The Psychology of Money: Part 1

I’m writing this series for people like me. Young adults, financially independent, and totally oblivious as to how our daily money choices are affecting our futures. Money might seem simple enough. Make some, spend some, save some. But if you aren’t monitoring your spending and you haven’t stopped to learn all the in’s and out’s of finances, you might be making some big mistakes you aren’t even aware of.

I know I was. I was spending on things I didn’t need, but I didn’t care much. At the end of the day, I paid all of my minimum payments on time, never missed a bill payment, and had a credit score over 700. I was pretty well off right?

I was also slowly racking up my credit card, paying literally 100s in interest each month, and slowly chipping away at my savings account. I hardly noticed any of it. I was busy trying to start a career, learning how to cope with growing up, and honestly losing my savings happened too slowly for me to care.

I had gone from never carrying a balance on my credit card and having $11,000 in savings to well… a lot of credit card debt, way more bills, and a small savings account. That was when I realized that something needed to change. 

How could it possibly have taken me that long to realize I was messing up?

We learn about history, literature, math, etc., in school; but our financial futures are left up to us.

Roth IRA, 401k, compound interest… Somehow we are allowed to take out enormous student loans and sign up for 30% interest credit cards without knowing what these things really are, and what they’ll do to us in the long run.

This is the American way. We make huge financial decisions before we even realize what they truly mean for our lives, and we continue to aimlessly spend until we find ourselves in a scary situation that we are then forced to dig ourselves out of. The worst part is, it’s hardly ever our fault.

We didn’t know. In fact, we didn’t even know that we needed to know what was going on.

You get paid, you pay for things, what else is there to know?

Most of us will figure out that we need financial help once we’ve already ended up in a scary situation and we’re finding it hard to get out of it. Just like me, and maybe just like you.

If you don’t believe me, watch Caleb Hammers YouTube series “financial audit”. If you relate to anything I’ve said, I can guarantee you that we are not alone.

I’ve managed to learn a lot about personal finances this year, definitely not everything yet, but I’ve gotten far enough that I feel the need to share this information with anyone who is just as lost as I was last year. Because had I known these things last year, or more importantly as soon as I got my first job, I would be in much better shape right now financially.

I wouldn’t have a big personal loan to pay off and $0 in my Roth IRA and 401k at 25 years old.

If you’re reading this, you’re already ahead of the crowd in a way. Most of us don’t realize we need financial advice, but once we start seeking it, it can change our lives. Money can seem really simple, and our choices can seem easy to get out of, but the truth is financial institutions can get the best of you if you don’t know what’s going on. And like I said before, most of us don’t even realize how little we know. That’s how they so easily screw us over.

This is going to be a financial series I work on for the next few months, so in this first part I want to tackle the simple question “Why should you care about your finances more?”

It’s easy to get taken advantage of.

That’s almost the whole business model. “Let’s just target the people who don’t know what they’re doing!” – some business probably.

Seriously though, if you don’t know what you’re doing, you are an easy target. So educate yourself and take that target off your back. How do you think the rich stay rich? They know all these finance terms and tricks, so they have no targets on their back.

Where do you start? If you’re not tracking your spending and building a retirement fund, you aren’t setting yourself up for success. Worse than that, if you’re not heading towards financial wellness, you’re likely headed toward debt and a never ending minimum payments cycle. And the holes we dig ourselves are harder to climb out than they are to build. But before we get ahead of ourselves with retirement, let’s talk about the debt’s and loans that are holding most of us back.

We need to manage our money and debt because financial institutions are set up in a way that penalizes people for making mistakes, and once you start facing the penalties (aka consequences of your mistakes) it’s harder to fix those mistakes than if you’d just known what to do from the start.

For example, if you max out a credit card you’re going to be paying a lot more in interest than you initially spent on that card. A LOT more. You might max out your credit card at a  $500 limit, but, because of compound interest, end up paying well over $1000 by the time you finish paying off the card. Then your credit score goes down because you have high utilization. 

Now that your credit score is lower, you go to buy a car and they offer you an insane 25% interest rate (they give the worst rates imaginable to people with low credit scores). Now you’re going to pay even more for your car in the end because you messed up your credit. Then, while you’re struggling to make car payments and credit card payments, an emergency happens, but you don’t have an emergency fund, so you open another credit line and the sick cycle continues.

Or let’s say you get behind on your taxes because you’re a contract employee. This happens to a lot of people. If taxes aren’t being taken out of your income, you need to set them aside each paycheck! Otherwise the IRS can do all sorts of things that will screw you over financially. Don’t forget taxes exist, because if you do, you’re likely to face a huge penalty. It’s much easier to set aside money before you set your budget, then to magically come up with several thousand dollars come tax season.

Seriously, if you don’t believe me that this stuff happens, watch Caleb Hammers YouTube series “financial audit”. Any one of us can fall into this trap, even if we’re being careful with our finances. That’s why it’s so important to be careful with your finances, to try and avoid this scenario in any way you can manage.

This kind of thing happens to people all of the time. And it has a lot to do with our psychology around money. How we mentally interpret money matters. So before you make a budget, consider how you think about money, and work on growing a better mindset toward your finances.

Your mindset matters.

“I can make the payments, it’s fine!” is the kind of sentiment that gets people into financial trouble. “I don’t have the money for that in my budget, so I’ll just have to wait” is the kind of mindset that keeps people out of financial trouble.

A budget isn’t meant to restrict you, make you feel broke, or scare you. A budget is a tool that helps you make decisions that will support you and your goals in the long run. If you don’t budget “I can make the payments!” is probably something you’ve thought before, I know I have. That thinking is usually how people end up with predatory loans and maxed out credit cards.

Once I got serious about my money (much later than I wish I had) and started to budget, it became easy to tell myself “I don’t have the money, guess I just have to wait. I’ll be able to afford it soon enough anyways!” Is the mindset that makes sticking to a budget easier and more meaningful. Making a budget doesn’t mean much if you don’t shift your mindset, because if you think of a budget in a negative way, budgeting is going to suck.

What should your mindset be when making a budget? Don’t think of it as “I can’t do anything! I feel like I can’t enjoy myself at all!”, that’s like thinking about your favorite dessert when you’re on a diet. Instead, try to reward your mind by getting excited as you see your debts shrink and your savings accounts grow. “Whoa! I’m actually making progress on my debt. After some time this debt will be gone and I can finally start saving for my trip to Japan!”

Instead of focusing on all the negative aspects of building a budget, focus on all of the positive changes you’re getting. No debt! My credit score went up! I finally have enough in savings for a rainy day! This not only stops you from feeling miserable on a budget, it makes you excited to be on this journey.

Seriously, there is room to have fun while building financial security. However, if you’re like the average person, you’re probably going to have to spend a little bit of time climbing out of debt and building emergency funds first. Then the real fun of investing in retirement, buying a home, saving for vacations, etc., can begin. And best of all, this time you’ll be doing all of that with no unnecessary debt!

Don’t let your money control you, control your money instead.

Money shouldn’t have the power to control us, but if you ignore your finances, they will control you someday. It will catch up to you and it will be much worse then if you had just monitored your decisions more closely the first time around.

I understand this feeling of “money isn’t everything!”, but unfortunately it is a huge part of our lives and we can’t just ignore it. To say it bluntly, it doesn’t make you more “progressive” or “carefree” to ignore your finances. You’re just creating a huge problem for your future self if you don’t take the time to understand your personal finances right now and fix whatever little mistakes you might’ve made already.

It’s not too late for you to fix your mindset on finances. It’s never too late to get serious, set a budget, and do whatever you need to do to get yourself into a better position.

You just need to understand that you should care about your finances, and then you’re on your way to financial freedom. Because once you care, you’ll take the necessary steps to do things the best way for you.

Now what?

If I happened to convince you that it’s time for you to better your life and start caring about your finances more, then the next step is to sit yourself down and face your financial situation! Whatever it is, you need to know what you’re dealing with so you can make a plan to better your situation.

I’ve mentioned Caleb Hammer’s Financial Audit series a couple of times already, because he basically shares the same ideas I do, and he does a good job at teaching people how to do this first step of facing your finances and setting a budget for yourself.

How to set a budget.

You need to actually sit down and write out all of your needs (rent, utilities, insurance, groceries, gas money etc.,), then write out all your debts (including interest rates), then look at how much you do or don’t have set aside for an emergency fund.

Once you do that, you have to put in a little more work and set a reasonable budget for yourself. Decide how much you can afford for the variable needs you have (food, gas, etc.,) and add that to your fixed needs (rent, utilities etc.,), and see how much you absolutely need to survive each month. Add in your minimum payments for debts, and now you have the minimum you need each month to stay afloat.

If you can, cut out unnecessary things. The lower this minimum amount is, the more you can put toward other things.

Next step would be to determine how much you have left over each month after your needs, and decide how that money is going to be best spent.

That’ll be different for everyone. If you’re like me, and you have a personal loan with a high interest rate that you want GONE, then you’ll be putting all that extra money toward a principal payment on that loan until it’s paid off. If you’re not like me (debt free or extremely low interest debts), then it’s probably time for you to build an emergency fund. Not having an emergency fund is an easy way to fall into debt again, so handle that as soon as you can.

If you have an emergency fund and no debts (I can’t wait to be there with you soon), it’s time for you to look into 401k’s or Roth IRA’s. But we’ll talk about those more later in another post.

This is just the first step to financial freedom. 

There’s still a good bit we can learn to grow and develop our finances, but this step is honestly the most important. Having a budget and some kind of plan is a great way to set yourself up for financial success. The rest of what we can learn will help a lot too, but I’m starting here and I think anyone who hasn’t been monitoring their finances should start here too.

Seneca once said:

This quote was actually talking about the importance of journaling, but we can apply it to a budget. If we keep constant watch over ourselves, we can better control how we interact with the world, how we think, and what we accomplish. A person who never keeps watch over themselves can easily fall down the wrong path.

The same is true about our finances. Think of a budget as a financial journal. If we keep constant watch over our financial lives, we will be able to keep ourselves from falling down the wrong path.

What is a 401K?

The Psychology of Money: Part 2

In the next part of this series, I’ll be going over some basic financial terminology and explaining things like compound interest, APR, APY, Roth IRA, Traditional IRA, Roth 401k, Principal payment vs minimum payment etc., so we can learn about financial freedom together and break down the gap of financial knowledge that currently exists in our world.

If I’m being honest, I feel as though those of us who could use this advice most are the ones who never get it. There’s a reason generational wealth exists, and that’s partly because people with lots of money are usually taught how to manage that money. They aren’t afraid of investments and they use the system to their advantage. 

Now it’s our turn to take advantage of the system and take control of our finances before they take control of us.

If you want any more financial advice, I recommend looking at people like Graham Stephan, Her First 100k, and of course Caleb Hammer.

Stay Psyched,

Vicky Diaz

If you’re planning to follow this series, comment below! Let me know what your finance goals are.

I’ll be sharing some of my personal progress in this series so we can grow together and become financially free as fast as possible. As of right now I just started my first high yield savings account, a ROTH IRA, and I’m getting my first 401k opened soon. I also got a second job to pay off my personal loan faster. I can’t wait to share my progress in the upcoming episodes of this series, and I can’t wait to hear what you’re doing as well.