Why Is It Hard For People To Follow Simple Money Management Rules?

The basic rules of money management are simple. But planning and managing our personal finances can be complicated because our lives are complicated.

One day, hopefully sooner rather than later, you will have discretionary income. That is the pot left over after all of your monthly expenses are paid. So what do you do with it? Should you pay down your debts? Put it into an investment account? How about a tax-advantaged retirement account? Or be a partner in a real estate joint venture?

Or you might want to put your money into something that can be a game changer and very lucrative. For example, your friends in the medical field told you about a startup calling for investors for a new AI-powered website that gives people medical advice and can one day prescribe drugs. The founders of the startup are lobbying state medical boards to allow AI technology to prescribe medications. They argue that only allowing doctors to prescribe drugs is protectionist and limits access to health care.

While you think about the above, you stash your money into an interest-bearing online savings account. You might be thinking about making a major purchase, like a house or a car. Or just have an emergency fund in case money becomes tight.

After transferring your money into the savings account, you turn to the financial news for additional guidance. You see headlines about stock markets and market caps rising (whatever that means). You also notice the stories about people living paycheck to paycheck, and another prediction that social security will be bankrupt in a year because of President Trump’s tweets.

Thinking about all of this is confusing and depressing. Your life is stressful enough as it is and lately you haven’t been feeling too well. You decide to schedule an appointment with the local BMW dealer to test drive the newly released M850i convertible. Maybe driving with the top down will clear your thoughts. Your colleague three offices down recently got a Porsche and is enjoying it even though you suspect he makes less money than you. So why can’t you?

Making personal finance decisions can be difficult. First, as noted above, you have a lot of choices which makes it overwhelming. There are all kinds of investment vehicles with varying degrees of risk. And there are a variety of retirement plans with its own tax consequences. What makes this even more difficult is that you will have to guess what will happen in the future. Will certain stocks rise in value in a number of years? Or will index fund yields fall at some point? This overload of options might result in you doing nothing.

Second, if you are seeking professional advice, be aware that they might not give advice that is in your best interest. A commission-based financial advisor might try to push you towards an investment product that will generate the most fees. A real estate agent might push you to buy a more expensive house now rather than a lower priced house later.

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Finally, it is hard to be disciplined financially. Just about every personal finance blog advocates the golden rule: spend less gold than you earn. But life happens sometimes. Someone gets sick. The car needs a new radiator. The roof collapses. Your child needs an after-school tutor. The slumlord raises the rent.

Also, and let’s be honest here — it sucks living on a budget. Is this what you went to school for? Most rational people don’t spend an additional three years of their lives going to school competing against everyone else (and paying an astronomical tuition for this privilege) just for the intrinsic value of learning.

So at some point, you might say “[screw] it” and live a little. Since it’s likely that student loans will be dischargeable in bankruptcy anyway, you may as well accrue other debt so they can be included in the bankruptcy schedules.

So how should you approach managing your finances with all of the options available? I think a good way to start is to see yourself in the long term. You should ask yourself when you plan to retire. Then project what your expenses will be. Do you plan to pay off your mortgage before retiring? How much do you want to have saved in retirement? Do you plan to move to a location with lower cost of living?

Of course, things will change over time so your long-term financial plan should account for potential changes. Usually this means having a certain amount of liquid assets.

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Second, work with trustworthy, reliable people. You are going to leave your money, assets, and basically your future to these people. So get to know them and check their credentials and get as much background information as possible. If they treat you right, reward them accordingly.

Third, take the time to know everything about whatever financial plan you or your advisors choose. If you plan to get involved in real estate, know as much as you can about the industry and its trends. If you plan to set up a retirement account, know what types are out there, and compare the tax benefits of each. Do not rely on your advisor’s word alone. You should know enough to have a meaningful discussion with your financial advisors and call them out if you think they are doing something shady.

Fourth, don’t worry about how others are doing. Some might be successful. Others look successful but are one payment away from foreclosure and one argument away from divorce. A few might be indicted.

Finally, don’t be afraid to spend the money to enjoy yourself. Life is short. When you get older, things get taken from you. That’s part of life. Some things in life are better experienced while young.

The basic rules of money management are simple. But planning and managing our personal finances can be complicated because our lives are complicated. In a future column, I’ll compare various investment and retirement plans along with the tax benefits (and consequences) of each. But before you invest your money, know what you are getting into, work with people with integrity, and enjoy your money once in a while.


Steven Chung is a tax attorney in Los Angeles, California. He helps people with basic tax planning and resolve tax disputes. He is also sympathetic to people with large student loans. He can be reached via email at sachimalbe@excite.com. Or you can connect with him on Twitter (@stevenchung) and connect with him on LinkedIn.