-
Website
http://consumerismcommentary.com/ -
Original page
http://www.consumerismcommentary.com/2008/08/20/the-path-to-mediocrity-doing-what-works-for-you-and-other-self-limiting-philosophies/ -
Subscribe
All Comments -
Community
-
Top Commenters
-
Popular Threads
I think I agree with your assessment that if you strive to be the best personal financial officer, you need to seriously work hard at following the best, mathematical practices at all times. This is pretty much indisputable in my opinion.
However, although you may not achieve TOP financial success, I feel that taking a slower, more "average" approach works better whose life priorities revolve around trying to be the "best they can be" at different things. The financial advice I've followed in the past few years have allowed me to save money, plan for my retirement, pay all my bills, get out of credit card debt and still have some money for fun during the week. I'm lucky in that I'm relatively young (31) and am building good habits that will last me through the rest of my life.
I know it's probably irresponsible of me to not make my personal finance my top priority in life but, like many other "average people" out there, I am more committed to other aspects of my life that take huge amounts of effort as well. And those things are deal-breakers regarding how happy I am in this life: money or no.
Mostly, I guess, that not everyone can strive to excel here and not everyone wants to. The approach of "self-limiting philosophies" works for those of us who put their self-discipline into other areas and their efforts and expertise into other pursuits. Perhaps you'll be a millionaire well before me (in fact I can guarantee it unless we get a windfall at work here, heh) and enjoy the heck out of getting there, but that's not the path for me. I know that following those strategies has gotten me to a very nice point in a relatively quick time and I just see my situation getting better (even with the occasional financial emergency).
Regardless, thanks for reading this and I still think your advice is great! Just thought I'd give some perspective from a different side.
I could mention some other winning financial strategies that might maximize my income or minimize expenses, but that I've decided aren't really worth the effort or stress. They won't "work for me."
Just so you don't think I"m a total sluggard, I have no debt other than my primary mortgage, which I am paying off early, and my wife and I put 24% of our money in savings and investments. Our plan is to retire in 12 years.
"Works for you" sounds nice in theory but any study of the "fundamental attribution error" that humans fall prey to makes it fairly obvious why objective standards are so valuable in self-evaluation.
This was an original post, I enjoyed it.
Regarding comment #3: I see Jon's point. I also think it doesn't entirely contradict the post. Jon's example is, I think, a bit different from the author's. The author's example refers to paying off debt in a situation in which the relevant figures are all available: the question simply is "Do you want to pay less interest or more?" People who choose "more" either don't understand what they're doing or are willing to pay more interest in exchange for a psychological reward.
In Jon's example, by contrast, you mention a situation in which the alternatives could very quickly get complicated. From a purely financial standpoint, you COULD say the rational thing to do would be to collect 3 or 4 or 9 credit cards, each of which offers a higher dividend in one category or another. But to do so would involve a bit of research, constantly monitoring the accounts to make sure the dividend didn't change, constantly monitoring other cards to make sure a better one wasn't available, and keeping up with the bills to ensure that they're all paid on time. (Personally, I've never made a late payment and I've always been a bit bewildered by people who have trouble in this regard. But even I would imagine that regularly using a lot of cards increases one's chances of accidentally missing a payment occasionally).
So the example Jon gives introduces a degree of complexity that would, at best, take time away from living one's life, and at the worst would also entail financial cost. This kind of complexity and mental clutter would, itself, need to be assigned an arithmetic value of some sort-- and the time spent entails an opportunity cost. Even if Jon's decision to choose simplicity over complexity is saving him nothing but a lot of hassle, i.e., even if he's "losing out" in cash terms, this is not irrational (as paying off the low interest debt IS).
I've seen some discussions on PF sites about another area where following the straight numbers isn't always the best thing. For example, chasing the highest interest rate in an online savings account. Unless you're dealing with very large amounts of money, it's not always worth the effort to change banks for a half a percent. If I ever got to the point where I had a couple of million $ invested, I'd probably spend more time figuring out where to put it to get the best rate of return (all other factors being equal).
Another subject that came up recently is the idea of buying presidential coins from the US Mint on a rewards credit card, then depositing the coins in savings until it's time to pay the credit card, as well as more convoluted variants on the idea. I looked at it, ran the numbers, and decided not to mess around with it.
My main focus these days is on simplifying my financial life, automating things as much as possible, so I can work on more creative things. Chasing the numbers too closely doesn't help me do that.
The best way of reaching a specific financial goal will always be the mathematical way.
(I'm not sure that 'disagree' is the right word for me to use, so let's say 'take issue with')
I have a buddy, who decided to get out of debt.
He lined up his debts, highest rate to lowest rate, and started paying them off. A few months in, he was still working on the exact same debt (the big one, w/ the highest rate)... and he got discouraged. So, he slacked, for just three months, and paid only minimum payments. Eventually, he got his act together,started kicking butt, and paid off his debt.
Another buddy of mine, he decided to get out of debt..
But he lined his debts, lowest balance to highest balance. After only two months, he was done paying his first (low balance) account. He was so psyched, and energized, that he turned around and started to ATTACK the second debt on the list. He paid off his final debt months ahead of his original schedule...
Now, if you look at these scenarios, the first dude had the math right, but the second dude was REALLY motivated, b/c he saw some progress. Granted, if both had maintained the SAME intensity, the first dude would have paid less overall interest. But, losing just THREE MONTHS worth of motivation derailed the first dudes plan, and in the end, he paid MORE interest than the second, more intense dude.
Math is cool, and all, but this stuff is still VERY psychological and VERY emotional...
Rock ON,
NCN
Just because your first buddy couldn't motivate himself properly doesn't mean that the option that worked for your second buddy should be recommended over the more mathematically superior option. (Sorry to all Dave Ramsey fans.) The goal is to use the BEST method, and the best is the one that *provides the possibility* of getting out of debt faster and cheaper. If you can't make that goal and want to adjust your plan, that's fine, but striving for a lesser option that is so similar but more expensive and slower -- and pretending that it is the best you can do -- is like an Olympic diver aiming for only the silver medal.
I'm sorry your first buddy got discouraged, but you can't use some people's discouragement as an excuse to strive for a lesser goal. And like I said, motivation issues can be handled separately.
Like I said in the post, there is a right time for taking emotions and other non-financial aspects into account when dealing with money, but *getting out of debt is not that time.* Getting out of debt is so important that you should strive to do it *right,* and if you're not motivated to pay your extra funds to the card with the highest interest rate rather than the lowest balance, that's another issue that you'll have to deal with.
Put it another way, let's say you're teaching an Advanced Placement History class in high school. It's a very hard class. Most students who took the class the year before only received a "C" as a final letter grade. They tried for an "A," but even with hard work they ended up with a "C." Maybe they lacked the motivation, but whatever reason, they didn't achieve their goal.
According to your suggestion, you would advise students entering your course to strive for a "C." In fact, you would only assign them the projects that would ensure the *maximum* they could receive in the class is a "C" (like how your second buddy could only achieve a sub-par result even by following his (Dave Ramsey's) plan to the letter).
I want to teach my students to be "A" students, not "C" students. Let's stop lowering the bar to cater to the most unmotivated individuals. Let's stop lowering our goals. Let's stop rationalizing by saying, "Well, at least a 'C' is passing." That's what this post was about.
"Emotional spending" is often what leads some people to finding themselves in debt, and the best way to solve that problem for the long term is separating emotions when making spending decisions, and a more rational view of money will help with that. Otherwise, one could find themselves back in debt soon after they "succeed" at eliminating debt.
But this post isn't really about getting out of debt, although I used that as an example. It's about setting goals in a world where we're encouraged to strive for mediocrity in all things. The "money is emotional" excuse can often be a crutch that prevents people from reaching their full potential -- a self-limiting philosophy.
As far as picking what you want to get your "A" in -- you're completely right. Focus your energy on the goals that are important to you, but when you have the option for expending the same amount of energy to get an "A" as you would to get a "C," go for the "A."
Your "A" and "C" argument holds no real water...
I'm talking about WHAT WILL ACTUALLY WORK AND HELP PEOPLE GET OUT OF DEBT...
I'm talking about behavioral change - and the psychological / emotional impact of getting rid of an entire debt account...
As someone who has written about and interacted with (literally) thousands of people who are getting out of debt, the impact of clearing away an entire account cannot be overstated.
I realize that my 'less-sophisticated' method doesn't meet the high standards of the personal finance-elites... and that's cool w/ me. I'm not writing about theory, I'm writing about fact. If you remove the emotional / psychological component, then you're just writing a how-to.
In theory, if we were to follow the absolutely mathematically correct course w/ all of our decisions, then we'd all be debt free, prosperous, soon-to-be multimillionaires... (we'd all be healthy, educated, and in shape, as well)... Unfortunately (or fortunately, depending on your point of view)... we are NOT robots... we have souls, and we have emotions... and, these emotions play an important role in what we do or do not do...
I dig the intent of the post... but as a former C student, I'll stick w/ us average joes...
:)
Rock on,
NCN
It's a fallacy that "we'd all be millionaires" if we followed a mathematical course of action at all times. Everyone has their own goals, interests, and values; some align with making gobs of money, but most do not. Many life decisions are *not* about money, even though there are financial impacts (getting married, having kids, moving to another country, etc.) Additionally, the opportunities to become millionaires are not available to everyone. So I'd have to say that argument doesn't really apply (but I hear it often).
One method isn't "less sophisticated" and one isn't "elite." They're basically the same strategies with one slight difference that many people wouldn't even notice, unless told that they might need a "quick win" for extra motivation.
I don't expect anyone to be robots. I've said already that emotions are an important part of the decision making process. Emotions are everywhere... from the feeling you get when you first decide that it's finally time to pay off debt to the feeling you get when it's all paid off and everything in between. Emotions will get you from one step to the next. But anyone who *relies* on emotions at the expense of logic for making decisions about money must admit that their goal is not "to get out of debt" but "to feel good about their debt situation."
The "A" maximum grade vs. "C" maximum grade is an appropriate analogy because the Dave Ramsey method of paying off debt falls short. It cannot match the other method for speed and total interest cost in most cases. YES, his method has been proven to work, but that doesn't mean other methods don't work better for people who can handle the motivation (and it's not much harder, you still get "quick wins," I've written about this at length).
I get that you want to stick with average joes. Some people are happy with being average. I can understand. Striving for excellence opens up more opportunity for failure and makes some people more vulnerable. Playing it safe is one way to live through life, and it's a choice anyone is free to make, as long as it is with the knowledge that they're sacrificing some element of quality. In terms of debt repayment, the Dave Ramsey method isn't really safer than the Avalanche method. They are so similar, especially for someone who is intrinsically motivated to get out of debt. It just doesn't make sense to pay more money and waste more time in debt.
In the end, it's can be a small difference in time and money or it can be a large difference, but it's usually small. So you can look at it as either a big deal, no deal, or more of a measure of mindset. People who are able to make financial decisions based on more logic than emotion will succeed more frequently... and this is a skill that can be learned. Sometimes people just need to be shown that they're wasting time and money. Many who follow the Debt Snowball method do *not* know this (even though Dave Ramsey mentions it). I've spoken to people, too. :-)
This is all just one small piece of the point of this article, the "doing what works for you" piece. Dave Ramsey's method works. He's got a multi-million dollar business based on it. That's great! But there are other options that can *work better* with hardly any more effort, if any at all.
Just to be clear, a financial decision would be called for when asking, "What's the best way to get out of debt?" On the other hand, "Should I have kids?" or, "Should I marry this girl?" do not call for purely financial decisions (though finances are a small part). Emotions and psychology are BIG, but when it comes to financial decisions, the best are made when emotions are checked at the door.
Take away irrational spending, track your money using simple arithmetic, and you won't need either approach for getting out of debt.
By the way, for some reason everytime you guys 'reply', the message is sent to my e-mail. I was not the originator of this discussion nor have I ever responded till now. So could you just drop this discussion, I am tired of seeing it in my inbox. How about you all just agree to disagree?
Didn't someone say that all progress is made by unreasonable people.
We just have to keep questioning and work on getting better in one way or the other.