The Psychology of Cash Flow
Never say budget. Learn the psychological traps that can keep you from managing your money successfully.
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Full Transcript below:
Speaker 1 (00:07):
Welcome back to 30 Minute Money, the podcast that delivers action-oriented smart money ideas and bite-sized pieces. Today joining me in studio fresh into the new year, Steve Wershing from Focused Wealth Advisors.
Speaker 2 (00:20):
Nice to see you, Scott.
Speaker 1 (00:21):
Nice and fresh.
Speaker 2 (00:23):
Nice and fresh. Excellent. Yes.
Speaker 1 (00:27):
So it's good to see you. Glad to have you here and to talk about some cool things. Good to be back. Like psychology.
Speaker 2 (00:35):
Like psychology and money. And
Speaker 1 (00:36):
Money because
Speaker 2 (00:37):
Psychology,
Speaker 1 (00:38):
We love talking about money. Yes, we do. That's kind of what you do.
Speaker 2 (00:42):
Yeah. So speaking of psychology, Scott Fitzgerald, why do you hate budgeting?
Speaker 1 (00:50):
Wow. How much time do we have? Exactly. Extended version of this projects 30 minute
Speaker 2 (00:54):
Money.
Speaker 1 (00:55):
Yeah. So the short answer is just because I'm not a numbers person, I'm a creative, and so I'm diametrically opposed to the process that goes into that kind of operation.
Speaker 2 (01:09):
Yeah, sure. And you can probably also imagine why other people hate budgeting as well, for all kinds of good reasons. One of them is because the way many people approach budgeting is sort of from a deprivation kind of perspective. It's like, I will only do this much or I will not do any more than that, or that kind of thing. And also some people just feel like it's just going to be too time consuming. It's like I don't have time to write all these numbers down and gather all this information and that kind of stuff. So all kinds of really good reasons why people really dislike budgeting. But what budgeting accomplishes is still really important to your financial plan. Oh yeah. So what I wanted to talk about today was how you can accomplish what you need to accomplish, but in a way that's a whole lot less demanding and less unpleasant and easier to do. Cool.
Speaker 1 (02:09):
I like
Speaker 2 (02:10):
Easy. Yeah, easy is good. We like easy. One of the other challenges too, even if the approach of I will spend no more than a hundred dollars this month going to restaurants or whatever, even if that worked, which it doesn't talk about that in a minute. Possibly the biggest problem with budgeting and certainly one of the biggest challenges that I have as a financial planner when I'm working with clients is that people attempt to make decisions like this without information. That if you don't actually know how much you spend on gas, if you don't actually know how much you spend going to restaurants, if you don't know all that stuff, if you don't have data in front of you and you're just throwing darts at the wall hoping that I think this is about what I spent, you're going to be wrong. And then you're going to get frustrated.
(03:02):
Because if you think that you spend $500 a month grocery shopping and you look at the receipts at the end of the month and it's $700 and you feel like I can't cut that much out, the problem was not in how much you're buying. The problem is how you are approaching the problem. And so there are a couple principles that I want to bring into it that will make it a lot easier and help make it more possible for people because really it is the basis of a financial plan. It's really important to know where your money goes so that you can do projections and figure out if you're going to have enough later.
(03:46):
So let's talk about psychology for a minute. Any sentence that starts with I should is going to give you problems. We could go into it. This is a short podcast, so we won't go into it too much. If you want to know more about it, you can read Drive by Daniel Pink, or you can read Why We Do What We Do by right here at the University of Rochester. Nice. Yeah. This is in 30 minute. Yeah. Analyst or something and it's called, yeah, right. Exactly. 30 therapy and it's called Self-Determination Theory. But basically when you say I won't or I should or those kinds of things, you're setting up what the transactional analysis people would call a parent child communication. And so if you are saying to your kid, don't do this, or you can't do that, what are they going to want to do immediately? Yeah. That thing, right? Yeah. So when you say, I should really do this, your inner child is going to rebel and say, oh yeah, watch me hold my beer. Well, I mean, if you're actually parent child, it's more like Hold my root beer. So don't should all over yourself. I'll suggest that you approach the idea of budgeting from a different perspective.
(05:13):
And this was taught to me actually by a friend of mine who is another financial advisor. And the way that he perceives it is budgeting is the process of taking a look at comparing what you thought was going to happen with what actually happened. So one of the big things here that will make it a lot easier is don't do no value judgements, no good and bad. No, I need to do this. I need to do less of that, or I shouldn't be doing that. Don't have any of that self-talk, right? Pure data. Yeah. Just say, this is what I believe happens. Let's collect some data and let's see, let's compare. And even if you've got good rock solid information, even if you've got really strong data, well one month is going to be different than another. Your washing machine's going to fail or you're going to need new breaks or something like that, and it's all okay. And if you say, I anticipate that I'll spend about a hundred dollars a month on auto repairs in one month, you spend 500 bucks. It's just information. It's not good or bad. You didn't break anything by doing it. You can then look at it and say, well, is this going to repeat? Is this going to happen again? Should I update my expectations? And just make it a process of refining your expectations and then comparing reality to it so that if reality differs from it, you can make different choices.
Speaker 1 (06:36):
And I don't want to get ahead of myself here, but the biggest problem that I have is it's like, okay, it's a new year. I want to do this year right now. I've got to look back at last year to try to figure out what the data is data are, but that's where I trip and fall because I go, oh, how am I going to go back and find out every time I got gas? Right. Do you suggest that when you do that you just do a couple of months and then take an average and then spread that over the year? Or how do you do that?
Speaker 2 (07:12):
Well, so actually that concern, that challenge is exactly where you would start. And the thing that will help you the most in this is getting, we have tons of technology now that will track all of your expenses for you. You can use Quicken, you can use our clients, use our planning system for it, our planning system. You can hook up your bank accounts and your credit card accounts to it, and it will automatically download transactions and it
Speaker 1 (07:42):
Groups them. It tells you what.
Speaker 2 (07:45):
Yeah. And that's where the investment of time comes in. But we start just by gathering data and we'll clean up the data afterward, but start by gathering data. And when you do that, if you start with Quicken or with our system or something like it, what it will do is it will go out and it will download a bunch of information to start with. So it may, as soon as you start it up, it may download three months or four months or even longer of information that you can start with. So that's where you would start is saying, okay, well I want to have a better handle on this year and I want to feel more in control of my finances this year. So let's collect some data. When you start that, you'll probably start off with somewhere between three and six months worth of data.
(08:31):
And so you can just start there, and then the investment of time comes in and the investment of time is really upfront, but it doesn't repeat. So the investment of time is in cleaning up those categories. When the system brings things down, it's going to look and it's going to see mobile. Okay. So it'll probably automatically put that into auto fuel, but it's going to bring down other categories and it's going to miscategorize. So you need to do a little bit of cleanup, but most of those systems, if you clean it up, it will memorize which vendors go with which categories. And so when it downloads stuff from then on, it will download most of them into the right categories.
Speaker 1 (09:13):
How long do you think it would take for the average person who does no budgeting at all to sit down with one of those programs and come up with a working viable budget to go off of
Speaker 2 (09:27):
A couple hours?
Speaker 1 (09:27):
Just a couple hours? I think that's an almost a no-brainer.
Speaker 2 (09:32):
And one of the secrets too is try not to tackle it all at once. So first pick a system and then download a bunch of stuff and then set aside a half an hour and sit down and take a look at the categories and start working on cleaning up the categories. And if you need another half hour schedule, another half hour at some point. And you might find if you're half an hour into it and you're doing fine, so you can keep going, but don't feel like you have to do all the whole thing at once. That's one of those things that makes it feel overwhelming. So you can do it in little bite-sized pieces first, start downloading the data, second, start cleaning up the data, let that clean it up over the course of a couple of weeks. And then when you have some of that stuff, then you can start taking a look at what do the patterns look like? You don't have to do that all right away. And that's a big part of what makes it easier.
Speaker 1 (10:19):
And this is something that I would assume is good to sit down with your spouse or your partner or whoever your in this financial boat with and do it as a team and maybe split the time so that there's not one person. I can see that in a marriage. Sure, I've been doing all this, I did all this work. Why aren't you, didn't you? That battle? That can sometimes happen,
Speaker 2 (10:49):
And sometimes that can happen. It's also very common that in married couples, one person naturally has the natural inclination to do that and the other doesn't.
Speaker 1 (10:58):
Right? I was going to say something else, that one person makes the money and the other person spends it. Well, there
Speaker 2 (11:04):
That's possible as well, but it is really common for one person just to be inclined is more comfortable with this stuff or likes doing it more or whatnot. I would suggest strongly that it's totally fine for one person to sort of do most of this stuff, but I would strongly encourage married couples to sit down once a month maybe, and just review what it says because it's important for both people to know what's going on. One person can do all this stuff. If neither of you really wants to do it, then it's probably a good idea to split the responsibilities. But even if one person's totally fine to it, really likes to do it, it's a good idea for both members in the partnership to at least know what's going on. And that's also important because the next step, and again, this is a really important psychological thing, is instead of saying we should, or we must or we can't, or those kinds of things, say, what would we want?
(12:02):
Once you take a look at the numbers, you can say, this is how much we spent in gas last month. Or you can say, this is how much we spent in travel last year, whatever it is. Then you ask yourself, is that what we would want? And as long as you're making choices based on real information, based on what you want, it can work if you try to. That's why a lot of the other ways fail psychologically because you're fighting against yourself. But if you look at it and say, you know what? I would really rather spend less in this, or I would rather invest in that a little bit more per year or whatever. If you're making choices based on real information, that's the secret to making it work is because all the psychology lines up, you're doing what you ultimately want to do and you're doing it based on data. So those are all the things that go together to make for good choices.
Speaker 1 (12:58):
And I can imagine that once you get it done, once you get it all set up and then you've gone a couple of months and you're seeing the data, you're seeing your spending and you're getting a better idea, the peace of mind that you must have is something. So I'm actually excited about doing this. Now you talking about it. I am excited about doing this. It's not something I was ever excited about, but I'm thinking of the end result. I'm thinking of the possibility that one day soon I could be like, Hey, I know how much we're going to spend pretty much, and I know what we can do. Can we do this? As a matter of fact, we can. All we have to do is not have pizza for three weeks. We have pizza every Friday. That's our thing. That's our family thing. So it's like, what if we say we're doing it every other Friday and we're saving those Fridays so that we can do this, and we know where the money's going. I love it.
Speaker 2 (13:57):
And even better if I can make a suggestion rather than say, we're not going to do pizza for three months, for three weeks, say instead, I think what I want to do is to have spaghetti this Friday instead of pizza.
Speaker 1 (14:08):
Ah, the psychology.
Speaker 2 (14:11):
No shoulds. Because now you're not denying yourself pizza. You're just making a choice. You know what? Pizza's good. Spaghetti's good spaghetti's a quarter of the cost of the pizza. I think I'd like to do spaghetti this week,
Speaker 1 (14:25):
So I'm going to trick myself. I got it. I do that all the time.
Speaker 2 (14:28):
Yeah, exactly. Exactly. And so getting the year started, right, instead of doing all the unproductive things about budgeting that don't work, pick a way that does work. And what does work is making voluntary choices and basing that on data. So that's the takeaway for today.
Speaker 3 (14:53):
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Speaker 1 (16:19):
Alright, so making a budget, 30 minute action item,
Speaker 2 (16:24):
30 minute action item is find a system that downloads your transactions. That's where it will all start.
Speaker 1 (16:30):
All right. Get yourself a bot to do it. Thank you for joining us once again, 30 minute Money, three zero minute money is where you can find us, of course, on all of the podcast platforms. We will be back again with Steve Wershing of Focused Wealth Advisors and myself, Scott Fitzgerald of Roc Vox Recording and Production. Have a good one.