Everyone starts their path to financial independence from a different position. The popular belief that everyone born in this country has an equal opportunity for financial success is a Utopian myth. It may be an ideal foremost in early European settlers’ minds as they escaped a society where wealth was determined by little more than birthright, but the playing field isn’t quite as level as some Founding Fathers would have liked. From the moment of conception, all are created equal, but after birth, we are each subject to the environment in which we live. The environment can be toxic if those around us do not place a high value on education, self-efficacy, and positive financial behaviors.

As children, we have little control over the environment and the behaviors of those around us define our attitudes in life, and as an adult, if there’s no compelling reason for change, the cycle will continue for yet another generation, embedding negative behaviors deeper into a social microculture.

If poor attitudes towards money and harmful behaviors approach the point of manifestation, it’s already beyond the point of recognizing the problem. It’s not too late, though. About a month ago, I addressed the psychological barriers to admitting there’s a problem and some thoughts for overcoming mental constructs that get in the way of financial success.

Even after admitting a problem exists — coming to terms with the idea that one is not on the road to financial independence and may in fact be approaching poverty or lifelong debt — the road ahead is a long one. Taking the first step to changing your life is daunting and frightening.

As I’m writing this, I’m reminded of a trailer for a new movie starring Will Smith and his son. I haven’t seen the movie, but the advertisement for the movie includes the actor offering the following advice when faced with difficult challenges for survival:

If we are going to survive this, you need to remember: fear is not real. It is a product of the thoughts you create. Now do not misunderstand me; danger is very real. But fear is a choice.

Now, fear isn’t exactly what prevents most people from saving a portion of their income, curbing over-shopping habits, setting up an emergency fund, and paying off debt. I would guess that the only fear might be the fear of losing one’s money deposited in a bank. The fear is irrational, and there is no real danger. But fear is a mental construct like the more specific psychological barriers that prevent people from taking the first step.

The article by James M. Olson, PhD in the Canadian Family Physician, which I referred to last month, describes these barriers.

Lack of knowledge

Education is always the first step. With “Financial Literacy Month” now concluded it’s a great reminder that learning the facts about money and the appropriate behaviors is not nearly enough to change the way people behave. I’ve written about the lack of effectiveness of financial literacy programs extensively, most recently discussing the virtues of positive financial role models. Guest author William Cowie also recently discussed four invalid excuses preventing people from investing.

On financial literacy, in the last few weeks, the chorus of agreement has gotten louder. Jason Zweig from the Wall Street Journal added his voice:

There is even some evidence that fin-lit classes can make people worse off. One study found that soldiers who had studied fin lit ended up significantly less likely to have systematic control over their household budgets. Another showed that people who had taken a fin-lit class in high school later reported that they were less thrifty, less likely to pay their credit-card bills in full and more likely to bounce a check.

After all, a little knowledge is a dangerous thing: Taking a fin-lit class might well give the least financially knowledgeable people just enough confidence to make them think they can safely take extra risks…

In one Federal Deposit Insurance Corporation survey, nearly two-thirds of banks said they participated in a fin-lit program because it was a way of “taking advantage of a good business opportunity.”

If financial education is not effective or even harmful, how can the psychological barrier of the lack of knowledge be conquered? The reason we turn to financial literacy in schools, non-profit organizations, and free seminars from for-profit entities in the financial industry is because it’s so difficult to impart skills and positive attitudes through the only effective means — being there for children during their formative years, exemplifying the positive behaviors and attitudes and being living examples of the results of these behaviors and attitudes.

I don’t know if there’s an answer to this question that has proven to be effective, but it’s something I’m interested in discovering.

Low self-efficacy

William Cowie described one of the four excuses preventing people from investing as the attitude that causes people to think, What’s the point of investing? I’ll just lose money anyway. There is some truth to this. Unless you invest enough money into a company to be part of the management team or oversight board, you don’t have much control. All shareholders can vote, but it’s rare for any one individual shareholder to dictate the operation of the company. When you invest in a company, you put your faith in management to make the right decisions. When you invest in an actively-managed mutual fund, you put faith in the fund manager to make the right investment choices. When you invest in an index mutual fund, you put your faith in the stock market. There is a lot that is out of the investor’s control.

But you do have control of certain things. You have control over the companies in which you investments. You have the ability to research your investment options, make choices for yourself, monitor your progress, and adjust as necessary. The choices you make have a direct bearing on your investment results, although that might not be apparent until later.

Low self-efficacy isn’t limited to investing. If you are convinced that paying off debt it pointless because you will just return to debt, or if you’re convinced that society has placed you in a situation like poverty or homelessness that is difficult to climb out of, you’re blocking yourself from moving forward.

The choices you make can have a profound impact on your financial health. And while external resources can help you move in the right direction, they only work when you actively pursue improvements yourself.

Dysfunctional attitudes

The Canadian Family Physician article describes two types of dysfunctional attitudes: unfavorable attitudes towards healthy behaviors and favorable attitudes towards unhealthy behaviors.

The second type is easier to describe and understand. Although people know smoking causes cancer and death, smokers do it anyway. Some will never make any attempt to quit simply because it’s a behavior they enjoy. Reasons often go deeper, but harmful behaviors are often fun and activate the brain’s pleasure centers. The idea of owning a beautiful house and driving fast cars is appealing to a lot of people, but if the financial groundwork to support those behaviors isn’t in place, these desires can lead to financial difficulty and delayed or prevented independence.

The other type of dysfunctional attitude usually consists of poor excuses:

• Budgeting is a tedious chore.
• Savings accounts earn paltry interest rates, so an emergency fund would actually lose value.
• Insurance is a financial industry scam.
• Banks are useless for people in my community.

To overcome dysfunctional attitudes, it takes an external force. When people are genuinely scared for their life, quitting smoking suddenly becomes an easier task; in fact, even the chemical barriers contributing to addiction seem to disappear, and though people speak of it being difficult to quit, the “cold turkey” method is suddenly effective. (Why? The danger, which has always been real, becomes too obvious to ignore.)

The external force for getting over dysfunction attitudes and taking the first step is most effective when it manifests as a serious problem affecting someone’s life. We can try financial education. We can write articles about diligently paying off debt until our fingers fall off, but if someone isn’t ready to hear the message, it won’t break through embedded attitudes.

Like physicians have a role in helping patients overcome their dysfunctional attitudes, financial advisers can play this role. But while everyone has — or should have — a doctor they see regularly, someone who can monitor their progress, relatively few people have a financial adviser to guide them on a personal level.

Another dysfunctional attitude is the belief that making the wrong choice with your money can be worse than making no choice at all. Financial advisers and writers like to argue about things like whether it’s better to use extra cash flow to pay a mortgage off early or invest, but in the end, either choice is better than spending too much time analyzing the possible outcomes.

The first step in the direction of financial independence can be the most difficult. This may be a long article that addresses some of the finer points of what, in a person’s brain, prevents him or her from starting a path to change, but it comes down to will power. When you want something bad enough, you make it happen. To want something bad enough, you have to see the future, one future that looks bright, and another future full of trouble. Some won’t see the future until it’s plainly in front of them. Some need help seeing the future.

The more we can communicate the physical danger of a life making one bad financial choice after another, the more effective we can help others take the first step. And for readers and those who might need to take the first step, consider that the only way to be truly free — free from debilitating stress, free to do what you want, when you want — is to be financially independent, and the only path to financial independence is making a habit of responsible choices with money.

Photo: Flickr
Canadian Family Physician [pdf]

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It’s difficult to get into this topic without sounding too much like a motivational speaker. I am strongly averse to most motivational training. Here’s my problem: Motivational training, in the corporate world, encourages teamwork — good — but often at the expense of personal identity and independent thinking — bad.

The nuances are subtle, though; task and project efficiency and the drive for overachieving become perceived as positive personality traits through motivational development, but these are traits that have no purpose for individuals unless they are in charge of their own business destiny. Working for a company, for an entity you have no personal connection with and a boss whose own success is irrelevant to you, the only beneficiary of efficiency and extra effort is the company. You may be told you’ll be rewarded “later” for exhibiting these attributes over and above colleagues who don’t “get with the program,” but that future reward, for most, never comes.

Motivational speakers often talk about overcoming psychological barriers. If the speaker’s purpose is to motivate directly and to provide tools for self-motivation, then he or she must address what typically prevents someone from taking the first step towards a goal or dream. The good thing about these barriers is that they are mental constructs — the exist solely in the mind. Thus, all it takes is changing one’s mind to overcome any psychological barrier.

People hold firmly onto limiting beliefs — these psychological barriers — that may be wrong. Why? It’s natural to protect oneself from failure, if failure is seen as a negative outcome. Limiting beliefs protect people from failure.

An excellent article by James M. Olson, PhD, published in the Canadian Family Physician, looks at psychological barriers as they prevent personal behavioral change pertaining to healthier lifestyles. The concepts form an excellent basis for financial change, as well. The psychological barriers are broken down into three categories: barriers to admission of a problem, barriers to initial steps, and barriers to long-term change.

In personal finance, coming to terms with the existence of a money problem can be difficult, but admission is essential before anything else.

These are the barriers:

Denial or trivialization

The consequences of bad financial choices aren’t so bad, right? The news media publish stories all the time about people who get into financial difficulties, are bailed out by someone else — could be the taxpayers — and they go on living their lives. It makes it easy to say, “I don’t need to worry about losing my house. Other people are fine when they stop paying their monthly mortgage, according to an anecdote in today’s newspaper.”

Perhaps the media do show someone else’s negative consequences. Here’s a common thought process: John learns about Mary who had to declare bankruptcy (and thus couldn’t buy a house when she wanted) after being faced with a surprise medical bill without insurance. John doesn’t have medical insurance, either, and because he has the same risk as Mary, he comforts himself by accepting the belief that he would probably not be faced with a surprise medical bill, and therefore does not need to worry.

Perceived invulnerability

This psychological barrier overlaps with the previous example. A smoker might intellectually understand that the habit causes lung cancer, but to protect itself from the cognitive dissonance that arises from trying to understand why he continues to smoke with this knowledge, he allows himself to feel that the worst won’t happen to him.

If someone punches you in the stomach, you feel pain right away. If you habitually spend more than you can afford with your credit card, you won’t feel the pain until much later. This delayed effect makes it easier to feel like no harm will come. You would probably avoid getting punched in the stomach repeatedly because you know the pain is immediate and will compound with each blow. But increasing your debt load doesn’t hurt physically, and it’s easy to ignore the damage by refusing to calculate your net worth each month.

Faulty conceptualizations

Misconceptions about how aspects of personal finance works can prevent someone from recognizing a problem. One of the most glaring misconceptions comes from advertisements. Television, radio, online, and print advertisements often name loan interest rates. It’s popular with mortgages and auto loans. “Visit your local dealer today for 0% APR financing on a beautiful new car!” Mortgage interest rates are low, we hear, so combined with low prices, it might be a good time to buy a house.

Maybe. But only a small percentage of customers qualify for those low rates. If you go into a situation with the conception that you will automatically get a great deal, you’ll likely be spending much more money than you expected over the long term.

In the same respect, consumers tend to be conditioned to believe that financial salespeople are obligated to do what’s in their customers’ best interest. We trust the broker when we go to the bank to invest money. We trust websites that provide stock trading advice and analysis. The truth is there are few salespeople that have any motivation other than their own self-interest. Even the concept of a fiduciary standard, where some advisers are members of organizations or have certifications that require them to supply advice towards the customer’s best interest only, is not a perfect guarantee that the advice will be good. Everyone is selling something, and the belief that we can trust salespeople is a naive misconception that could have expensive consequences.

Debilitating emotions

On the other end of the spectrum from denial, there’s the possibility of becoming so overwhelmed about the existence of a problem that it becomes too emotionally painful to accept. Dr. Olson’s article offers the example of a patient who refuses to undergo a test for a disease because the consequences of having that disease are life-threatening.

Is there an analogy in personal finance? I think so. Turn back the clock to 2000, and pretend your net worth is fully invested in technology stocks. You hear the news about the tech crash, and you don’t want to open your statement. Thanks to your lack of diversity and safe asset allocation, you are afraid to see the damage.

Perhaps you and your spouse are not getting along well, and your significant other decides to go on a spending spree to spite you. Will you open that credit card bill? Or perhaps a divorce is in the works and your partner is taking whatever steps necessary to ensure you’ll end up on the financially losing end of the deal. While there’s not a lot of situations that could be considered life-threatening, being overwhelmed with emotions or being frightened of an outcome can prevent you from even knowing if you have a problem.

Overcoming barriers to admitting you have a financial problem

• Nothing is permanent. People have the capacity to deal with problems, and they have the efficacy to be able to move in a better direction.
• Financial education helps. Where misconceptions abound, education can go a long way to help people feel more comfortable about their situation. Education isn’t much of a motivation for change — and I’ve written often about the studies that show the traditional approach to financial education is ineffective, but one-on-one guidance with a specific problem can help alleviate misconceptions.
• The negative effects of ignoring the situation are worse than the situation itself. This brings me back to the problem I had with multiple speeding tickets. I couldn’t afford the fees, so I just ignored the various tickets I received. And I thought I received them unfairly, that my car was just a police magnet. But I ended up in much more trouble — financially and legally — when I just ignored the warnings.

In a future article, I’ll address psychological barriers to making the first steps towards change and to being successful with long-term change.

Photo: Flickr
Canadian Family Physician [pdf]

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