Being in debt is largely a matter of second grade arithmetic — if we spend more than we earn then we’ll get in debt; if we continue spending more than we earn then we’re likely to stay in debt.
The solution is to reverse the equation: Instead of spending more than you earn, start earning more than you spend. Put the difference against your debt regularly and soon it will be gone; continue stashing away the difference and soon you’ll have considerable savings on which you could retire and live happily ever after.
Who said there is no direct link between maths and happiness!
Here is my problem: Arithmetic, just like any description, is very useful in telling us about the “what.” What is the current state? What is to be done?
However, most action, and change, also needs the “how.” In this case, how do we stop spending more than we earn? My answer to this is: By changing the habits that shape the way in which we manage our money.
Most aspects of our lives, including our finances, are habitual. Habits are what makes our lives possible; sometimes, however, these can become obsolete and hinder our existence rather than enhance our lives.
Being in debt is usually a signal that our money habits have become obsolete. Here are the four basic habits that keep us in debt:
Ignorance
Ignorance, in any area of life, is an affliction that needs to be remedied as speedily and efficiently as possible. Ignorance keeps us in debt in four different ways:
- Ignorance about our personal financial situation prevents us from acting
- Ignorance about money and money management deprives us of choice
- Ignorance of broader economic developments makes it impossible to place our personal financial situation in context, or understand and change it
- Ignorance limits our earning capacity
Who says that ignorance is bliss?
Albert Einstein once said the only thing that interfered with his learning was his education. I agree. So, to deal with the habit of ignorance start learning.
Remember — learning is not a one off act; it happens in all kinds of settings. Get educated:
- Check these financial statements, use technology to link and manage your personal bank accounts
- Educate yourself about the fundamentals of money management
- Develop the personal habits that underpin responsible financial behavior
- Follow what is happening with the economy; remember that the economy is very sensitive to politics
- Develop competencies and skills that will help you get a higher paid job
Change this habit of ignorance and start now — but remember:
- Education is about what you know and can do; a degree is about certification. Go for education!
- Don’t assume education in a particular subject will bring the highest financial returns. For example, top accounting firms rarely recruit people with degrees in accounting; many recruits have degrees in classics, history and philosophy.
Lack of balance
Socrates said that the way to happiness is to observe moderation in all things.Just like in life, financial moderation provides an anchor for balancing our decisions and actions.
Losing our balance with money can easily send us into, and keep us in, debt.
The remedy? Understand the kind of life you want and what do you want in your life. Remember that:
- Money doesn’t make much sense if it doesn’t nourish your life; and
- For a different future you should plan from where you want to be, not from where you are now
Bad judgement
Most people make decisions based on emotional judgment, rather than facts. Humans have almost unlimited capacity for self-delusion; which means many of our judgements are really bad. Regarding debt this can be: ‘I’m in debt but I can pay it off at any time.’
One of my all time favorites is: ‘I’ll deal with my debt when I get a raise.’
It doesn’t work like that. People pay their debts off when they decide that they’ve had enough. After that, even the smallest payments help: We had $160,000 worth of debt and, after paying it all off, I noticed our smallest payment was $6.
So become mindful of your assumptions and change them when and if necessary. Experiment rather than assume.
Inaction
Most people’s lives consist of selected intentions. I know because I was there! And things started changing only after I started acting.
The bottom line
Ignorance, lack of balance, bad judgement and inaction are habits that impair our financial health and keep us in debt. Changing these habits is hard — but it’s so worth it. In all senses of the word!
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About the Author: Maria is the blogger behind The Money Principle: a personal finance blog that will make your head hurt and your wallet sing.
Photo Credit: Stock Monkeys
Ignorance is bliss until you realize the mess you are in and that it will take triple the time to dig yourself out of it. Unfortunately we all keep a certain level of ignorance in some part of our finances or life. Great post Maria!
Thanks, Pauline. You are right; I call these ‘carefully chosen areas of ignorance’. Like, I rarely think of the calories when eating a bar of lovely, smooth, milk chocolate. Still, I should :).
“Albert Einstein once said the only thing that interfered with his learning was his education.” This is so true.
When we think we know we (most of the times) stop learning.
Jai, glad you liked it; I was very taken by this quote myself – it has layers of meaning. And I agree with you – once we decide we know something we close the possibility for improving.
“Being in debt is largely a matter of second grade arithmetic.” And along with the arithmetic I think we need to start teaching in second grade about debt and the remedies you recommend. Would make for some excellent math exercises!
Kurt, agreed. I fail to understand why school fails to teach children about responsible PF behaviour. It is as, if not more important than, ethics and relationships.
In principle agree, Krant. But there is control and control. Not buying a coffee is one level of control; not getting this lovely Gucci handbag is a different one. And buying a poverty model airplane is also controlling spending. This is also important to remember – that it is in the ratio not the number.
It’s arithmetic, alright. However, it’s the spender’s mindset to spend like there is no tomorrow. I strongly believe some folks ought to see a shrink. Many researchers have pointed out and commented on the spending behavior of folks.
Shopping has become recreation (beats me) and some do overspend. But being in debt (or any money management for that matter) is about knowledge/information, assessment and action.
“Suffice it to mention that top accounting firms rarely recruit people with degrees in accounting; many of their recruits have degrees in classics, history and philosophy.”
Stopped reading here, please list all the firms you know who don’t want people with accounting degrees and CPA certification.
What makes people employable is a very complex question (if you would like to know a bit more on what I have found about that you can read the following academic article http://www.tandfonline.com/doi/abs/10.1080/02680930903349489#.UZXFv1GQMx4). As to listing the firms who recruit from classics and philosophy, my co-author who is a prof in accounting has access to data sets that show that all top four do. And they want people who know about accounting – they just think it is better to get in people with broad education and teach/train them in the ‘craft’.
Being in Debt is really a stressful thing in today’s thing this is a very informative blog that describes how should we balance our earning and what strategy we should follow to get rid of the problem of Debt
Lorn Austin
I would agree that being in debt is very stressful; and paying it all off feels so good :).
For me, the big one is feeling like I “deserve” things. Thinking things like, “I worked hard this week; I deserve a treat,” is an easy way to make purchasing decisions I will later regret and that will hit my budget hard.
Oh, how I know this feeling. My way to deal with this one was that when I was weaning myself off spending stupidly, I made sure that I kept some of the things I love. Expensive perfume, for instance – which, actually only seems expensive. It is a good idea to deal with the ‘deserve’ mentality anyway – I find it can spill over in other spheres of life.
TV advertisers exploit this emotion: “Get the (this-or-that) you deserve!”
I hate it.
Great points; being honest with yourself is absolutely the first step.
I think ignorance disappears with age. The older you get, the wiser you become, in most cases. Otherwise, you are in big trouble.
I have to disagree on the hiring of top accounting firms. The top accounting firms hire accounting graduates or CPAs. I know quite a few people that work in the top three firms and they’re all accounting degree holders. They really don’t have time to train people on accounting skills. Colleges do that. It is the same for Engineering or the top Medical jobs such as doctors, PAs and nurses. They have to be trained in colleges and certified in their specific specialties before they can work in their fields.
Fantastic read, Len! It’s about time someone wrote about this!
I agree, Olen. (!)
This sounds so logical and so easy. But how come so many people ends up with bad debt? Why do people put their head in the sand and just continue spending even they cannot afford it?
Do we need more education?
PJ, I think education is a kind of “fix-all” that current fashion would try and impose externally on a problem which is internal to irresolute people.
Self discipline is developed in childhood, IMO and that’s when parents can teach it, by example.
I totally agree with your statements:
“The solution is to reverse the equation: Instead of spending more than you earn, start earning more than you spend.”
“Ignorance, lack of balance, bad judgement and inaction are habits that impair our financial health and keep us in debt.”
I don’t believe in the cliche “Mo’ money, mo’ problems”…As long as you know how to manage your money and you trust the real experts in handling finances, your money can grow without so many problems.