Model of healthy financial decision is the same.
More than Just money:
Money has meaning
- What does money mean to you? That simple question probably prompted a lightning fast association. Some people might flash on happiness or a burden. Even before there's a word, there might have been a feeling, somewhere between excitement and uh-oh. On one level, money is a numerical tool that provides a fluid means of exchange and storing value. But money also taps into our lives and culture on multiple levels, from family dynamics to social norms, from our sense of survival to our need for belonging. Money means far more than just rational decisions about dollars and cents. For example, have you ever known someone who's really tight with a dollar? I'm not talking about someone who has to be careful to make their income stretch. I'm talking about a person who scrimps beyond any financial reason. This person may frustrate those around them when they balk at paying their fair share, or take extreme efforts to do something on the cheap. I once met with a woman who was so worried about having enough money in the future that she would live on the barest minimum while socking away every dollar she could. Even when she lost her job and was living on unemployment, she continued to try to save. When she was unable to manage, she asked her parents for help. She came to me because she was terrified they would stop sending her money if they learned how much she had just sitting in the bank. For her, the idea of having to withdraw any money from savings, even to keep a roof over her head, flooded her with panic. Is this behavior rational? Most of us would agree that it's not. But sometimes it's hard to see when a basic belief about money, like the benefit of saving for the future, is shaped by our emotional needs instead of a clear-eyed assessment of the facts. Let's look at the ways in which money has meaning beyond just the numbers. The ways your financial life reflects your expectations of how someone like me should think about and use money. The ways that money determines the groups you belong to, reinforces your important relationships, or causes you to be excluded. The ways you feel prepared or not prepared to direct money and assert your right to be in charge. The ways that money protects you from harm or future need. The ways that money itself is a source of fear, degradation, or shame. So where do these associations come from? In general, meaning gets attached to money in two ways. One is through our previous experiences, messages, and relationships. What we see and learn as children has an especially profound effect on how we think about and use money as adults. The other way is simply in effect of how our brains work. In his book, "Thinking Fast and Slow," psychologist Daniel Kahneman outlines how mental tasks can be thought of as falling within one of two systems. System one, fast system, is basically our automatic pilot. It's the way we engage the world. System one senses danger, perceives patterns, and makes inferences based on certain cognitive shortcuts called heuristics. This system is fast because it uses our past experiences to make predictions about what to expect in the here and now. If you've ever felt in your gut for example that five dollars is an obscene price to pay for a slice of pizza, you're not checking your bank balance or assessing the cost per ingredient to make that decision. That reaction is just system one quickly skimming through your pizza history and coming up with a handy belief about what one should pay for a slice. Our second system, system two, is activated when a task requires specific attention and mental effort, such as reading a textbook or following directions to an unfamiliar destination. You might think that most of our financial choices would be handled by system two, but, think again. Unless we're performing a complex evaluation or trying to do something different with our money, system one will quickly use meaning as a way to help navigate the volume of simple decisions we face each day. I want to be clear that these associations with money are completely natural and the goal here is not to strip them away. Instead, we begin by appreciating that while they help us to act efficiently, sometimes they can be obstacles to the life we want, like the woman in my earlier example who realized that her fear of being unprepared for the future hurt her ability to deal with the challenges today. Simply bringing awareness is always the first step.
Your brain on money
- How much would you pay for a subscription to The Economist? Even assuming this is something of interest to you, there's still a good chance you'd struggle to come up with a good price without a little context. In this video, we'll examine the ways that human brains are designed to avoid risk and seek reward, and we'll explore a few of the mental shortcuts and biases that can skew the way our system one perceives the facts of a financial choice. Let's take a look at this ad, which caught the notice of renowned behavioral economist, Dan Ariely. You probably noticed something funny right away. How can the magazine subscription and the magazine plus web subscription have exactly the same price? Was it a mistake? Dr. Ariely, himself, was so curious about this ad's intention, after all, you'd think The Economist would have figured out how to price and advertise their own product, but he turned it into an experiment. When Dr. Ariely showed this ad to 100 MIT students and asked which offer they would choose, 16% selected the economist.com subscription, zero chose the print subscription, and 84% chose the print and digital combo offer. Sounds reasonable, right? But when the print only option was removed from the list, something very curious happened. Now the percentage of people interested in the digital only subscription jumped from 16 to 68%, and the number who selected the combo dropped precipitously from 84 to 32%. Now it doesn't take an MIT student to recognize that paying the same price for print only as for the print plus digital subscription was a bad deal, so why did it make such an extraordinary difference in people's preferences even though they didn't choose it? This is called the decoy effect and it happens when we're presented with three options, one of which is similar, but not quite as good as one of the other options. It enhances the appeal of the similar and slightly better option. It turns out that human beings are highly susceptible to context cues when we're trying to figure out something's value. Nowhere is this trait more finely exploited than in the very scientific calibration behind, of all things, restaurant menu design. One of the first fancy restaurants I ever went to was Balthazar in New York City. Take a glance here at their menu. Where does your eye almost immediately go? Clearly it's the upper right corner with the illustration of a platter of oysters and the large font red lettering. While, obviously, delicious, you might quickly dismiss the idea of a dish that costs upward of $150. However, without your even knowing it, this price has already altered how you will evaluate the prices of the other dishes. $34 for salmon, must be a bargain, right? This effect is called anchoring and it's the human tendency to rely too heavily or to anchor on the first piece of information we see when making a particular decision. Because this effect is so strong, it commonly drives how different price points are presented. This is why, for example, requests for charitable giving usually lead with the highest level of support listed at the top. Because when we're first asked for $200, it's easier to say yes to 50, but our true financial achilles heel has to do with the power of free. A simple buy one, get one free offer can light up the reward centers of the brain, while at the same time neutralizing the sense of risk or loss that usually occurs when we part with money. This high reward, low risk combo often tempts us to buy things that we didn't even want merely seconds ago. So the next time you're choosing between feature bundles, scanning a menu, or clicking to add another item to your shopping cart, take a moment to ask yourself, what is it that's telling me that this is the reasonable choice? Am I swayed by the decoy effect, anchoring on a high value, or influenced by the power of free? Our automatic thinking system clearly cuts some corners as it quickly frames and executes decisions. In fact, these are only three of the well over 100 identified cognitive biases. Luckily, we're not solely reliant on system one. Even by asking ourselves, how do I know what's reasonable here? We can bring conscious attention to the decision. This gives system two a chance to balance out the emotions and mental shortcuts by adding rationale deliberation to the process.
A picture of financial youth
- To really understand the personal meaning of money, we need to go back to childhood. As tiny, dependent creatures, human beings are programmed to be sensitive to the emotions of our caregivers. Anything that pushes grown-ups buttons will be noticed by children and this makes money of particular interest. But, in a child's eyes, money is also a mysterious somewhat magical force. Lacking the full context and understanding of financial matters, children make their own interpretations about money's inherent attraction or power or danger. Think of a money statement that you heard growing up. Maybe a rule about money, like "You can never have enough of it" or "Only bad people care about it." Maybe the rule was a little more subtle, like when someone swerved in front of your mom or dad's car and they grumbled, "Look at that jerk in the Mercedes "who thinks he owns the road!" Suddenly selfish behavior and luxury vehicles are being linked in a way that may have nothing to do with why that driver cut you off. These early messages and experiences have a profound effect on us, effecting each generation in turn. Grandparents who suffered and scrimped during the Depression might create such a frugal environment that parents rebel, refusing to ever deprive themselves or discipline their spending. After growing up in such a financially chaotic household, can you guess who their kids will probably take after? That's right, just like grandma and grandpa, they'll want to control every nickel. Our families provide our first lesson in how money works, how people handle it, talk about it, or don't. One useful tool for exploring your money legacy is the financial genogram. Genograms were first developed for therapeutic settings by Monica McGoldrick and Randy Gerson in the mid-1980s and have been adapted over the years to be used in a variety of situations. Our financial genogram is a way of depicting the relationships, events, and conflicts that constitute your family's financial past. Here's the key for how to draw the central people and events. Start with yourself and, if you have them, your spouse and your children. Traditionally, when the genogram is used in family therapy, we use squares to represent males and circles for females. This genogram shows a man and a woman. The solid line between them indicates that they're married and the bracket and two circles below show that they have two daughters together. We can use other types of lines to represent other types of relationships. A broken line means a divorce or similarly terminated relationship. Or an X on the line means the relationship ended because the person passed away. Now we move up the family tree to show parents, grandparents, and siblings. In this example, we can see that the woman from our first family system has a sister and a brother and that her parents are divorced. She has an uncle, her father's brother, and her mother was an only child. Once the people and basic relationships are in place, we can write a few words about each person's attitudes and experiences with money. We might include how the person earned a living, what his or her lifestyle was like, and other significant events such as a job loss, inheritance, or medical issue that had a major impact on his or her financial life. Now we draw in how money was a factor in relationships. Let's say that after the divorce the woman in our example, then a child of course, went with her siblings to live with their mother where money was tight. We can show how the mother may have praised her son for handing over his earnings from a part-time job, while openly complaining about how much it costs to keep the young daughter in ballet lessons. Why is this type of information important? Because any time there is a strong emotional dynamic combined with a financial message, you can bet that it's going to be coded into a belief about money. Over time these become the basis of the identity, affiliation, responsibility, safety, and threat categories from money has meaning. Not every example is so clear and dramatic, and at this stage your financial genogram should just be a place for you to start to jot down ideas, associations, and memories. In the accompanying exercise file, we'll take you deeper into the step by step process of setting up your own financial genogram. We'll include questions to help you further explore the role money has played in your family's journey. Going through this exercise can bring childhood messages and experiences into the full light of adult understanding, clarifying the emotional forces or gaps in learning that may be limiting you in the present day.
A matrix of competing needs (Doing Vs. Being)
- When people talk to me about their financial frustrations, one phrase I often hear is "I'm just bad with money." I usually respond by asking the person to be more specific and describe to me what it is they do that's so bad. This is an example of using the doing versus being principle from our core essentials. The purpose of making a doing versus being distinction is to bring the "bad with money" label out of the realm of identity, and into the realm of behavior. Identity provides meaning to a pattern of actions that we then internalize as something that's true about ourselves. Even when this identity is negative, we have a harder time changing when we see it as a part of who we are. Behavior on the other hand, is something we can work with. For example, some common themes I hear of how a person is bad with money include not saving enough or avoiding opening bills and missing due dates. But unlike something that describes our way of being, these ways of doing are actionable. We can bring awareness to how, when, and why we do them, and create strategies to do them differently. That doesn't mean that change is easy. We first need to understand that financial choices are determined by a whole matrix of competing needs. The most important are basic physical needs like food, shelter, and safety. We have to eat and keep a roof over our heads. But beyond those basic needs, money often plays a key role in how we regulate our emotions and meet psychological or social needs. We might buy a new outfit to feel more confident for an upcoming interview, or decide to meet a friend for coffee when we're feeling stressed and lonely. But perhaps the trickiest factor is the timeliness of the need. Is this something we require right now? Or will we need it in the future? For instance, we all know that we need to save for retirement. Failing to do so can put our future security in serious jeopardy. But a goal this big requires sustained effort and sacrifices over a long period. For a payoff that may be decades down the road. In the meantime, there will be a million instances where the money that you intend to save could be spent elsewhere. This summer, you decide to travel for a family wedding. And in the fall, you find out that your kid needs braces. Or maybe it's been a tough week, and you just want to buy yourself a new pair of boots and not read the 401k prospectus. What do we do when our needs compete with each other? Expecting ourselves to always be self-disciplined isn't the answer. Self-discipline is a resource. It gets used up when we've already made a lot of decisions or when we're hungry, angry, lonely, or tired. We can replenish it with rest or self-care. But we don't always have it in the tank at the moment of choice. In fact, we can actually measure how our mental reserve gets exhausted. In research by social psychologist Roy Baumeister, subjects were asked to turn down sugary treats or resist crying during a sad movie. In another experiment, they had to choose between a long list of consumer products. After these tasks, they were given a classic test for self-discipline. Holding your hand in ice water for as long as possible. It's pretty uncomfortable. So the impulse of course, is to pull your hand out. Those subjects who hadn't had to turn down dessert, hold back tears, or think about candles versus T-shirts, were able to keep their hands in the ice water for an average of 67 seconds. The other group, 28 seconds, less than half. Giving into impulse doesn't mean you're bad with money. The key is to anticipate the ways that your future needs are in competition with immediate needs, and create a cashflow structure that provides the best balance between them.
Money as a mental trigger
- So far we've looked at the multiple ways that we experience money, from symbolic and meaning-filled to physiological and subject to the operations of our brains and bodies. Let's take a moment to focus how, in some instances, financial stress can trigger a powerful physical response that overwhelms our ability to think and act clearly. Last year, a client of mine learned that she had made a mistake on her tax return when she received a notice from the IRS demanding she pay several thousand dollars. She told me that as she read the notice, her muscles tensed and she could hear her pulse pounding in her ears. This is the fight or flight response that indicates our amygdala has fired and the limbic system of the brain has been activated. The limbic system is responsible for putting our bodies into a state of alert when we perceive a possible threat. And threat doesn't mean just physical danger. As we grow up, our limbic system encodes any and all manner of things that make us feel afraid, from public speaking, to being in a crowded elevator, to receiving a notice from the IRS. For many of us, money triggers the fight or flight response quite routinely. This might be because you're under a high level of financial stress, or you may be particularly sensitive to some of the emotional aspects of money. Your body actually can't tell the difference. The response is the same. If money is a trigger for you, then you've probably already discovered how difficult it is to think your way out of fear. Remember, we're wired to survive. So our bodies will prioritize a threat response over other mental functions. Blood flow in the brain is directed away from higher level cognitive operations, meaning it's literally impossible for you to think clearly until you've brought this reaction under control. We need to calm down, not try to problem solve. When you notice this happening to you, try some of these tips. Take deep breaths. One of the key features of the fight or flight response is quick, shallow breathing. When you take deep breaths, you tell the amygdala to slow the release of stress hormones and begin the flow of endorphins. Do a simple physical activity with a tangible result. Discharge some of that physical agitation by moving your body and restore your sense of control with a task. Load the dishwasher, jog around the block, do five minutes of yoga. Get outside. Our environment has a direct effect on reducing stress, especially if we can be in sunshine or nature. If you can go for a quick walk, even better. As you also get to combine being outside with moving your body. Take mini breaks. Trying to push through tension only increases it. When working on financial tasks that cause stress, give yourself permission to pause and replenish your energy and focus. Set the timer for 20 minutes, and when the timer goes off, take five minutes to stretch and clear your head. Finally, connect with people. Social animals that we are, we're wired to be soothed by the presence of others. Invite a trusted partner to join in money tasks, talk through options, or just make a plan to grab a cup of tea with a friend. Using these techniques will help you to meet the body where it is and transition out of the fight or flight response into a state of calm focus. Once you're there, then you can address the source of your money worry and more effectively problem solve.
The process of Financial Behavioral change
Understanding stress and money
- When your financial life is in balance, it doesn't necessarily mean that everything is perfect. But there's an overall sense of harmony in those areas of life where money provides meaning. And there's a system to meet your everyday needs and long-term goals. You may not have a string of fat zeros on all of your accounts, but you do have a plan. And your choices are in alignment with that plan. But let's say that that's not the case. When money is out of balance, the way that we first notice that is an emotional cue. We feel stressed. Stress is uncomfortable and unpleasant, and that's the point. Its job is to get us to wake up and identify what needs to be addressed. In fact, most of us want to do that as quickly as possible so that the stress will go away. Enter system one, our fast and automatic system, which jumps in to provide an interpretation of events and tell us what we should do. Sometimes it's accurate, but sometimes it simply repeats an old childhood message, like you just have to work harder. System one is not set up to deal with complexity. And financial issues are often complex. In order to respond effectively to the stress cue, we need more than just our gut reaction. The first step is to notice when something around money feels off or causes concern. Tune in. Observe what you're doing when the feeling comes up, or if there's a particular thought or image. Next, we notice the message. The original interpretation that comes from system one isn't necessarily wrong. We just want to be careful not to treat it like truth with a capital T. Finally, we focus on tolerating the feeling. We don't need that unpleasant feeling to go away entirely. The key is to stay in a functional zone. When there's no stress, there's no motivation. We stay firmly in the status quo. When we're at the top of the chart, we lose the ability to think and act clearly, and need to use our techniques to calm the limbic system back down. When we're in this middle zone, we're motivated to explore change while still able to do the higher level analysis that system two provides. This is how we end up with a more clear-eyed and informed solution, rather than a knee-jerk response. We can even use another one of our core essentials called yes...and? to help us out. Being conscious about money often puts us in touch with emotions like frustration, anger, or fear. Yes...and? acknowledges the emotion, but redirects focus back to the task at hand. If we're working on an exercise to track spending for example, and you notice that you're feeling particularly annoyed because you wish you could just buy a bagel and coffee without having to stop and write it down. You basically tell yourself, "Yes, I am frustrated right now. "And I'm going to log this 395 and go on with my day." We don't ignore the feeling, we don't judge or analyze it, we just notice it and try to bring attention back to the action. Learning to tune into and tolerate the feelings that come up when exploring money is something we will continue to work on. Don't worry if it feels a bit awkward at first. With practice, it will get easier to know when stress is telling you to do something and when it's just a distraction.
Making friends with ambivalence and resistance
- For many of us, the solution for how to bring money into balance is not always clear. We know from the matrix of competing needs that sometimes making a new financial choice will address one goal, but conflict with another. For example, in my role as director of the Financial Wellness Program for the Actors Fund, I often see this dilemma present itself as the choice between work that's fulfilling and lucrative but not always available versus lower-wage work that's more available, but squeezes the ability to pursue creative projects. Which is better? Reliable but low-wage and low-meaning work or continuing to take the gamble on rewarding work that might also lead to more opportunities? People often wrestle with this question for years, while the consequences of indecision add up. Without a crystal ball, we don't always know the right thing to do. And thus, it's common to feel stuck between something that's not working and that unknown something else. But just as we reframe stress as an important and valuable signal in the change process, we can do the same with that feeling of being stuck. The two terms we most often associate with feeling stuck are ambivalence and resistance. Ambivalence is when we have strong opposing feelings about something. We want to do it and we don't want to do it. Ambivalence is not a sign that you're not ready to change. In fact, it's considered part of how we prepare ourselves for something new, by ensuring is this change really necessary? Remember, human beings are wired to be creatures of habit. We continue following familiar patterns for as long as possible, because that's where our automatic and intuitive systems work best. You work through ambivalence by listening to what it's trying to tell you. One tool we can use to explore conflicting feelings is a list of pros and cons. I actually do this as a group exercise in the first session of my Managing Cashflow for Artists workshop. I ask members, what are some bad or unpleasant things that might happen if you choose to continue with this group? When we've written down everything from, "Takes time I could be doing something else," to "Don't want to find out, I have to work even more," we then look at all of the positives that might come from continuing. What are your pros and cons for continuing to explore changes to your financial life? Will it take effort, but have the potential to work better? Maybe you have to give up something, but could also open up to a new goal. The idea is to get these thoughts out of your head from the scariest and the grandest to the most trivial. It actually doesn't matter which side of the list is longer. This isn't an exercise in quantity. It's about making full acknowledgement of your conflicting feelings, and moving forward with your eyes open. The next place we often get stuck is feeling resistant. Resistance is the act of opposing or struggling with alterations to the status quo. Resistance is like friction. It's the drag we feel when we're trying to move forward. People are often surprised by how hard it can be to do something new, even when they feel totally committed to doing it. Sometimes, it looks like fear of making the wrong choice or not knowing how to do something new. We might feel stuck wishing the old way still worked. We might struggle with feeling powerless in the face of change that we don't want, or just exhausted by the effort. The core theme here is a feeling, an emotion that comes up, usually around a task we don't want to do. And resistance is our human way of saying, "Slow down, resolve this feeling." Even positive change involves letting go of something in order to make room for something new. So, the function of resistance is to work through that loss, and make sure we're not inadvertently sacrificing something important in our rush to fix. To work through it, we can try the refocusing technique of yes, and from our core essentials. But if that doesn't work, we can use baby steps. The baby steps technique is a way of staying in control when you have strong feelings by modifying what you're asking yourself to do. Let's use our tracking example again. If you're recording expenses and that emotional cue of I hate, I wish, I fear is so strong that it's tempting you to give up, ask yourself, "What is a smaller piece of this task "that I can commit to?" You might give yourself permission to just collect receipts and log them at the end of the day, instead of entering it right after your transaction. Sometimes, just giving yourself permission to do less is all it takes to find your motivation again. But even if you do end up with a modified task, that's okay. The important thing is you stay in the driver's seat and keep yourself moving forward. Trying to simply push yourself through feelings of ambivalence and resistance is a major reason why people burn out and give up. But these cues are nothing to be afraid of. Rather, embrace them as a way to make sure the changes you seek are the right changes for you.
Setting goals using the core essentials
- This video will round out our list of the core essentials, a series of tips and techniques that help us achieve our goals. In it I'll also introduce you to a man named Simon who used the core essentials to turn his finances around while navigating a sensitive period of his life. Let's begin by recapping the tools we've already touched on. Doing versus being, identify specific actions and behaviors you can take as opposed to wishing you were different. Yes, and, when feelings come up, notice them without judgment and bring focus back to action. Baby steps, modify a task instead of giving up when feeling overwhelmed. These three tools have to do with self-organization, with keeping ourselves centered and focused as we work on a larger goal. But we also need to make sure our goal itself is well-organized. How do we do that? Simple parts, take a large or complex goal and break it down into smaller prioritized items. Capacity check, ensure that you have the necessary time and energy for a given task relative to other priorities and commitments in your life. Time frames, assign a specific time frame for goals, priorities, and activities. Resource check, identify any outside support, information, or inputs that are necessary to reach a goal. All together, the core essentials are like the navigation system that gets you from financial point A to financial point B. Let me demonstrate by telling you Simon's story. I met Simon a few years ago when he sought help dealing with his debt. Simon had just completed a treatment program for alcohol addiction and was newly sober. Unfortunately, before he entered treatment, Simon's life had gotten pretty chaotic. He'd racked up tens of thousands of dollars on his credit cards, and many of those accounts were already in collections. Thinking about the enormity of the situation made Simon feel depressed, which was a dangerous trigger for him picking up and drinking again. How did the core essentials help Simon get his life back on track? No matter how badly Simon wanted his debt gone, paying it off was going to require steady effort over a period of time. So first we used the simple parts principle to make sure he was able to meet his basic expenses and pay more than his debt minimums. This helped him feel safe and in control. Next we focused on how to repay the debt. We looked at different time frames to strike a balance between Simon's desire to get rid of his debt quickly with the need to have some room in his budget for self-care. Yes, the longer it took him to pay back his debt, the more it would cost. But Simon decided that he was more likely to stick with his plan if it didn't make him feel like he was living in total deprivation. To keep track of his progress, Simon wanted to spend about a half hour per week looking over his numbers. We did a capacity check to make sure that this plan would fit with his other commitments. But even the best plan is still bound to be difficult at times. Simon reminded himself that he could use the Yes, and tool to refocus himself when he was feeling particularly regretful or ashamed and the baby steps principle when the effort felt too overwhelming. He also asked a trusted friend to be his money buddy, someone he could talk to each month to share progress and get encouragement. This is a great example of doing a resource check to make sure all needs are met. The core essentials allowed Simon to recognize what he needed to take care of himself today so that he could make sustained progress toward his long-term goals. As we unpack the elements of your financial life in the next section of the course, we'll continue to use the core essentials to help you bring money into balance.
The wheel of change
Introducing the wheel of change
- If you've tried to create a cash flow plan before, it may have gone something like this. Find yourself very stressed about not having the money for something, say, an upcoming bill. Berate yourself for those times you spent money that you wish you hadn't and promise yourself that you'll stop doing that. Think of other categories of spending that seem unnecessary. Forbid yourself from ever indulging in them again. Write down some numbers that reflect this future of brown bread and evenings at home. Stick to it for a while, then slide back into old ways and old habits, repeat. This is not the picture of healthy financial management. This is using a budget as a form of punishment for past mistakes. To do better, we need a way to disrupt old patterns, turn down the volume on limiting beliefs, and double check our assumptions to make sure we're not getting tripped up by mental shortcuts and cognitive biases. We do this in four steps. These steps are gather information, analyze, decide, and act. In the first stage, gathering info, we'll get clear about how and when money comes in and how and when it goes out. In stage two, we analyze the information we just compiled. We introduce our model of cash flow priorities, determine where we stand, and identify options for ways to bring money into balance. In stage three, it's decision time. We come up with a first draft of our new cash flow plan. We figure out where we want to make changes in our finances and think through what we need to do to make those changes real. And finally, in the last stage, we organize and implement the plan with an eye on developing a sustainable financial management routine to support it. Though the process itself sounds simple, you'd be surprised how hard it is to hold ourselves to it. The challenge is that we need to do these steps in order and to completion. That means we can't be gathering information and analyzing it at the same time. We can't jump to a conclusion based on our first hunch. And the kicker, we can't change anything until we've done all of the steps, all of them. Following these steps helps us stay in that functional zone by not rushing the process. We give our deliberate, analytical system, too, the opportunity and materials to do its job. Now you're not just reacting to financial stress. You're weighing options, resolving dilemmas, and laying the foundation for your commitment to long-term financial wellness. Let's get started.
Gathering information about your finances
- We begin by looking at how money goes in and out in your life today. Please take a moment to download the Financial Wellness Cash Flow Worksheet attached to this video. The outflow side is divided into four sections, committed monthly expenses and flexible monthly expenses, and committed periodic expenses and flexible periodic expenses. Now, committed in our case doesn't mean that you can't ever change these things. It just means that it's not something that you're deciding on a moment to moment basis. At some point you've already signed that lease or contract for your cellphone plan, you know you should expect a bill from your energy company, and so on. The items in this category are all pretty easy to find out. Some of them you might already know off the top of your head, but a quick review of your bank or credit card statement will confirm the exact amounts. You'll notice on the worksheet that we specify credit card minimums. Even if you always try to pay more than that for now we ask you to write down the minimums. First of all, only the minimum is a committed expense, anything above that is considered discretionary. And number two, when people make the mistake of trying too aggressively to pay down their balances they often leave themselves short when other expenses are due. And what do they use to cover those expenses? That's right, the plastic. So for now, if you carry credit card debt only write down the minimum payments in your committed expenses section. Next, we get to the flexible monthly expenses. These can be a little trickier. Some like clothing or haircuts may not fall neatly into a monthly framework. Review the last three months of your bank and credit card statements to find all of the expenditures you see in the flexible monthly expenses section. Add up the individual categories and take a monthly average. For smaller out-of-pocket expenditures like coffee or convenience food I recommend tracking your spending for a few weeks. Tracking is not only a great way to be more conscious with your money, it will also give you the highest degree of accuracy. Record what you spend as you spend it, either on your phone or a piece of paper tucked in your wallet, or by making a little sleeve to keep around your credit or debit card. Each week take all of the lists that you've created and organize the individual expenditures into the categories on our monthly flexible expenses sheet. Just note that the last week of the month will actually be longer than seven days as you continue to the 30th or 31st. Unless it's February the month won't fall neatly into 28 days. Many people find it tough to track without reducing their spending. Either they're uncomfortable with the feelings that come up around it, or it's just inconvenient so they do it less. Remember, at this point we're trying to get a baseline measurement of what you normally spend, no changes. So two tips. One, when you're writing this information down pretend you are a neutral scientific observer and you are your own subject. Your job is to get the data. The other tip is to refer to your core essentials. Maybe you need to take a yes and moment to notice your feelings and bring awareness back to the task. Or maybe you need to use baby steps. Next let's look at periodic expenses. On the committed side we'll have things like insurance premiums or medical deductibles. On the flexible side you might have holiday costs or travel. Once again, you'll need to review your bank and credit card statements to figure out how much and when you've spent on these items. The when is important because we'll use that information to figure out when you need that money to be there in the future. Now we can look at income. If you receive an annual salary this is easy to determine, but for freelancers or entrepreneurs income is often variable and this can make cash flow planning much harder. Most of my clients are creative professionals so I see this every day. Let's identify all of your income sources and think about whether the money you receive is regular, seasonal, or unpredictable. We still consider an income source as regular even if it ranges a bit, like if you get paid by the hour or shift and those can vary from week to week. Just capture the range and multiply it out for the month. Next, notice if you have any seasonal sources of income. Maybe your work is influenced by the cycle of the school year, or fluctuations in the hospitality industry that would cause you to have boom periods and dry spells. Finally, there are those income sources that are not predictable at all. Many freelancers and entrepreneurs are constantly hustling for business, but they don't have control over when they're going to book a gig. Feel like this is a bit complicated? That's okay, it's not supposed to look like a plan just yet. All we want right now is the best description of how and when money goes out and how and when money comes in. When we have all of that together then we can start to ask some important questions.
Analyze your cash flow status
- Now that you've gathered all of the information about your income and expenses, our next step is to determine your cash flow position and priorities. We can organize cash flow priorities using the 3S Model. 3S stands for safety, stability, security. Priority number one, safety. cash flow safety means you can meet basic food, shelter, and health needs for yourself and any dependents on time, without incurring debt. Priority number two, stability. Cash flow stability means you're able to meet your basic safety needs, and can start to prepare a financial cushion for needs and goals that are not immediate. This cushion, or contingency fund, is there to cover periodic expenses, dips in income, or any financial surprises. The size of people's contingency funds vary. Most experts recommend having at least three months of expenses reserved, but a good rule of thumb is the more your income and expenses swing, the more you'll need to have put aside. I like calling this a contingency fund instead of an emergency fund, because I want you to feel comfortable taking money out when an appropriate need arises, and then putting money back. These kinds of situations are usually not as dramatic as an emergency. When you're at this point and you're building up your financial cushion, you also know that you can afford to pay more than just the minimums on your credit cards. And finally, priority number three, security. When you're paying your bills on time, not incurring debt, and you have a contingency fund, now you can start to make progress toward long-term financial security goals like retirement, asset-building, or saving for your children's education. Sounds great, right? You can get there. Let's figure out how. The first question is, where am I in the 3S model? Knowing where you are is a way of using our simple parts principle from the core essentials. The journey to reach your loftiest financial dreams starts today. With your first step right from where you are. Next we ask, what challenges do I face to reach the next stage? Usually people respond with, I don't have enough money. I get it, but let's try to drill a little deeper than that. Some common answers could be, I have to use my credit cards just to survive. I'm not even at cash flow safety. Or, I'm okay most months, but I'm not prepared for periodic expenses when they're due. Or maybe, my money comes in in unpredictable lump sums, and I don't know how to organize it. No matter what your answer is, be as specific as possible. Exactly how much is your monthly deficit? How much do you need to have on hand for periodic expenses? How many months do you sometimes go between gigs? Review the information in your cash flow worksheet, and take a moment to write down the specific challenge you face to reach the next stage. Now we focus on generating options. What possible changes could I make to resolve my challenge? Notice the plural possible changes. It's good to just brainstorm, and come up with as many options as you can at this point. Don't rule anything out, and don't commit to anything. For example, if you have a deficit of X dollars, make a list of all the ways you could trim your spending, boost your income, or do a combination of both to reach that number. Maybe your monthly cash flow was fine, but you repeatedly find yourself short for periodic expenses. One option is to reduce some areas of your regular spending so that you can build a portion of those costs into your monthly plan. Or consider my friend Jane Barratt's advice in her Personal Finance fundamentals course, when she talks about the value of a side hustle to help you reach new financial goals. Though generating multiple options take some effort, one of the key benefits is that it helps us regain a sense of control when financial stress has us feeling trapped. It can also open our eyes to possibilities we may not have considered before, and pave the way to take our financial life in a new direction.
Making a financial action plan
- Congratulations on all of your work so far. Gathering information about income and expenses and generating options for change is already a huge accomplishment. In this video, we will decide which of your identified options you're going to try first and create a plan to implement it. In general, the easiest changes that you can make are things that are of little importance to you, you only have to choose once or very infrequently, and meet a need that's easy to satisfy in other ways. Let's use an example to demonstrate. Say you have a regular salary which reliably covers your safety needs, but you often find yourself short when periodic expenses come up and you have no financial cushion. You don't have any ideas for a side hustle, so your first plan is to look for expenses that you can cut to the tune of $100 a month. Your options are your $110 premium cable bill, to stop buying prepared food at between five or $10 a day, or start riding your bike to work and saving an average of $100 on monthly transportation costs. Which is best? Well, if you don't watch much TV, my recommendation would be to cut the cable cord. There are other digital streaming solutions available at a fraction of the cost, and once you've made the transition, you're done. That doesn't mean it's not a good idea to make your own food or bike more places. In fact, doing more of those things could also allow you to contribute to your contingency fund or speed up future savings. But committing to changing those daily habits requires consistent self-discipline to get the same bang for your buck, and we know from the matrix of competing needs not to make self-discipline our go-to financial plan. Next ask yourself what would need to change in my lifestyle in order to implement this plan? This is a form of capacity check that is often overlooked. So, for example, if you're committing to cooking more, you need to consider how that changes both your schedule and your grocery budget. What are ideas for some potential trouble spots, like those nights when you come home tired and don't feel like making dinner? Next we ask, what outside inputs would I need to meet this goal? Resource check. Do you need to ask your partner to take on additional household responsibilities if you cook more? Sometimes the resource we need is simply some accountability or encouragement from a friend. As you consider your options, jot down a word or two about what you need to give yourself the best shot at success. But, let's face it, not every choice is as easy as cutting cable. Some goals may require sacrifices that cut deep into your comfort level, or perhaps even when you've identified all the options you can, you still don't see a clear way to get yourself to a safe financial place. You just feel stuck. In those times, take a deep breath, review your core essentials, and maybe watch "The Money is a Trigger" video one more time. Over my years of working with people in financial distress, I can tell you that this is where sticking with it really counts. Don't close your eyes and give up. Focus on improving as opposed to solving. Do what you can to move yourself closer to the safety that is a balanced budget. If you maintain awareness of your financial picture and keep looking for options, you're giving yourself your best shot for spotting opportunity when it comes, and that is what will allow you to achieve your financial goals.
Implementing an action plan
- Now, we've looked at how money comes in and goes out, we've analyzed where we are with the 3-S model, and gotten specific about how to reach the next stage. In this video, we'll focus on implementing our plan and creating a financial management routine that you can stick to. The first thing you need is to put a time frame around the changes you decided to make in the last video. When are you going to stop by the gym to cancel your membership? Tuesday, great! Any action that you identified from researching alternate data plans to updating your LinkedIn profile needs a time frame attached to it. Next, we want to pick a method to organize and manage our cash flow. This method should directly address the particular cash flow challenge you've identified, either helping you pay better attention or else making it harder for you to slip up. For example, if you decided to set a lower amount for your out-of-pocket spending, you could keep practicing the daily tracking technique to notice when you're approaching your limit, or you could put yourself on a cash budget for expenses in that category. As far as which organizational method to choose, there isn't one magical product or approach that works for everyone. Essentially, all cash flow management is about three things. Reviewing what you've earned and spent, predicting what's coming up, and creating a plan to cover it. What matters is that you pick an organizational method that you find intuitive, visually engaging, and that provides the level of detail you need to manage and track your progress. Whether you're an app, spreadsheet, or notebook kind of person really comes down to you. One specific organizational tip that I recommend for those whose challenge is variable income is to maintain a robust contingency fund that separated from regular monthly spending. Consider putting your income directly into a high-yield savings account, and then, at the beginning of each month, transfer the funds you need for that month's expenses over into checking. When you don't know when your next payday will come, it's essential to prepare for dry spells by saving aggressively, and without this separation, it can be very easy to overspend when money comes in. As a client with a regular lump sum income once said to me, "I'm not sure if I'm rich or poor. "I think I'm both." Making a lifestyle change is always easier when the people in our lives are supportive. Unfortunately, that's not always the case. Often there are people who encourage us to spend on things that are not in our cash flow plan. If we want to keep those people in our lives, eventually we're going to have to address the situation. I find the best way is to be positive and transparent. Instead of just saying, "I'm too busy to meet for lunch." For the tenth time. Tell them what you're working toward. "I'm not doing meals out because I'm saving up "for holiday gifts." Or, "I'm paying off my debt by the end of the year." If you're not comfortable sharing specifics, it's fine just to say, "That's not in my budget this month." But I do find that people are generally more supportive if they feel like they're helping you work towards something. The second challenge is posed by those who are directly involved in our money who don't see the goal the same way that you do. And, boy, is this a tough one. I work with a lot of couples who beg me to just make their partner see reason, but the truth is that people often have a very different view of what's reasonable, and it doesn't mean that one person is wrong. Instead of bombarding your significant other with facts and figures, open a dialogue. Share the emotional significance of what this means to you. Try saying, "I love you, "and I want to share a long life together. "I'm worried about our financial security "if we don't get this under control." It's certainly much more engaging than, "You need to stop wasting money." But, by far, the most important factor in successfully managing your cash flow is not saying the perfect thing, choosing the best app, or lining up a neat row of cash-stuffed envelopes. It's establishing a regular financial management practice. When you're starting out, I would suggest having a weekly money date with yourself, somewhere between 30 minutes to an hour, to review, predict, and plan. After you get the hang of things, you may find that a monthly sit down is fine. If this last one seems particularly tough, remember your yes, and and baby steps techniques. Stay focused, modify where you need to, but try to stay on that horse. Financial management is a form of regular self-care just like eating a balanced diet and getting enough sleep. You never get to be done eating or done with sleep. You never get to be done with managing your money. Keep tinkering until you have the right method and the routine that you can stick with, and then, hopefully, reaching your financial goals is just a matter of time.
Conclusion: A new beginning
- I'm so proud of you for doing this work. I hope you've learned that managing cash flow is about a lot more than just dollars and cents. Money has a deep personal meaning that begins in childhood. We experience money in a very physical way, from our stress response when things are out of balance, to the fast and slow ways that our brains execute decision-making. We've discussed how to sit with your feelings long enough to figure out what's happening with your money. We've outlined how to gather the right information, analyze it and make a decision to put a plan into practice. We've addressed what it takes to change behavior and stick to it. But even the best plans are bound to run into trouble spots, and that's completely normal. We want to be careful about being too rigid or perfectionistic about this process. There are lots of ways to deal with obstacles or get back on the horse when you fall off. Let's look at some common challenges and how to respond to them. "Whoops, life did not go according to my financial plan." Congratulations, you've discovered one of the fundamental truths about managing cash flow: there's no such thing as a typical month or typical year, something unexpected always comes up. But since you never get to be done with money, you always get the chance to keep adjusting. Make sure you're still going through the actions, either each week or at least each month, to review income and expenses, predict what's coming up and make a plan to cover it. Many financial ups and downs can be fixed by increasing what's in your contingency fund. If you keep finding yourself thrown by unforeseen events in your financial life, it probably indicates that you're under-preparing for life's curveballs. Go back to the analyze video and see if you need to revise your plan. "It's too hard, I want to give up." Sometimes the changes necessary to bring money into balance are really difficult. Use time frames to figure out how long you'll stick out this particular plan before exploring the next option. Use baby steps to find a modification, like bringing down a certain expense by 25%, even though you need to cut it in half to make your budget work. Also, consider another capacity check and resource check. Sometimes people are working on too many different life goals at once and need to focus, or they need to look for more support. Also, be positive and specific about your progress so far. Were you able to cut your monthly deficit down to just $50 a month, or save $700 this quarter when your goal was a thousand? Pat yourself on the back. We tend to increase behaviors we feel good about, so don't let an all-or-nothing attitude drag you down. "I'm struggling to change old habits." Changing behavior can take time and effort. First, try to be specific about where you're running into trouble. Is there a person or situation that's part of the issue? If you're depending too much on self-discipline, is there a way to decrease or avoid exposure to temptation? Maybe you need to adjust your organizational method and try something new, like switching to cash if you've been tracking spending with an app. "I'm good for a while, but then I fall off the horse." If for whatever reason you fall out of your healthy financial management routine, you can always, always start again. Gather your information about income and expenses and see what's not working, reassess what needs to change. The good news is that you're not starting from scratch. The more familiar these steps become, the easier it will be to get back on the horse and to internalize those good-with-money behaviors for the long-term. If you're looking for more tips and encouragement, consider me part of your financial wellness team. on Twitter at @mandaclay, on Facebook at Amanda Clayman Financial Wellness Expert, or online at website. Hope that you're able to use these tools and your new awareness to not only meet your financial goals, but to make money a positive, purposeful and meaning-filled part of your life.
