Financial fitness can be surprisingly hard to measure, track, or even understand. For instance, for forty years you think you’re doing just fine with your retirement plan. How could you go wrong? You meet with your adviser, set aside the money… yada, yada, yada.
Then one day you graciously accept your gold watch and settle into your Barcalounger to watch Law and Order reruns whenever you darn well please, only to learn that you didn’t set aside nearly enough money to survive your golden years. Actually, you do have enough money, as long as you don’t buy anything. Or go anywhere. Or eat too often.
Or perhaps you’re one of the lucky ones. You’ve retired and do get to buy things—but only when given permission by one of your children, who now support you. Like tens of thousands of other new retirees,1 you’re now living the life captured on the popular T-shirts people used to wear back in the eighties—the ones that said that the best way to exact revenge on your children is to live long enough to be a burden to them. Well, you’ve become a burden all right, but as it turns out, being a burden on your children may be funny on a T-shirt, but in real life it’s a Greek tragedy.
Or how about this? No matter how fiscally responsible you are, financial stability is never in your control anyway. You pinch every penny until you accumulate a veritable fortune, and then the market falls and you’re clipping coupons, not for recreation, but for survival.
So what’s a person to do? One thing is for certain; it’s a bad idea to take cues from your neighbors—unless, of course, you live next to a skinflint. But who wants to stockpile a mountain of cash while never buying so much as a new pair of socks? What kind of life is that?
Then again, you don’t want to follow in the footsteps of your other neighbors either. It turns out that about 43 percent of American families spend more than they earn each year,2 and they now have eighteen thousand dollars in high-interest debt.3 They also have something like seventeen cents set aside for a financial emergency.
And yet they still buy things on credit—discretionary items that they’ve rationalized into calling “necessities” that their own parents would never have dreamed of owning without ponying up cold, hard cash.
“Not to worry,” your neighbors exclaim, because as near as they can tell, “everyone is doing it.” Besides, no matter their money woes, your financially stretched friends do find a way to scrape by every month. Of course, they’re one medical emergency or even a parking ticket away from losing it all.
Are you similarly at risk? Could one missed paycheck start you on a downward spiral that leads to financial disaster? If four or more of the following statements apply to you, you probably are at risk in the short run and most assuredly are at risk come retirement time:4
You owe more than seven creditors.
You’re a compulsive shopper.
You and your life partner have lied to each other in the past six months about your purchases.
You treat credit as cash, not debt.
You frequently borrow to pay monthly bills.
You see overdraft charges or late fees as a normal occurrence.
You cover even small setbacks (home or car repairs, minor medical needs) with debt.
Of course, not everyone is living a financial nightmare. Lots of people are financially fit—millions of them. And we even know how they got that way. They spend less than they earn. That magical act—simply spending less than you earn—lays the very foundation of financial stability: having a surplus.
The good news is that literally dozens of books teach how to manage that precious surplus. They teach what you should do someday in the distant, fuzzy future when you actually do have money building up in an account. If you’ve found a way to earn more than you spend, Armani-clad financial gurus will eagerly explain how to protect the excess, prepare you for the worst of circumstances, and secure your future.
But if you’re like the vast majority of people around the world who don’t have a surplus, a fat lot of good the investment and money management books will do you. Your challenge isn’t ferreting out financial strategies to maximize the money that’s piling up under your mattress. You have to find a way to change your current behavior so you’ll accumulate a surplus in the first place. And that’s what this chapter is about.
The following few pages will help you apply the Change Anything process to your own spending habits—which, according to popular financial adviser Dave Ramsey, is our real financial challenge in the first place. According to Ramsey, “Winning at money is 80 percent behavior and 20 percent head knowledge… Most of us know what to do, but we just don’t do it.”5
Here’s what we do know. In order to become fiscally fit you can create a surplus by either earning more or spending less—or both. As you might guess, most people prefer earning more. In this chapter we’ll look at what it takes to spend less. We’ll help you develop a responsible plan you can live with, a plan that not only will help you develop new feelings and passions about financial habits but also will lead to happiness both today and in the future.
To discover what it takes to create a financial surplus we’ll seek the aid of two fiscally challenged Changers—Shiree and Tyson M. This lovely (and quite typical) couple first suffered from, and then resolved, serious financial challenges.
Shiree fell in love with Tyson when a bouquet of one hundred Mylar balloons arrived in the middle of story time with her twenty-seven kindergarteners. Her face flushed with happy embarrassment at being doted on so publicly. Then she had a fleeting thought that, on Tyson’s graduate-student budget, this was a pretty extravagant expression after only one date. But she brushed her judgment aside in favor of the warm thought that Tyson was everything she wasn’t.
Shiree had been raised by a banker whose “wallet squeaked when he opened it.” While she loved clothes shopping, she felt pangs of guilt when she didn’t get her pricey designer clothes on sale. So it seemed like a dangerous thrill to her when Tyson helped her into a helicopter on their first date and took her on a stunning flight up the Hudson River. He handed over his credit card for the five-hundred-dollar ride without taking his eyes off her.
Ten years into their marriage, Shiree worries that Tyson is bankrupting her. She does her best to rein in his outlandish spending and then resents him all the more when she has to feel guilty about a well-earned shopping spree. Their debt is mounting, their spending continues, and if something doesn’t change soon, they’ll lose it all.
As you now know, the Change Anything process begins by identifying your crucial moments. So you’ll need to give some thought to the moments that lead you into spending temptation. What are the characteristics of the times, feelings, or circumstances that lead to your financial missteps?
Tyson noticed that his spending was largely emotional. For example, it’s a Saturday afternoon and he’s bored and out of sorts. He’s watching a ball game with an electronic accomplice sitting nearby, and in a half-alert state he whips out his laptop and begins surfing his favorite websites. In no time he has cornered his quarry—a new fishing reel. With a single click he finalizes his purchase, which produces a small thrill, followed by an empty feeling of disappointment. Staring at his computer screen, Tyson suddenly realizes that he has to change how he acts during these crucial moments of boredom or dissatisfaction.
For many consumers, their crucial moments have social roots. The Joneses entice them into buying things they don’t need and didn’t want—until the Joneses bought them, of course. Shiree’s source of social influence lived with her. It kicked in every time Tyson violated some spending agreement the two of them had made. On bad days she would rationalize that if she blew the budget as well, perhaps he would begin to take some responsibility for their financial perils. Her counterintuitive plan never worked, but she kept doing it anyway.
Of course, the physical world can also stimulate irresponsible spending. Often Shiree would leave a store with two or three times more in purchases than she had planned. According to Paco Underhill, a well-known expert on consumer behavior, it isn’t just high-end stores that break us down: Even supermarkets “are places of high impulse buying. Fully 60 to 70 percent of purchases there are unplanned.”6
Tyson and Shiree quickly realized that although it was true that they were far too spontaneous and out of control, they didn’t spend every minute of every day. In fact, there were only a few crucial moments that they needed to watch for, and then they needed to act differently. After looking at their weak moments, they came up with their first, best guess as to what they should do. These initial vital behaviors would provide the starting point of their change plan. Later, when they faltered, they’d turn the bad day into good data by seeing if there was a new crucial moment they’d have to plan for—and a new vital behavior to help them master it. But initially, the four vital behaviors they chose were:
Track Everything. They would increase their awareness of their spending by recording everything in a mobile phone app.
Know Before You Go. They would make a precise list of what they intended to buy before they went to a store—and buy only items from the list.
Save Before You Spend. They would take 10 percent off the top of their paychecks to accelerate debt repayment.
Hold a Weekly Wealth Review. Every Sunday morning they would review what they spent, discuss deviations, and agree on the next week’s budget.
Of course, as Dave Ramsey said earlier, it’s one thing to watch your crucial moments and identify what you should do to survive them; it’s another thing to get yourself to do it. Here’s how Tyson and Shiree used all six sources of influence to support their four vital behaviors.
Visit Your Default Future. When they were truthful with themselves, Shiree and Tyson acknowledged that there was a lot about their financial situation they didn’t like. Paying the bills invariably led to a heated argument. Then they’d clam up for weeks on end. The silent treatment not only hurt their relationship, but also kept them from examining their default future.
But how could they tap into their own best desires to change? How could they take a good look at what lay ahead for them if they didn’t change? One of the turning points for Shiree and Tyson was a simple conversation they had one evening. What they did is remarkably similar to the powerful process of motivational interviewing7 that anyone can use to help clarify their default future and connect to their most powerful reasons for change. Decades of research show that spending a small amount of time on this process produces substantial dividends in future change.
Here’s how it worked. One night Shiree and Tyson decided to talk very explicitly about their reasons for changing. Initially they did so because Shiree was worried they didn’t share a mutual purpose for their financial future. Specifically, she wasn’t sure Tyson really saw the need to change his spending habits. She was afraid he was agreeing just to appease her and wouldn’t follow through when she wasn’t around. In retrospect, Tyson admits that Shiree’s concerns were valid. He knew their finances were a mess, but he hadn’t really paid attention to them.
So, Tyson and Shiree set aside an hour to interview each other. They would create a safe setting where the two could take an honest look at their financial life, their default future, and their personal motivations. The result would be a Personal Motivation Statement that would remind them of what they really wanted when the going got tough.
First Tyson interviewed Shiree. He took notes on her answers to a few crucial questions:
Where do you want us to be in ten years?
Where will we be in ten years if nothing changes?
What are the advantages of changing?
What do you intend to do?
At one point in the interview, both Shiree and Tyson broke down in tears. She had just asked Tyson where he would be in ten years if nothing changed. He looked stoic for a full minute, at which point Shiree began to think his mind had drifted. In irritation she said, “Sorry, is this topic too boring for you?” Tyson turned back to face her with moist eyes and said, “No, it’s too horrible. I know that if I don’t change I will lose you. And that would kill me.”
When the two finished their interviews, they pulled some key quotes from their notes to create a Personal Motivation Statement that would guide their efforts. It included:
We don’t want to ever have another fight about money.
Buying things has not made us happier; it’s made us depressed.
We will value peace more than pleasure.
Getting something new is not worth losing our marriage.
Finally, after returning from their visit to their default future, the two made a promise that they would read their Personal Motivation Statement each time they were tempted to violate one of their vital behaviors.
Tell the Whole Vivid Story. Tyson and Shiree changed their feelings about their choices by changing their story about their circumstances. In truth, they had previously never stopped to think about the big picture of their current situation. So, by using a variety of financial tools and techniques, they were able to get a more complete look at what their future held.
First they used a web tool to track all of their income and spending for thirty days. It took some work to track their earnings and spending, but once they did, it hit them like a blow to the stomach. They were currently spending about 10 percent more than they earned every month. If they continued to make their current payments on their credit cards, they would pay $18,371 in interest over ten years.
In addition to helping them feel differently about their bad habits, visiting their default future gave them hope for what lay ahead. The constrictions of a budget started feeling like a protective fortress that would keep them safe.
Make It a Game. To transform their budget from a pair of handcuffs to a helpful tool, Tyson and Shiree set goals and dates for their achievement. Shiree delighted in the idea of saving money. Putting money in an emergency fund was exciting. Each new deposit felt like a touchdown.
Even Tyson began to get into the spirit of the process when they turned it into a game. They created time-bound goals, aimed at small wins, and created a visible scoreboard. The first scoreboard consisted of a photocopy of each of their six credit cards. Then, underneath each card they wrote a date by which they could pay it off if they stuck with their plan.
Despite the fact that turning their plan into a game seemed a bit contrived at first, Tyson proudly admits that when Shiree handed him a black marker to give him the honor of crossing the first paid-off credit card off of their scoreboard, it felt like he had regained his soul. The second, third, and fourth milestones became increasingly motivating and often led to them feeling closer to each other than they had felt in a long time.
When Shiree and Tyson conducted a financial skill scan, they quickly realized that they had all the wrong skills. They knew how to shop credit card rates, screen calls to avoid creditors, and avoid talking about their real future—to name but a few of their dodging techniques.
What they didn’t have were the skills required for living in financial peace. They were ignorant about basic investment management. They were clumsy about tracking their financial status or assessing the impact of decisions they made. They never felt inadequate, because everyone they knew was equally unskilled. Most college students get an F (scoring 53 percent correct) on tests of basic financial literacy.8 Our indebted couple was no different.
So the two set a course to become financially savvy. First, they became regular listeners to a radio talk show on personal finances. Next, they bought and studied a couple of highly recommended books. Then they discovered a free personal finance web application that made it easy to track their progress. Shiree loved knowing where their money was going and where their finances stood. Always the banker’s daughter, she fell in love with her computer tools and the power they gave her to control her money.
Then, to deal with their biggest challenge, they worked on their will skill, or impulse control.
“We were far too spontaneous,” Tyson explains. “At the supermarket checkout stand I’d throw in two breath mints, a magazine—and if it had been possible, a Lexus.”
Their first line of defense against unplanned purchases was their vital behavior “Know before you go.” By writing that precise list in advance, they didn’t have to decide what to do each time they stumbled into a tempting new product. If it wasn’t on the list, their answer was no. End of discussion.
Later, when they gained more control over their spending, they added a delay-and-distance tactic. In areas where they had some flex room, when they came across something they thought they might want and it fit in their budget, they’d write it down, return home, and then revisit the purchase twenty-four hours later. If they still thought it was okay, then they’d make the purchase.
When it comes to shopping, many of the people you associate with are accomplices. Research shows that consumers have a much stronger impulsive urge to buy when they are shopping with others.9
Be careful about the negative influences of peer pressure. Remember what happened to our fifth-grade shoppers when we surrounded them with others who were snapping up horribly overpriced candy? Within seconds they were swept up in the social spending frenzy.
Here’s what you can do to reverse this well-documented and powerful effect.
Redefine “Normal.” One of the best methods to get social influence on your side is to get yourself on your side. Stop judging your self-worth by your net worth. Embrace the idea that happiness doesn’t go to the person with the most toys. Take heart in the fact that there is no correlation between spending and happiness. There is a mound of research that suggests that a little exercise can bring you more pleasure than a thirty-thousand-dollar raise.10
The wonderful thing about redefining “normal” for yourself is that in so doing you inoculate yourself against all kinds of unhealthy social pressure. When others are going golfing on the weekend and the greens fee is out of your price range, you can comfortably say, “I’m going to pass,” and not make yourself miserable with self-conscious ruminating. Learn to embrace simplicity and authenticity. It’s incredibly liberating!
Hold Transformation Conversations. For most of us, cutting ourselves off from friends and family members who encourage us to spend irresponsibly is overkill. A more reasonable choice is to transform our spending accomplices into our friends. That’s what Shiree and Tyson did. Obviously, since day one they had been accomplices to each other. Their indulgence in impulsive spending condoned and even provoked that behavior in each other. Fortunately, their mental visits to their rather bleak future motivated them to have a series of transformation conversations—with each other. One discussion at a time, they transformed each other into friends, and each mutually committed to becoming financially fit… together. Then, at their planning and review meetings, they sincerely complimented each other’s integrity and celebrated each dollar of debt paid off and each dollar added to savings.
Next they took on larger social circles. They had talks with family, friends, and co-workers about what they were trying to do and asked each for his or her support. They suggested less expensive family reunions and talked with their friends about the need to change the location of some common get-togethers. Instead of meeting at a mall and walking the hallways, where temptation lurked in every store window, they started walking the neighborhood. Then, as they walked, they started sharing cost-cutting advice, shopping deals, and free entertainment venues.
Add New Friends. To help connect themselves to others who were trying to become more financially responsible, Tyson and Shiree developed a virtual “friends” network made up of hundreds of others who listened to a personal finance radio talk show. Adding these distant friends had a much greater effect than they ever imagined. The comments of one particular caller stuck with them for months. It was an elderly woman who was filled with remorse because she and her husband were ill prepared for the life they were living now in their seventies. She told the host how difficult it was some weeks to choose between medicine and food. Shiree was hit particularly hard by the story because Tyson had a heart condition that required some fairly expensive medication. She was horrified to think that one day Tyson might skip a week of medication so they could fill their car with gas, for example. A woman they never actually met had a powerful influence on their perseverance with their plan.
As Shiree and Tyson succeeded in their plan, the intrinsic rewards were tremendous. Feeling in control was its own reward. They also loved reporting their progress in a family blog. As family members came to understand how important their financial goals were to them, they began to give electronic high fives, which meant a great deal.
But they also added an extrinsic reward to the formula. Their plan was simple. For every week they stuck to their financial plan, they rewarded themselves with a cost-free Wednesday night date. Just the two of them would spend time having fun together. Both were amazed at how much they enjoyed these midweek dates and did their best to not jeopardize their time together.
Take note: This was a low-risk, cost-free reward. They didn’t walk through the mall; they walked through the park. They didn’t buy dinner out; they ate at home and had an inexpensive treat.
Some of the simplest and most powerful changes Shiree and Tyson made were structural in nature. They made easy changes in a few physical factors that, in turn, made a huge contribution to their success. With time they came to realize that when it comes to financial fitness, Source 6 can become a powerful ally.
Use Tools. The most important physical device the two employed was a cell phone app that displayed how much they had left in each budget category. It even synced their combined spending so they could see the net effect of their actions. As simple as this application sounds, it had a profound effect. Like most bad habits, spending addictions are sustained by mindlessness. Their cell phone app helped them become conscious of the choices they were making while also helping them see their cumulative effect. By forcing them to make their choices mindfully, the simple, inexpensive app profoundly accelerated their change.
Engage Your Autopilot. Tyson and Shiree used their natural tendency to do nothing to their advantage as well. They set up an autopilot that made positive change the path of least resistance.
Their plan was based on very good social science. Behavioral economist Richard Thaler created a retirement plan called Save More Tomorrow. Those who sign up for the program don’t have to sacrifice today but instead agree to place some or all of their next salary increase into their 401(k). They make this decision a year before the increase comes. Then when it actually arrives, they don’t miss it because they’ve never adjusted to it. When people do this, they tend not to think about it anymore. They create the default setting and then let it control their destiny—in a positive direction.
That’s exactly what Shiree did. She asked her HR department to automatically withdraw a modest amount from her paychecks for her 401(k) account. But then she asked that 100 percent of her future salary increases be funneled in the same direction. Tyson made the same commitment with the retirement plan he had set up for himself. Three years into their automatic plans, Tyson is saving the maximum amount toward retirement and Shiree is also getting the full benefit of her company’s matching contribution—all without torturing themselves over the decision over and over again.
Build Fences. Adults—just like the fifth graders we reported on in the first chapter—spend more carefully when they use cash. In contrast, credit cards, casino chips, and the like make it feel as if you were not spending your hard-earned money. It’s funny money. So Shiree and Tyson built a “cash fence.” That is, for six months they paid for everything in cash.
This decision turned out to be incredibly inconvenient but went a long way toward making the two big spenders fiscally aware. They began the experiment with some “plastic surgery”—they cut up all of their credit cards but one. In addition, they removed credit card information from all the websites where they were set up for automatic purchasing. Instead, if they made an online purchase, they would use a system to debit their checking account immediately. By making a one-time decision and then walling themselves off from these risky devices, they made their crucial moments far easier to handle.
Manage Distance. As we explained earlier, Shiree and Tyson avoided places that would tempt them to spend money. They turned down invitations to expensive restaurants or to pricey activities. Initially they limited themselves to grocery stores, and even then, they stuck to a sparse shopping list.
This distancing tactic was tough to begin with because the pair really enjoyed ogling and purchasing new merchandise. However, with time they learned to visit and enjoy new locales. For instance, their neighbor gave them an unused tandem bike, and after making a few alterations, they began taking an hour-long ride each evening. By placing themselves in interesting no-spend zones, they kept their distance from brick-and-mortar (as well as cyber-) dens of fiscal iniquity.
Change Cues. Tyson and Shiree did everything they could to remove buying cues from their environment. They also added cues that kept their attention on their long-term goals. They posted graphs showing their progress toward paying off their debts, they created a collage of the lifestyle (home, cars, and vacation) they’d like to enjoy guilt free someday. They even changed their home pages and favorites bookmarks on their computers to remove all buying cues.
Finally, in an effort to save money and the planet, they used a service to get their names removed from countless catalog mailing lists.11 Over the course of the first year, their mail shrank by 90 percent. It took longer to get dropped from e-mail distributions, but through the magic of junk filters they even cleaned up their electronic cues fairly quickly. Again, they made these changes to get rid of the temptation of purchasing needlessly.
Three years after embarking on an effort to change their financial situation, Tyson and Shiree have achieved remarkable results. They’ve paid off their car and credit cards, making them debt free except for their mortgage. With less money going to interest payments, they now make extra payments each month to pay off their condo in half the time (saving a fortune in interest).
Now that they have their spending under control—and budgeted in a way that creates excess rather than a deficit—Tyson and Shiree are adhering to the vital behaviors that financial gurus have been suggesting for years. They don’t have (nor will they create) credit card debt, they stick to a monthly budget, and they set aside 10 percent of their income toward retirement.
As a result of their combined efforts, the transformed couple describe themselves as happy and relatively stress free. For the first time in their relationship, they now enjoy saving and feel optimistic about their financial future. Plus there’s been an added bonus that came from solving their problem together. Both believe that their journey to fiscal fitness has strengthened their partnership.
Like those of others who are working to get out of debt, increase savings, and retire in style, theirs was not a straight line to success. They had some setbacks. Just like the rest of us, they had to learn and adjust. They know it’s a continual process. But it is a known, tested, and effective process.
That means that you too can find ways to spend less and save more. You can overcome Dave Ramsey’s observation that “most of us know what to do, but we just don’t do it” by learning exactly how to do it. Decide what you really want, identify your crucial moments, create your vital behaviors, and then engage all six sources of influence. Do this and you can create that ever-elusive and wonderful thing known as a financial surplus. Do this and you can change anything.