Money is Emotional, not Rational

Money is not math, and math is not money. Money is emotional.

Many will argue that the decisions they’ve made or the way they handle their finances is based on logic. But when we peel back the onion, there is no logic. Only emotion.

Much of that emotion stems from lack of understanding. They do things the way they do them because it’s how they’ve always done them or because it’s comforting to them. Maybe their parents did it that way. Maybe one of the financial media talking heads or some other complete stranger told them they should do it that way.

One of the questions I ask people in our initial meeting is: “What aspect of your current financial position makes you feel good?”

The two most common replies are: “I’m max funding my 401(k)” and “I’m making extra mortgage payments.”

I show people empirical evidence to demonstrate why these things may not be the most cost efficient way to build personal wealth every single day. I’ve written enough about exactly why I often recommend against these two things, so I’m not going to here, but as the question confirms, people do this because it makes them feel good. It makes them feel safer. But neither really does make them safer.

Putting money in the walls of your house or a 401(k) feels safe because we can’t get the money out to spend frivolously. Putting the money there to protect it from spendthrift tendencies only works until something comes along and you need cash. Then these are terrible places to have money.

This is just one of many examples. Here’s another. One of the services we provide our clients is to negotiate the purchase of new cars or other major purchases for them. We’ve seen enough transactions where our clients were taken advantage of, and many have said our guidance through what is often a very stressful process is tremendously helpful to them. But some who take us up on the offer don’t take all the advice we give them. Maybe we show them why using manufacturer financing would save them thousands. But the discomfort of having to make payments is too much to bear, so they pay cash. Others still don’t take us up on the offer because they’ve done business with a certain dealer before and don’t want to appear foolish, or disrupt their relationship. Even if we (gently) show them this dealer has been hosing them for years.

I could go on. There are many examples of people doing things because they can’t bring themselves to reach beyond their comfort zone. But I’m here to tell you that’s the only way anyone has ever grown personal financial wealth.

I’ve been doing this for over twenty years, and I have yet to see someone become wealthy by putting money in a 401(k), or by refinancing to a fifteen-year mortgage.

Now before you start hassling me with your comments about why me telling people they shouldn’t ever do either of these things is sacrilege, that’s not what I’m saying at all. Accumulating some of your money in 401(k)s and home equity is not a bad thing. But if it makes up half of your wealth, you’re setting yourself up for disappointment.

The financial institutions, on the other hand, are emotionless. Their financial behavior is exclusively rational, and they are keenly aware that ours is not. In fact, they have expended vast resources to learn how they can maximize their exploitation of this phenomenon. Making commercials that show us walking around our neighborhoods with our net worth figures floating above our heads is a text book example. All their marketing is carefully crafted to play upon our fears. And it’s working.

Show me someone who became wealthy on their own, and I’ll show you someone that wanted to badly enough to break away from the herd and take risk. A risk that scared the crap out of them, but because they wanted it bad enough they did their homework, thought about it, laid awake at night worrying about it, and made the leap, despite still being completely freaked out about it.

But if you’re content to hide out in the herd hoping your number doesn’t come up, that’s OK too. Millions have gotten by doing so for ages. It doesn’t make you a bad person.

I rant about the institutions all the time. And with good reason. Part of our mission is to protect our clients from their malfeasance and blundering.

The other part of our mission is to save them from themselves.

Who are the people you love that are ready to be saved?