The Psychology of Personal Finance: Meet Diligent, Destitute and Dickey (Part 2)
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:
Destitute the Emotional
They all make similar incomes, but they all go about saving, spending and investing differently. With each approach, there are trade-offs.
Part 2: Destitute The Emotional
Destitute works just as hard as anyone else, so he likes to have a good time and treat himself. He acts on what makes him feel good. Destitute is focused on the short term.
Because his financial goals are unclear, he ends up with the least savings of the three—despite having a well-paying job.
Yet he’s impressive in other ways. His superhuman ability is conjuring up credit in ingenious ways so to bring about massive spending potential.
And just like Diligent the Rational, he’s heard of Voltaire, but he doesn’t care much for card games.
Saving, Spending and “Financing”
Besides vacations to Cabo and attending the nation’s top music festivals, Destitute doesn’t plan very far in advance. He does keep an eye on his bank account though, so it never gets to zero.
Desty thinks Einstein was certainly onto something: 14 days between paychecks does, in fact, feel like an eternity.
One time, he found new shoes he wasn’t actively searching for, but the deal was just “too good to pass up” and “he’d be leaving money on the table otherwise”. He laughingly told his friends he was just being spontaneous; his friend nodded without saying much.
His spending is optimized with an innovative 4-tiered approach:
Cash first
High interest credit cards
Buy now, pay later
Payday loans
He’s memorized all his credit card minimum payments and figures that if he can just afford the minimum credit card payments, he can afford the 7 LED TVs.
For the more expensive items that he really likes, the most pertinent question on his mind is, “How do I rationalize this?” And the innovative answers he comes up with here are only surpassed in ingenuity by his credit-sourcing abilities.
“Investing”
Destitute has heard that saving money and planning for retirement is important.
The other day he read, “The best time to plant a tree was 20 years ago. The second best time is now”. He feels like he’ll act on this advice very, soon, in a big way. He’s felt this way for a while…
Contrary to popular thinking, he does “invest” a bit. Like how you might watch certain sports not to be left out at the office, he picks stocks because everyone else seems to do it.
One time, he made 6% (3% after fees and taxes) while day trading over 6 months! So now he knows he can make money in markets. Yet he didn’t happen to notice the S&P 500 was up 12% over that same time period.
He gets some of his investing advice from well-advertised internet search results, which led him to penny and meme stocks. He once sold his entire stock portfolio in response to a Yahoo article claiming a bear market was imminent.
Though he found this advice kind of confusing, because Yahoo had just posted a separate article declaring the beginning of a bull market. Nonetheless he figured “Why take the risk?”
Hobbies
Going to Yacht Week
Restaurants, but only the ones with long lines
Day-trading penny stocks using Yahoo reccs
Conjuring credit
Ordering take-out Sushi, 7 nights a week
Clubs, but only the ones with long lines
Shopping to de-stress
What He’s Teaching his Kids about Money
He generally avoids addressing finances or teaching it. Nonetheless, his kids do learn from him. They certainly have come to understand you can purchase nearly anything you want.
Desty is an expert in deflecting the topic of personal finance with humor, whether at the house or about. Often, he gets laughs with, “You can’t take it with you”.
Financial Decision-Making
“YOLO” is his motto and one of his favorite sayings, which gets laughs too. A close second is, “If you can afford the minimum payments, you can afford it.”
Destitute is fun to have at parties, and he is fun to be around. And you always know you can count on him to join you at the bar on weekdays.
Financially though, his poor money habits are reinforced by some of his friends’ bad habits and his fuzzy thinking. This keeps the poor-financial-habit cycle going.
He has a hard time seeing that small changes over time lead to large outcomes. “That’s life though”, he thinks.
However, Destitute has a self-administered mental remedy he’s developed over the years and takes frequently to “make sense of things”; it includes backward rationalizing decisions, question substitution, downplaying poor decisions, and counterfactuals. These mental gymnastics dance around the truth. Therefore, he can’t even accurately describe what’s taking place with his finances.
Reader Relation
Destitute is an over-the-top example. Emotions tend to be the basis for his personal financial decisions, Thus, he acts only on what feels good and focuses always on the short term.
Though Destitute lives the life he always wants to, it’s a life of excess indebtedness. He’ll need to work more years than he otherwise might and live with the constant stress of owing someone else money.
The good news is, it’s really easy to make better decisions than Destitute, and it’s never too late to be smarter with your money.