Harley Hahn - Economics Explained - How to Think About Money

Money and
Economics

How to Think About Money

(January 28, 2012)

Summary: How we think about money has a great influence on our overall happiness. If we want to think about money well, we must learn how to modify our habits and our assumptions in a way that reflects the true nature of money as well as our emotional needs.

Money is one of the most powerful forces in your life. Indeed, the ebb and flow of money, in and out of your hands over the years, is one of the most important factors affecting your happiness. Put simply: if you are going to be happy and content, your are going to have to come to terms with money.

We all know that it is useful to learn basic money management. However, what I am talking about goes well beyond the nuts and bolts of budgeting, purchasing, saving, and investing.

Much of our thinking about money comes from unconscious habits that control our actions. Because we are unaware of such habits, we don't realize what a hold they have on us. And when we do examine our behavior, we tend to deceive ourselves. Although we realize that other people have a tendency to engage in extreme, foolish, or irritating behavior, we tend to think that we are generally "normal" and "sensible". This is because we don't see our own extreme, foolish, or irritating behavior unless we look for it, but we don't want to look for it, because we feel bad when we see it.

Thus, from time to time, it behooves us to examine our assumptions and reevaluate our behaviors. Do we do what we do because it makes sense and has served us well? Or are we simply following the path of least emotional resistance by doing what we have always done, perhaps what we have learned, uncritically, from our parents?

When it comes to money, the most important thing you can do is learn how to think about it well. Doing so will significantly boost your physical and mental health and, if you are married, improve your relationship. Unfortunately, few people know how to think about money wisely, which means that most of us must contend with a great deal of unnecessary misery in our lives.

My goal is to show you how to think about money — in good times or bad — in a way that will minimize your stress and discomfort. To lay the groundwork for our discussion, let's take a moment to consider what money is and how it is used.

The main purpose of money is to act as a medium of exchange. For example, let's say I want to buy a car from you for $15,000. Instead of having to find something you need right now, I can pay you using money. You save the money until you need it, knowing it will retain its value. In this way, the $15,000 I give you acts as a storage medium, maintaining its value until you decide to buy something.

Money is important because it separates the act of buying from the act of selling.

The reason money is so important is because it separates the act of buying from the act of selling. In doing so, it allows you to store purchasing power indefinitely without losing value. (This would not be the case if I bought your car by giving you, say, $15,000 worth of tomatoes.)

The key insight here is to recognize that money is nothing more than a convenient, highly efficient way to store purchasing power. (After all, the only thing you can actually do with money is spend it.) The more money you have, the more potential purchasing power you have. This is why it is easy to feel powerless when you are short of money.

The reason money is so mysterious is that it interacts with the primal, unconscious forces that lay deep within us all. When we are young, money has little meaning in our lives. As we grow older, however, money comes to represent security, comfort, power, and hope, all of which we need to maintain our mental health in an uncertain and, often, hostile world. Let's examine each of these needs in turn.

It is true that money can bring security, but only to a limited degree. A real feeling of security must come from deep inside. Some people, perhaps because of their upbringing, never develop an innate feeling that they belong in the world and that everything is working out just fine. As a result, such people are always worried. Watch them and you will see that, in an attempt to make their world secure, such people will often put a great deal of time and effort into accumulating far more money than they actually need.

Similarly, money can bring comfort but, again, only to a limited degree. People who, deep inside, feel unloved, will spend a lifetime fruitlessly looking for a feeling of comfort. For many of these people, money will take the place of love, and they will force their spouses, their friends, and their relatives to prove their love, over and over, by spending money and giving gifts.

Another reason people lust after money is the power it can bring. For people who thrive on power — and there are many of them — accumulating money is an effective way to increase the control they have over their surroundings and over other people. This is why you will see many rich, powerful people — especially men — spend a lifetime pursuing more and more money. Such people are really pursuing power, and power is addictive.

Finally, many people use money in a different way: to create the illusion of hope. They will surround themselves with distractions and possessions, as if the money they spend can make up for the emptiness they feel when they contemplate their lives. In this way, money can act as a diversion, but it will only work temporarily. Eventually, life has a way of catching up to us all.

So how can you overcome your fears? How can you learn to think so as to have as little trouble as possible working with money, as you accumulate it, spend it, and invest it?

You start by realizing that we all have weaknesses. No one is completely well adjusted and, at times, everyone uses money for security, comfort, power and hope. This is normal. Realize also that no one manages money perfectly all the time. This is because money is powerful and we are all imperfect.

One reason money is the source of so many unpleasant feelings is that it is the symbol onto which we project our insecurities and worries. As a result, it is common to have what we might call "false emotions" based on distorted thoughts. The key to freeing ourselves from the effects of such feelings is to rid ourselves of the distortions behind them.

The truth is, there is no magic way to attract money into your life. Nor is there a secret investment strategy that will guarantee you "financial independence". Anyone who tells you different is trying to sell you something.

The best way I know to relate well to money is to replace the need to be in control with the confidence that comes from wisdom and experience. Trying to be in control of money is not only impossible, it will make you chronically anxious. Instead, I suggest that you deliberately put in the effort to build your confidence. Here are some ideas to get your started.

Real confidence comes from using purposeful effort to overcome adversity.

First, real confidence — not mere wishful thinking — comes from using purposeful effort to overcome adversity. With respect to money, you start by learning the three basic skills: budgeting, saving, and investing. As you do, you train yourself to make decisions thoughtfully. Accept advice only when you think it is basically sound, and not because it panders to your personal weaknesses and insecurities.

Second, from time to time, examine your needs — and your motivations — clearly and honestly. Look inside yourself and figure out, at that moment, what money means to you. Then take a few minutes to see if you can replace your distortions with clear thinking.

Next, whenever you can, talk over your finances with someone who knows how to listen well and whose opinion you respect. Such a person will be able to hold up a mirror, a valuable tool when it comes to eliminating distorted thoughts.

Finally, teach yourself how to turn worry and despair into purposeful action. This, in my experience, is a particularly valuable skill. Here is how to do it.

Whenever you catch yourself experiencing a negative feeling about money, immediately change into "constructive thinking" mode. Stop complaining about what has already happened, and stop worrying about what might happen. Instead, ask yourself: "What can I do about it, right now?"

Recognize that just about everyone worries about money, most commonly: What will happen if I run out of money? Although such worries seem important at the time, they distort your thoughts about the future, so much so that you will often find ourselves suffering now worrying something that will probably never happen.

By slowly building your skills and your wisdom, you will come to have the confidence that, no matter what happens, you will be to take care of yourself and your family. In this way, you will liberate both your feelings and happiness money, as it flows in and out of your life.