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Why We Fail With Money

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Yesterday, I wrote Many Americans Can’t Afford $400 in an Emergency, which was based on research cited in The Atlantic article.

The point of many Americans having minimal savings is interesting on it's own. What really makes The Atlantic article pop is that the author seems to be successful by all measures... on the outside. As Neal Gabler says,

"I have had a passably good career as a writer—five books, hundreds of articles published, a number of awards and fellowships, and a small (very small) but respectable reputation."

The author points out that even middle and upper class income earners have problems coming up with a significant amount of money. It's not one age or one demographic either.

One of the biggest issues seems to be the invention of the credit card. People seem to have lost focus on saving money. This lead the following dangerous combination:

"When you combine high debt with low savings, what you get is a large swath of the population that can’t afford a financial emergency."

Essentially people have been given enough rope to hang themselves.

The problem extends deeper than just the availability of credit. The bigger problem is one that I hope readers of Lazy Man and Money have conquered.

According to the article, most Americans are "financially illiterate." One study found that 65% of people between the ages of 25 and 65 could be classified that way.

The author reviews some of his life choices such as being a writer in New York city (not the best combination of income and cost of living) and how the decisions he made were never really about money. They were about how he wanted to live his life.

I'd argue there's nothing wrong with that - to each their own. However, he seems to be realizing now that maybe money should have been more of a consideration.

The author still did well, but financial emergencies popped up. (They always do.) It wasn't something simply like a lawnmower breaking down like in the picture. Instead it was one of the biggest expenses, housing. It seems like housing and medical bills always seem to cause the biggest financial problems. In this case, he was keeping up with two mortgages.

And while it might not be an emergency, sending two children to top colleges with little financial aid was another big blow. Finally the nature of getting big book advances means a lot of upfront taxes and lean years with little income.

The other big issue he found is that wages aren't increasing. His weren't. He said he was getting paid the same as he was 20 years ago. Inflation will eat your buying power. He points out that America isn't much better, but at least wages have been flat with inflation... not losing their buying power. It seems most of the gains over time went to those who were already in the top 25% with the biggest gains going to those in the top 5%. (Somewhere, I picture Bernie Sanders saying, "I told you so.")

The downward spiral continues.

The lack of money is the highest cause of stress. Stress itself can cause health problems. However, think about combining that with poor eating habits (the unhealthy stuff is usually the cheapest) and the high cost of health care. As the author put it:

"Money may change everything, as Cyndi Lauper sang. But lack of money definitely ruins everything. Financial impotence casts a pall of misery."

It seems to me that the main reasons we fail with money are:

  1. We don't have an understanding of money (we're financially illiterate)
  2. We don't think about money (we chose to focus on other things in life)
  3. We don't have the self-control (we overuse credit)
  4. It's a competitive environment with respect to wages
  5. Crappy financial things happen

I've never really stopped to think about this topic until I read the article in the Atlantic. What do you think about how we fail with money? Let me know in the comments.

Posted on May 24, 2016.

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