Money Issues: You Have a Psychology Problem, Not a Math Problem

When we talk about finances, a lot of us talk about it in terms of numbers. We talk about spending less than you earn, paying down debt by starting with the loan with the highest interest rate, and watching out so that fees and taxes don’t reduce your real returns on your investments.

All of this makes sense, and it’s important. These are all math issues. The problem is that most of us know what we need to do, in terms of the math. You understand that if you want to become a millionaire, you have to manage your money so that you are earning more and cutting unnecessary spending. You probably know that you need to invest if you hope to reach your retirement goals.

When it comes to money issues, it’s not usually a math problem. Most of the time, as J.D. Roth recently pointed out during one of our episodes, it’s a psychology problem.

money issues

Psychology and Money Issues

Even though you know that you’ll be ahead, financially, if you pay down your debt starting with the highest-rate loan, sometimes it’s difficult because you feel discouraged. That’s why so many gurus (most famously Dave Ramsey) encourage consumers to go for the quick win and pay off the debt with the lowest balance first. When you see that progress, you will be more likely to continue your efforts, rather than feel like you are making no progress.

The same can be said about saving for retirement. You might be paying higher fees when you agree to your employers preferred retirement plan, but some people are so paralyzed by having multiple options that they just don’t get started. In these cases, it’s better to just invest in something suggested by the employer, even if it costs a little more, than it is to do nothing.

In a number of cases, money issues can be overcome by just taking some sort of action, even if it isn’t the ideal action. There are a lot of reasons that people struggling with money, from fear, to a lack of information, to a feeling of helplessness. So many of us ourselves overwhelmed, that it’s hard to move forward to put our finances in order.

Most of the time, overcoming money issues is less about knowing the math. Rather, it’s about changing your money mindset, and tackling the psychological issues holding you back.

Just understanding the math is almost never enough. If you want to improve your finances and live the life you want, you need to get back to basics, and you need to recognize the way that your mindset and your emotions influence your money decisions. Once you understand that, and learn ways compensate for the psychological aspects, you will be more likely to overcome your money issues and make solid progress.

What do you think? Are you more likely to improve your finances if you look at the psychological aspects, rather than focusing on the math?

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