What is financial well being and how do you approve yours?
The Consumer Financial Protection Bureau (CFBP) is the inspiration for this post.
Teaching Financial Well Being
This business was started to share my financial knowledge with the elderly. However, recently, younger individuals have inquired about learning how to get their financial lives in order. As such, I am adding to my services Financial Education, similar to what is taught in a financial management course in high school.
It will include teaching clients how to:
- Review current income and expenses.
- Identify steps to get their personal finances in line.
- Set up payment plans/schedules for bills to avoid interest and late fees.
- Create a plan to pay down debt, save for an emergency, and save for retirement, without incurring new debt.
- Review insurance policies to ensure they are protecting you from what you thought you were being protected from.
This sounds so simple; however, according to the CFPB, 7 out of 10 individuals in the U.S. do not have a spending plan (budget), and 4 out of 10 are overwhelmed with the thought of creating one. With Social Security estimated to be reduced to 85% in the year 2035, there will be no safety net for today’s current young to middle-aged citizens.
So now is the time to enhance your financial well being.
Causes for Lack of Financial Well Being
Despite the current political rhetoric, it is not because the politicians are trying to increase the gap between the rich and poor so that the politicians can control the masses.
The CFPB did a study that highlights 5 reasons individuals do not have high levels of financial well-being. Those reasons include:
1. “All or Nothing”
As noted above, people are overwhelmed with the thought of creating a spending plan. They have no idea where to start, and are afraid they will not do it right, so they don’t even try!
Step 1 to Financial Well Being: Know how much and where your money is coming in and going out!
2. “Putting Today First”
Individuals focus on the present and spend 100% of their money now! The reference “living paycheck to paycheck” comes from handling your money this way.
There are a few psychological reasons this happens:
- The first is pure justification. What does this look like? You work hard all week and see a new pair of shoes that you have to have! You tell yourself, “I deserve a treat!” This is your brain justifying the bad decision it is about to make.
- The onslaught of social media posts from others results in a negative image of ourselves. This triggers our brains to think, I should have everything that everyone else has. The reference “Keeping up with the Jones'” comes from this thought process.
- Every place you shop, there is a salesperson who knows how to convince you that you can afford a certain monthly payment based on your income. That salesperson never tells you the cost of the item, or the total amount of interest you will pay for that monthly payment, just that you can afford that wonderful item you want so much! This results in the majority of consumers calculating their monthly income and taking debt on everything they purchase up to the maximum for their income!
Step 2 to Financial Well Being: Know what you can afford and what you cannot! Commit to only spending what you can afford!
“Overconfidence”
Consumers believe “I’ve got this!” and as such do not take a close look at what they are doing. This results in unnecessary loss of money, which could be saved towards the future.
Stop! At Least take a Look and begin with Step 1.
“Too many decisions”
Psychologists have found that when presented with too many decisions, human beings freeze. When individuals freeze, they do nothing.
Reviewing your financial situation and creating a plan to meet your financial goals does require a lot of decisions. This is why people need help!
Step 3 to Financial Well Being: Create a plan broken down into many small steps, so that no step is overwhelming and each small step has one decision. Do not try to make all decisions at once; you’ll get to each step in due time.
“Always making exceptions”
This returns to the psychological phenomena that human beings are great at justifying, introduced in putting today first. We are great justifiers because when we know we are doing something wrong (I am not supposed to be buying a new pair of shoes), we have to justify to release the dissonance in our brains.
Step 2: Commit! It takes discipline not to cheat!
How to Fight Against these Causes
You can attempt to do it yourself. There are so many useful tools. I use AARP, CFPB, and Nerdwallet for much of my content and tools. You can use them too! Each entity listed has a hyperlink to its website. However, similar to breaking a bad habit, it is easier with help. This is where BRPS Consulting comes in.
BRPS can teach you how to review your bank accounts and credit cards online to understand where your money is going. This is a discipline you will want to do twice a month. The feedback you will receive from reviewing this information so frequently will:
- Enable you to identify when you exceed your spending plan quickly, which in turn will allow you to get back on course before it becomes overwhelming.
- It also has the added benefit of enabling you to identify if your accounts have been compromised by a scam or identity theft.
BRPS can teach you how to calculate what you can afford and what you cannot! This information will help you create a spending plan. Frequent monitoring of that spending plan will provide timely feedback to ensure you stick with the plan.
BRPS will teach you how to break down that spending plan into manageable steps, so that no one step is hard. The road to financial stability starts with ensuring you can afford what you have and then finding ways to save more.
This process can be done on any budget! However, if you are living above your financial ability, my recommendations will be to sell the assets you cannot afford and purchase assets you can.
Words of Wisdom
- Live within your means, which means 50% of your NET income should go to needs (shelter, food, water); 30% to wants, and 20% towards savings.
- Admit to yourself – you do not need to keep up with the Jones’! The Jones’ maybe filing bankruptcy soon, you do not know!
- Discipline is key! You can do it. Figure out where to get a rush, when you do something good. For instance:
- One client told me, every time her credit score went up, she got a surge of adrenaline because she was successful.
- When I was saving for the future, every year I took off my retirement age, gave me that same rush. I retired at 49!
- Another client developed her plan, so that there was a fund for something truly frivolous, just because she could!