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by Tanza Loudenback
July 16, 2020
by Tanza Loudenback
July 16, 2020
Money is everywhere. You might earn, spend, and invest money all in the same day without uttering a word about cents or dollars.
And yet, too many Americans are quick to forgo a financial plan. Some say they don't have enough wealth or time for one.
If you have goals that require money to achieve — whether it's retiring or becoming a homeowner or fine dining — you should have a financial plan. Spending and saving on a whim might work for a while, but the absence of intention won't do you any favors.
"I always tell people that a budget is nothing more than you making the choice of how you use the money that you have to do the things that you want to or care about," said Tania Brown, a certified financial planner with SaverLife, a nonprofit that develops rewards-based programs to encourage saving.
But even with a plan, Brown told Business Insider, mistakes are bound to happen.
"Perfection is the killer in a financial plan," she said. "It is OK to mess up — we're human."
It's how you handle a crisis — such as spending over budget, missing your credit card payment, or navigating a pandemic and financial downturn — that is a far greater determinant of success.
People find it difficult deciding what will benefit their future self, said Katy Milkman, a professor at the Wharton School of the University of Pennsylvania and co-director of the Behavior Change for Good Initiative. Her research centers on how insights in economics and psychology can apply to finances, health, and other areas of life to inform positive behavior.
"Present bias is a big problem," Milkman said. "What that means is a tendency to focus on all the things that we want right now and how lovely it will make us feel to have something right now. We vastly underweight anything that is going to come to us in the future, so retirement, for instance, or anything you have to save for."
When the future isn't valued, it can lead to impulse buying and under-saving, she said, because the consequences of a potentially poor decision are too far out of reach.
If you have difficulty shoring up the motivation to save money for a goal that's years away, both Brown and Milkman suggest setting micro-goals.
"The more proximal your goal, the more bite-size you make it, the more likely you are to be able to stick to it," Milkman said, referencing seminal research on goal setting by the psychologists Gary Latham and Edwin Locke.
"It's easier to slip a little and then a little more each day if you have some giant end-of-the-month goal and then you get out of whack," she added. "But if you have daily goals, you can hit those daily goals. Yeah, sometimes you'll miss them, but you're accountable every day, and hopefully most of the time you hit them."
Brown acknowledged how easy it can be to get hung up on small missteps.
"If you hyper-focus on that, you miss what's right in front of you, which is a life preserver," Brown said. "You are not able to see that if you take this step, this step, and this step, you can get there. It is not about being perfect. It is just progress. What is one step you can take?"
Chances are you won't be able to eliminate every risk that comes across your path. But often the biggest financial mistakes are born out of simply not being prepared.
"When I see people with a financial plan, one of the things I tell them is to expect the unexpected," Brown said. "As long as you're walking on this earth, you're going to have an unexpected expense. I call them 'the known unknown,' and those are expenses that you know are going to happen, but you don't know when."
Milkman calls these costs "exceptional expenses" that aren't really exceptional at all. The concept, she said, was explored in a 2012 paper by Abigail Sussman, an associate professor of marketing at the University of Chicago Booth School of Business, and Adam Alter, an associate professor of marketing at New York University Stern School of Business.
As Milkman sees it, "If you're making a plan, you want to be careful not to just look at your recurring expenses — every month I pay rent, every month I pay for groceries, every month I have restaurant expenses — but actually to look at the 'exceptional expenses' too. Recognize that those are not truly exceptional and see what your average is of extra expenses, something that comes up and you have to pay on a monthly basis, and factor that into your planning rather than only putting in those things that are literally recurring."
An emergency fund stocked with at least three to six months' worth of expenses, in cash, is one way to ensure you won't undo your financial progress if an expensive repair or bill crops up. Insurance on your car and home, or the ability to earn an income, is another way to protect against line items typically unaccounted for. But if you don't have either of these safeguards in place when you're thrown off course, not all hope is lost.
"What I find people do is they focus on a thing that they cannot control and ignore the things they can," Brown said. "For instance, if someone loses their job, they had no control over the job loss, but you have 100% control over calling your creditors and letting them know you may not be able to pay the bills. You have 100% control of going in your budget and cutting out unnecessary items, like cable."
Like staying in shape and eating healthy, managing your finances well is a ceaseless task — but that's the beauty of it. Because you're playing the long game, there's room for error, improvement, and course correction.
"When people look at planning, they see it as linear, like the thing that goes straight uphill. And a lot of times it's more like a roller coaster," Brown said.
If you can commit to being consistent rather than being perfect, a poor personal decision or even a sudden economic crisis winds up being less of a threat to your overall plan.
"Sometimes a crisis is a reminder that there is risk," Brown added. "Life happens. If you made a mistake, if you didn't do what you thought you should have done with your finances, that's OK. Do what you can where you are right now, and just move forward."
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