Emotions and Money: A Guide to Financial Empowerment
I read a Garfield comic when I was about 12 years old that I’ll never forget. “When is the most popular day to start a diet? Tomorrow.”
We’re at that time of year when people make New Year’s resolutions. I’ll tell you though, I can’t stand New Year’s resolutions. If you’re going to change, don’t pick an arbitrary date in the future to change full-scale. Telling yourself you’ll change later while remaining the same in the present is a logical fallacy.
Regarding the influential comic I read as a child and diets in general, I have read that doctors recommend following diets 80% of the time while playing fast and loose with the other 20%. A quick search lead to Health.com, Shape Magazine and WebMD all recommending this dietary approach. Following the 80/20 rule isn’t medically superior to keeping a 100% clean diet, it’s just easier to…. stomach. Puns aside, there’s a psychological aspect to dieting that must be addressed. The 80/20 rule is one of the most successful answers to people being unable to keep to a 100% clean diet. Full-scale, cold turkey change, while possible, isn’t often recommended.
Now stay with me for a moment as I apply this theory, and share a little of my own theorems, to your personal and family finances. In my professional experience, not many families are able to successfully stick to a budget. In fact, only a very small percentage of our thousands of clients even have a written budget, much less follow it to any degree. The psychological problem with a budget is the finality of it. Necessitating expenses be kept within certain parameters can be emotionally taxing (that’s my last pun, I promise).
Rather than keeping to 100% “clean” finances, which puts enormous emotional and psychological pressure in an area of your life that’s already difficult, let’s see what applying the 80/20 rule could look like.
- You’ve got to pay the bills
- You need to look to the future with savings and retirement
- You need to allow your emotions to have some type of financial outlet
Now #3 isn’t so popular with many financial experts as we tend to live in a math-oriented world. The approach I take with my clients is thus: First we remove all emotion from your finances, then we use data to diagnose obstacles, challenges and opportunities, and finally we inject the emotion back into it and make actionable plans to help improve your finances.
As you gain a better grasp on your total financial picture, you will exercise that 20% fast-and-loose more sensibly. Also, let’s clarify one thing. The 20% doesn’t represent 20% of your gross or even net pay. The 20% is a number we must diagnose after points #1 and #2 above.
My wife taught me about cheat days during my immortal days of being 23 years old when I thought I’d never gain an extra pound. Cheat days are there to help keep you sane when trying to implement a strict diet. What she taught me, which I personally also found to be true, was that after putting in really hard work all week, once your cheat day came you’d be more measured than was necessary when deciding how to cheat on your diet. Due to the things you’d learned and how you’d grown, you wouldn’t want to undo all the hard work you’d put in. So sure, you’d use your cheat day and go off diet, but you wouldn’t rubber band all the way back to eating some of the garbage you did before.
This same sentiment holds true as the steward of your own finances. Diagnose the obstacles and challenges, structure a plan to work through them, and then expect to only get 80% of the way. Once your expectations are at the 80% marker, you’ll find ways to stretch that to 85% or more because you’ll see that your choices and actions have a direct positive impact on your plan.
There are many different financial concessions you can make and still reach your financial goals. However, there are a few areas that don’t have much flexibility. The one I’ll focus on presently is your tax filing obligations. You can’t just send the IRS 80% of your tax return or report just 80% of your income. Your tax return has a direct impact on your finances, either positive or negative, and it doesn’t stop there. You need to be able to diagnose areas on your return that can be improved upon. While 2019 may now be a matter of historical record, you can make changes and improvements to help positively influence things now and in the future.
Contact us
Come see us at Molen & Associates; we’ll take care of your tax filing obligations for 2019 and help guide you through some fundamental planning as we enter the 80/20 year of 2020.
Kevin Molen
Tax Advisory Manager
