Why Are People So Bad With Money?

Chris Gaetano
Published Date:
Dec 11, 2017

It's a question that many CPAs have no doubt asked themselves when observing a client making a particularly bad decision: why are they so bad with money? A behavioral economist from Duke University thinks he has an answer to that question—several, in fact, according to CNN Money. It's not that people specifically set out to spend every last cent they have, but there are certain cognitive effects that prevent certain people from being able to fully comprehend the impact of their financial choices. 

One is that saving is a largely invisible activity. People tend not to talk about it and so we don't have as much knowledge of what's normal in terms of saving money, and that furthermore it's seen as pretty normal to not have all that much put away for an emergency. Encouraging clients to not only think more but talk more about the money they save, whether it's a 401(k) or even a second checking account they divert some cash into each paycheck, can help keep saving in the front of their minds, and be more inclined to sock away cash for a rainy day. 

Similarly, spending is easier than ever. Compare the convenience of things like credit and debit cards, mobile payment apps, and automated billing to having to get cash, count it out, physically hand it to someone. Today it's easy to spend without knowing how much money you even have. Beyond just being more mindful of individual payments, clients could also put their weekly budgets on pre-paid debit cards to keep themselves disciplined. 

Finally, we tend to think of our future selves as someone else entirely, versus, well, ourselves. Since we're so disconnected from future consequences, we tend not to consider what effects buying something will have on them. Clients should set weekly, not monthly, budgets and perhaps even look at a photo of themselves aged up to remind them that their actions have consequences. 

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