Money

This one is for all you yogis, meditators, and Buddhists out there. You want to achieve enlightenment? The key is not in down dogs and green smoothies. The key is budgeting.

I know that sounds crazy. But take it from Thich Nhat Hanh, “Budgeting leads to enlightenment.”

I’m just kidding, Thich Nhan Hanh didn’t say that. But he did say, “Awareness is like the sun. When it shines on things, they are transformed.” 

As any good scholar of Buddhism knows, awareness is the key to enlightenment. Well, what better way to become more aware than by budgeting? 

Being aware of our spending is one of the most powerful tools we have to become aware of ourselves. And really, that’s all budgeting is! It’s simply being aware of our spending.

I don’t run into too many people who love to budget. And when it comes to co-budgeting with a spouse or partner, there’s a good chance at least one of you will actually hate the idea.

And yet, anyone who takes the time to think about it would agree that spending money in a way that’s more aligned with our values will bring us more happiness. 

So why aren’t we doing it?

1- It’s not fun.
True. But remember, as Stephen Covey says, “If the ladder is not leaning against the right wall, every step we take just gets us to the wrong place faster.” Budgeting is how we make sure our spending ladder is leaning against the right wall.

2- I already know where my money is going.
No, you don’t. Sorry. Unless you track your spending, you don’t have a clue where your money goes. Everyone I’ve ever seen go through the process of tracking spending for 30 days usually ends up saying some version of, “I had no idea I was spending that much on X.”

3- I’m not sure I want to know.
I think this is the biggest mental hurdle. The reality is that as we become aware of what and how we’re spending, we’ll find some things that surprise and bother us. Then we have to decide: Do we want to change?

The answer to that last question is… Yes! Of course you want to change! 

Why else would you be contorting your body into weird shapes in a heated room with people chanting “Om” at you? Right? The whole point is to become more aware.

Just give it a shot. 

1- Try tracking your spending for 30 days.
2- Don’t stress about what app to use.
3- Just carry around a pen and a little notebook, and each time you make a purchase, write down what you spent and how it made you feel.
4- At the end of the month, go back through your notebook and just notice. Become aware. That’s it.

What do you have to lose?

-Carl

P.S. As always, if you want to use this sketch, you can buy it here.

Investor behavior matters a lot. In fact, it probably matters more than skill. To understand why this is true, first you need to understand one fundamental concept: Investment returns and investor returns are almost always different.

In 1999, I was working diligently doing my job as an investment advisor or financial planner (I was never sure what to call myself back then). As far as I understood it, my job was to search for investments that would generate above-average returns for my clients. That’s what the entire industry was built on, and really, that’s what clients thought they hired me to do. 

Above-average returns is called “alpha,” and finding even a little of it was worth any trouble. The search for alpha was why investment firms hired bright people and gave them bigger computers than the “other guys.” As I was searching for a little alpha anywhere I could find it, I ran across a little annual study done by Dalbar. This study attempts to find out how investors did compared to the average investment. You see, investment returns are not the same as investor returns. 

Investment returns that you see in the paper or in marketing material are based on the assumption that you invest a lump sum at the beginning of the period, and then you leave it alone. You do not buy or sell. You do not change your mind and trade to another fund. You just buy once and hold. 

Investor returns measure your real-life return. The return you earn as you buy and sell your investments, or switch from one investment to another in your search for the next hot thing (remember our search for alpha?). 

Well, for as long as Dalbar has been doing their study, the result has been shocking! The latest update is not much different from the one I read back in 1999. The study uses the S&P 500 as a proxy for the “average investment.” For the 20-year period ending 2007, the average investment return was 11.81%. The average investor return was 4.48%.

Now think about this for a moment: The entire industry is based on the idea that their job is to find the best investments, and in the process, they are killing the patient. The well-intentioned search for alpha is resulting in the average real-life person underperforming the S&P 500 by over 7%. That is crazy stuff. 

When I realized the implications, my entire job changed. I realized that investment success is not about skill — it is about behavior. I could not figure out why this story was not being told anywhere. I even remember reading an issue of Consumer Reports that went into great detail about how to save a percent on fees by buying no-load mutual funds. Then, buried in the article was one sentence that mentioned the Dalbar study and warned people about this 7% problem. 

Three pages devoted to saving a percent, one sentence that mentioned a massive problem but offered no ideas for solving it! I started telling the story everywhere I could. I drew this sketch on the whiteboard in every client meeting and at every public speaking engagement.  

It turns out my job was not to find great investments, but to help create great investors. If all you had to do was buy good (versus great) investments and then behave correctly, that changes everything. I decided that the search for alpha didn’t matter (turns out it’s a fool’s errand anyway, but I didn’t know that at the time) if you lost 7% in the process just because of bad behavior. I decided to leave the complex task of finding the best investment to the smart guys with the big computers; I was going to focus on the simple problem of helping people behave correctly. 

It turns out that outperforming your neighbor is not about finding better investments, it is about behaving better. Wow, if this is true, think of what it does to your life. No more Jim Cramer, no more late nights after work trying to find the next Microsoft.  

If this is true (year after year, studies tell the same story), then the focus is really on the few things that you control. 

If this is true, your relationship with a financial planner should be based on trust.

If this is true, we can focus on the simple, but not easy, task of becoming a better investor.

The lesson is that investment success isn’t about skill. It’s about behavior.

In 2013, a guy made headlines because he was caught using a lowly flip phone. In a world of gold iPhones and palm-size phablets, it does seem a little odd that someone would still use such a low-tech device. But it was the identity of the person using the phone that got everyone’s attention: Jerry Jones, owner of the Dallas Cowboys.

The Cowboys alone are valued at $3.2 billion, and Forbes estimates Mr. Jones’s net worth at $4.2 billion. Clearly, he can afford a nicer phone. But when asked about it, he commented that it was practical and comfortable. Plus, as he noted, “It’s how you have a stadium worth $1.2 billion. If you watch your pennies and you have flip phones.”

This story came to mind during a recent conversation with a close friend who has built an impressive net worth. We were chatting about the idea of having our wealth flash as a number above our heads and how it might change us.

After all, when it comes to other people and their money, we’re making subconscious judgment calls constantly. Those judgments are based invariably on a broad set of assumptions. We see the car someone drives. We see the home someone buys. We see the phone someone uses. Then, we make judgments about their success, status, and intelligence.

As my friend and I talked, we tossed around an idea. What answers would you get if you were to ask 10 people who know you casually to guess your income and net worth? How close do you think their guesses would be?

It’s an interesting question because it tackles head on what we think we know about someone’s finances versus the reality. If the guess was way high, what would it mean for your relationship? How would you feel when it came time to admit the real number? Embarrassed? Uncomfortable? If the guess was way low, how might that change the dynamic when you reveal the higher real number?

I’ll venture a guess that almost everyone ends up far off the mark. And it leads to another question that’s even more difficult. How does what we know (or think we know) about someone’s finances affect how we treat them? What does it say about us if we find that we’re kinder to or less judgmental of wealthier people?

These questions made me think of a longtime friend. He’s usually reserved in a room of people, unless there’s someone there who has a lot of money or influence. Then, he becomes really animated and social, particularly with that person. The crazy thing is that my friend isn’t angling for favors, and he doesn’t own a business that needs investors. It’s purely a social response.

While it’s easy to pick on my friend and say his behavior is ridiculous, what if we are that person? What if our behavior changes based on what we know about a person’s wealth?

That leads to my last question. Imagine you have a friend who has struggled for years to build a business. The business is successful, and she’s worked hard, but she’s cash-poor. Then, one day, she sells the business for $10 million and it makes the local news.

Any guesses as to how the community will engage with her going forward? How would you think about a friend who went from no money in the bank to $10 million in the bank?

All of these examples point to an underlying truth we keep pretending doesn’t exist. At some level, money is a common thread woven throughout our lives. The idea that money doesn’t affect us or that we aren’t influenced by it isn’t true.

I don’t believe this is automatically a bad thing. It is, however, something we need to get better at talking about because it’s the assumptions that can create the most headaches. By talking about how money makes us think, we stop giving power to the assumptions that drive our behavior because we learn to understand the inconsistencies. Driving a Bentley doesn’t mean you’re wealthy, just as using a flip phone doesn’t mean you’re poor. As a result, it becomes a tiny bit easier to avoid judging others and ourselves for what we have or, more likely, what we don’t have.

This column, titled Viewing Others Through a Prism of Money, originally appeared in The New York Times on November 17, 2014.

Eleven years ago, I needed a new bike. At the time, I rode a lot. I was in a big group of relatively competitive riders, and we’d often put hundreds of miles on our bikes each week. I agonized over what bike to buy, but I kept coming back to one made by a company called Moots, a Colorado company that builds titanium road and mountain bikes by hand.

The father of a good friend of mine had a Moots bike when I was growing up, and it made me salivate. The problem was, they were really expensive. Like, “far more money than I ever considered spending on a bike” expensive. Maybe $5,000 or so back then.

But the more I looked into it, the more I was convinced I had to have this bike. After putting myself through the painful process of shopping around, comparing prices, and looking at models that I didn’t really want, I pulled the trigger.

Following weeks of buyer’s remorse that more closely resembled terror, I came to realize something that is going to sound crazy. Buying this incredibly expensive bike was one of the best financial decisions I’ve ever made. I understand that writing $5,000 and the words “bike” and “smart financial decision” all in the same sentence sounds absurd, but it’s not.

This was a fantastic, rational, smart financial decision. And I know that goes against everything you’ve heard from every personal finance advisor out there. They’re always telling you how to save money, how to reduce expenses, how to buy cheaper. Right? Cheaper, cheaper, cheaper. What I’m saying is, that’s a shortsighted message that we need to change.

Here are the reasons:

1. If you love it, you will keep it; if you keep it, you will use it. I bought a bike I love. You may not like it. That’s fine. If you don’t like it, don’t buy it. But I love it. And since I love it, I’ve kept it for 11 years. And since I’ve kept it for 11 years, I use it all the time.
   
   
2. It replaces five other bikes. The guys I ride with own plastic bikes (carbon fiber). And they may feel the same way about their bikes as I do about mine, but most of them don’t. Most of them think, “Oh, I’ll just go buy a bike.” A couple years later they buy the newest bike, and a couple years after that they buy the newest bike again. Each time they sell the old one and buy the new one, they lose money. That can be costly. I have changed almost nothing on my road bike in 11 years, and I like it more than when I bought it.
   
   
3. It will last. Let’s say you follow the standard advice and buy the cheaper bike. We all know what happens with the cheaper bike. It breaks! It wears out, you replace it. And not only does good gear last, but when you buy cheap stuff, you get bored with it. I do not get bored with this bike, and that is why it is saving me money.
   
   
4. It’s beautiful. That may sound silly, but it’s important. If you’re planning on having something for a long time, you’d better like looking at it. Any time I even consider looking at a new road bike, all I have to do is wash mine and see the beautiful welds, and I fall back in love again. When I’m done and can no longer ride my bike, it will hang above the mantle over my fireplace. That’s how much I love it. It’s a piece of art to me.
   
   
5. The cognitive benefit. Buying things is agonizing. The cognitive expense of switching, replacing, and constantly thinking about whether you need a new bike or not has a cost associated with it, too. I don’t think about it. I don’t have to think about it. I’ve got the bike I love. Period.

So, I hereby give you permission to consider buying the things you really love — things that may be two, three, or perhaps even four times more expensive than a similar product. I am asking you to consider the possibility that buying stuff you love, regardless of price, may be the best decision you can make.

Consider that if you love it and you’ll use it, you’ll save not only money but retain the cognitive and emotional energy you would have used to replace the thing once a year. You’ve heard of “buy nice, or buy twice,” right? Well this is a derivative of that idea. But don’t just buy nice, buy what you love. If you don’t, you’ll end up hating, and replacing, until you do.

This column, titled The Financial Benefits of Buying What You Love, originally appeared in The New York Times on December 21, 2015.

I talk to many people who have problems with spending. Sometimes it’s friends. Sometimes it’s co-workers. Sometimes it’s neighbors. And yes, sometimes I talk to myself about my own struggles.

What I’ve discovered over the years is that most of our problems do not come down to income. Instead, we don’t notice enough. Spending mindlessly, without even thinking about it, has become a national bad habit. And we all know how hard it is to break habits. So we make the same mistakes over and over again.

Oops! I did it again! Another month, another blown budget.

We keep having this problem because we keep using the same tips and tricks while expecting a different result. We tear up our credit cards and use only cash. We may even wear a shock bracelet (there’s actually somebody who advocates that), which you can use to zap yourself when you buy something.

Crazy, right? Well, it’s time for a new approach.

Solutions that focus on negative reinforcement are like hacking at the branches, when what we really need is to focus on the roots. What I’m proposing is really simple, and it’s based on one central hypothesis: The solution is not making spending more painful, the solution is awareness.

So I want you to try a little experiment I’ve created. It’s called “30 Days and Three Seconds.”

Here’s how it works. For 30 days, when you spend money, I want you to take three seconds and simply notice what you’re doing. That’s the program. Simple, easy, and doable. It can be before, during, or after the purchase. Be consistent, and make sure you do it for every purchase.

For instance, if you’re buying lunch at Whole Foods, when the cashier says, “That will be $8.67.” After you pay, stop for three seconds and say to yourself, “Eight sixty-seven for lunch. Isn’t that interesting?”

And those are exactly the words I want you to use: “Isn’t that interesting?” Not, “Isn’t that dumb.” Not, “Oh, I should have…”And certainly not, “Not again.” I just want you to notice.

The point of this is not to beat yourself up about your spending. All of the emphasis for the next 30 days is on awareness — that’s it.

One way you can do this is by setting up your credit card or Apple Pay to send you an automatic message each time you make a purchase. In the Whole Foods example, you spend $8.67 on your card and, almost immediately, you will get a text message saying, “You spent $8.67 at Whole Foods.”

If you don’t like that idea, get a receipt for every purchase. When you walk out the door, look at the receipt, read it, and say, “Isn’t that interesting?” Then throw the receipt in the trash. And if you don’t like that, just say it to yourself each time the cashier tells you the total.

That’s all you’re going to do.

And then, 30 days from now, send me an email about what you learned, the experiences you had, or what happened to you. You can reach me at hello@behaviorgap.com. I’m going to take some of those lessons, and some of my own, and write a follow-up column you can count on seeing two weeks after that, on June 13.

Look, I could tell you what the goals of this exercise are. I could tell you other tricks and tips on how to achieve them. But we’re not going to do any of that stuff. No budget, no list, and no adding it up at the end of the month. Again, the entire objective is awareness. I don’t want you to judge yourself or to change what you’re doing, just simply notice.

Thirty days, three seconds.

Experiment with it, see what you discover, and then shoot me an email.

This column, titled The Solution to Maintaining a Budget Is Awareness, originally appeared in The New York Times on April 25, 2016.