it a cloud of shame that follows us around everywhere we go (I remember that all too well). You can’t pay off debt until you reconcile with the feelings of shame. Putting your money into investments can be scary when you see the market fluctuate. You can’t earn money in investments if you’re constantly pulling it out of the stock market. And following a spending plan is easy to say and hard to do. You can’t stick to your plan if you don’t remember that it can sometimes feel like a trudge – there are days it will feel great and days you’ll want to quit.
In short, financial goals are easy to plot, but can be hard to stick to from an emotional standpoint. Finances are loaded with emotions. Expect it. Reflect on the emotions that are most likely to bring you down and the emotions that lift you up and then plan accordingly.
Create a Plan that Answers to Both
The real winning financial plan is the one that incorporates both numbers and emotions. Working with the emotions that motivate you (finding ways to gain momentum in your financial plan) and understanding the emotions that threaten to take you down (feeling shame over your financial situation).
When I had consumer debt, there were times when I allowed it to make me feel terrible about myself. Those were the times I found it hardest to stick to my plan. Rather than feeling more motivated to get rid of it, I felt helpless about my situation and victimized about a situation larger than I.
I beat this emotion by realizing that I wasn’t just feeling limited by my debt, I was feeling limited by my income. So instead of succumbing to a fate that would never end (a cycle of debt), I empowered myself to change what I could (my income). I made a major career switch that at first included a pay cut, but within one year doubled my salary from before. It was a calculated risk and it paid off. Rather than rewarding myself with something “fun” like shopping or a trip, I rewarded myself by knocking my debt out faster than planned.
In this case, I actually wanted to put all of my money towards debt because I empowered myself to earn more. The new, positive emotion (empowerment) gave me the momentum I needed to pay my debt off faster. Whereas before my negative emotions (shame, frustration) threatened to make me feel stuck in life and stuck in salary, which would have logistically made it harder for me to pay off my debt.
As your life changes, so too will your emotional needs and thus your financial needs. If you continue this process of reflection every time you sit down to plot out new goals and new plans, then you’ll be able to repeat success over and over again.
The biggest mistake any of us can make in our finances is to act like our emotions don’t impact the numbers. It may not look like the emotions impact the numbers, but you better believe they will in real life. To ignore it is to stick your head in the sand or to think that your will is stronger than your emotions. Make room for the emotions and find a way to use them to create momentum. This will be your winning combination – and one you can use to achieve your goals for the rest of your life.
Image Credit: Matthew Wiebe