The Psychology of Personal Finance: Meet Diligent, Destitute and Dickey
There are three broad approaches you can take for your personal finances, which in large part is behavioral. So I decided to model these approaches with three fictional characters.
Meet:
Diligent, the Rational
They all make similar incomes, but they all go about saving, spending and investing differently. With each approach, there are trade-offs.
Part 1: Diligent, the Rational
Diligent always heard that saving money was good and planning for retirement was important, so he puts in the effort to save and invest as much as possible. He’s unsure what Voltaire meant by: “Perfect is the enemy of good”.
Diligent’s goal is to minimize expenses and maximize his wealth for retirement. For him, it’s just that simple.
He has a pulse on the entire fin-o-sphere: FIRE, Bogleheads, indexing, Borrow- Buy-Die, carried interest and proposed/recent tax law—you name it. You might have even seen some of his message board posts as well.
Diligent is laser focused on the long term and is well on his way to become the wealthiest of the three models.
Spending and Saving
Diligent balances his budget every week by hand and puts the recommended 20% into savings. Although he’s wanted to, he’s never purchased an appetizer or a vanilla latte. Those who know him have heard him mention this fact a time or two.
He has 16 credit cards that he uses to “hack credit card rewards”. Diligent keeps an excel spreadsheet to help manage the 16 credit cards so he knows when to use which one, as each’s promos and targets can move around.
Dilly is known in some circles as an extreme couponer. Those who shop at the same grocery store have come to recognize him. His checkout line always seems to end at him.
For whatever reason, everyone at work scatters when he approaches the water cooler.
Investing
In his office, just next to the family portrait hangs the framed Einstein quote: “Compound interest is the 8th wonder of the world.”
Because Diligent’s goal is to optimize wealth, he always puts in the effort to consider every financial possibility using excel:
S&P 500 drops 20% in a year? Check.
US loses reserve currency status? Check.
Planet of the Apes scenario? Check.
Revelations, but US keeps reserve status? Check.
He is prepared. But sometimes he wakes up in the middle of the night, sitting at the computer, and he doesn’t remember how he got there. His doctor calls it “sleep-spreadsheeting” and gave him a prescription. But he’d rather “deal with it” than dip into his health-savings account—compound interest being what it is.
Dilly also shares his investment strategies with his son each night, partly because it’s become very effective at putting him to sleep.
He worries about his investment asset allocations frequently, but he knows that’s normal. Dilly tries not to worry too much about how much he’s worrying. And although his smart watch (gift) shows slightly elevated resting heart rates, he knows financial optimization is worth the possibility.
Hobbies
Personal finance is his favorite hobby; a distant second would be keeping the house clean.
He believes the Excel function he wrote a couple years ago will go down as his greatest achievement. Dilly won’t brag about it, but he’s happy to show it to you if you ask.
His wife made their family take a vacation last year to Colorado. Everyone had a great time, but Diligent still feels anguish and regret when he reviews the books. The lost compound interest is hard to stomach.
What He’s Teaching His Kids about Money
He’s teaching his kids the value of a dollar by charging them a quarter every time they leave the lights on. Diligent also charges his kids 50 cents for every shower over 5 minutes.
The family water heater is set at lukewarm. He tells his family this is to conserve energy, but he does cherish the low energy bills.
Financial Decision-Making
For the finances, “No stone unturned” is his motto, and he always follows the numbers. This means Diligent avoids using mental shortcuts, or rules-of-thumb, which he knows will fall short of optimal financial outcome, though they save time.
He can become mentally exhausted from doing all the work required to optimize expenses, savings, couponing and investments. “That’s life though”, he thinks.
Reader Relation
For some reason, Diligent isn’t the first person we call to hangout. He’s just hard to relate to.
His constant financial optimization, which spills over into social interactions, gets in the way of his otherwise fine personality.
Being Diligent all the time is tedious and can cost you in other areas of life.