Here is some personal finance advice you don’t hear very often: forget the numbers.
That is the advice of Sarah Newcomb, behavioral economist for Chicago-based research firm Morningstar Inc, whose new book “Loaded” is now hitting the shelves and Kindles.
She preaches this because before you can get into the nitty-gritty, like monthly budgeting, you need to understand why you spend what you spend, earn what you earn and believe what you believe.
Reuters sat down with Newcomb to talk about why your own personal “Money Story” is so important.
Q: What is your ‘Money Story’?
A: I had a lot of debt, I overspent, and basically lived hand-to-mouth for years, with no savings at all. I had no money for college and had to pass up my dream school because the price tag was too high. Money had always been a barrier to my hopes and dreams, and as a result, I came to hate it.
Eventually, I ended up taking a course on psychology and financial planning, which addressed how your personal relationship with money affects how you see yourself. At that point, a lightbulb really went on. I realized if I always saw money as an enemy, I was never going to be comfortable making a good living.
My own ‘Money Story’ was that either you care about people or you care about money, and you have to choose sides. I chose people, which meant I ignored money, and made my financial life a mess.
Q: Once people unpack their own Money Story – then what?
A: This is where behavioral finance offers great hope, because there are really specific things you can do to change money behaviors. For instance, if you are focused too much on today and not saving enough, you can do visualizations about the future. Imagine yourself at 65, 70, 75, and how you want to be spending your time. The more detail you put into that picture, the more you trick your brain into believing that the picture is real.
Q: Since we all want to earn more, how can behavioral finance help people do that?
A: When people think about budgeting, they usually think about money coming in from somewhere else. Instead, start to think of yourself as the source of multiple income streams.
For instance, I knew a guy who used to be a wrestler, and who played music on the side. So he started turning those things into real value: he offered a few guitar lessons a month, and taught wrestling to local kids.
Everyone has resources like that going unused. Maybe you just have an extra room in your home that you can rent out to a college student. If you are creative, you can create several new income streams in your life without much effort.
A: I care about people and I care about being financially healthy at the same time. I can earn a good living and not feel guilty about it.