Since 2003, Luke Landes has been writing about personal finance and ensuring your money is wisely spent. Luke took a moment away from his site, Consumerism Commentary, to speak with us about caring for your money and why, surprisingly, personal finance isn't as "personal" as we think.
What are some common misconceptions you see about finance?
"Personal finance is personal!" Here's an interesting conundrum. One of the reasons given for an apparent lack of good financial decision-making among the public is that money-related decisions are more about emotion than mathematics. We all learn basic addition and subtraction when we're young. People with uncontrollable amounts of debt have no lack of understanding of arithmetic; this result is due to something other than the question whether a bank balance greater than zero is better than one less than zero.
Human beings simply make decisions with emotions rather than with logic. When financial literacy tries to solve the problem through education, it's often focusing on the wrong things.
But here's where the constant "personal finance is personal!" drumbeat leads to a misconception. Yes, humans are emotionally-driven beings, and good financial decision-making requires more than a textbook understanding of the net worth equation, for example. This mantra is often used as an excuse to ignore good financial advice, to fully submit to emotional decision-making, and to rationalize bad ideas. It leads to the idea that while some advice is good for "most people," I am above average. A special set of rules applies to me. Chances are good that you and I both fit in well with "advice for averages."
How do you balance a good saving strategy and not be too penny-pinching? What's a sign you should loosen up a bit?
There's more to life than money. Financial writers don't want to believe that; their livelihood is based on framing all of life's interesting bits from a financial perspective. I get that. To a hammer, everything looks like a nail, and even when I write, I look for an angle that reflects my audience's expectations to read about finances. It's possible to take any good idea too far. If your penny-pinching is hurting other people, if you're making unnecessary sacrifices, or if the return you get for your time isn't high enough - and that return will decrease as you become more financially savvy - it's time to reevaluate your choices.
For example, I used to track every single expense down to the cent. I had to. I was on a tight budget, earning a small salary for a non-profit, having basic living expenses that were eating up my net pay. But as I made changes over a long period of time, I found that I no longer had to spend as much time tracking every cent. My time was more valuable adding value to my business or working harder at my job. In the tight times, penny-pinching saved me from going homeless, but as my condition improved, no amount of tracking would have benefited my long-term financial health - not as much as using my time for more lucrative pursuits.
What are some good saving strategies you recommend for those dealing with debt?
Well, "dealing with debt" can mean a lot of different things. If someone's dealing with something, they've recognized the problem, so they've achieved that first step. That's good progress already. Towards the beginning of dealing with debt, it's good to get organized. Tools like Quicken and Mint are great for organization. Knowing when your bills are due and paying them on time can be much easier when you have apps guiding you through.
If dealing with debt means that your debt payments are under control, and you're on schedule to get out of debt, think about doing even more. If you haven't already challenged your assumptions - whether they're about your household's needs vs. wants, your ability to earn income, or the type of living you're willing to accept in order to improve your life for the better in the future - then think about some of those ideas, and discuss them with your family if applicable.
Any strategies that pertain to saving money, specifically, come from that higher-order thinking. From there, if you find that you need to save more, you can track your spending more closely. You can advocate for yourself at your job and learn to negotiate more successfully. You can take any extra time (what's that?) and create something of value that someone else might eventually pay you for.
How has personal finance changed since you started writing about it?
Personal finance hasn't really changed, but my perspective has. Even changes in the economy haven't changed the nature of money. I started writing years before this latest recession, and I saw people writing about "the new frugality" and how people's financial philosophies had changed, maybe permanently, but at least temporarily. But personal finance didn't change.
Technology is more advanced today than it was ten years ago. You can carry your financial details in your phone. You can transfer money from one bank account to another or from one person to another with just a few swipes on a mobile device. You can access your information in the cloud from anywhere in the world. But personal finance hasn't changed - just our interaction with it. In fact, technology has allowed people to become more obsessive, and I'm not convinced that's always a good thing when it comes to money. Is life better now that we can check stock prices down to the second?
If somediv experiences a personal setback, like losing their job, what's the first thing they should do with their money?
The first thing to do is not panic. Determine what your options are. Take care of your most basic needs, like food and shelter. Make sure that's covered, and if you have to make any adjustments, now's the time. If you can avoid taking on debt, including borrowing from your future self through
your retirement fund, that's always best.
How do you see personal finance changing in the future?
Like during the recession, the "personal" perspective in personal finance can shift along with the zeitgeist. Personal finance, as an idea, doesn't really change, but different stages in life, different living situations, different circumstances, and different economies all have something to contribute to the way people see their relationship with money. Technology will surely advance; I wouldn't even begin to imagine I could predict what technology has in store for the world even five years into the future. If anything, people's relationships with money will get more intense, more obsessive, as money continues to be seen as an important facet of everydiv's life.