© Frank Magwegwe 2017

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Financial Problems

Many South African households suffer from financial problems and are financially unwell. A few examples of these problems are increasing consumer debts, emolument attachment orders (garnishee orders), resignations in order to access retirement fund benefits and falling behind in debt repayments.

Not Earning Enough

As a certified planner, every day, I come face to face with many people whose root cause of financial problems is spending more than they earn. In my financial wellness education seminars, I can predict with 90% accuracy that the audience’s answer to “What causes financial problems?” is not earning enough money. 9 out of 10 people in the audience believe this, yet in my experience, this is only true at most 20% of the time! In 8 out of 10 cases, people have spending problems not because they do not earn enough money but because they spend more than they earn.

The Holy Grail

The Merriam-Webster online dictionary defines Holy Grail as “something that you want very much but that is very hard to get or achieve.” If there ever was a holy grail to managing personal finances, it is this: spend less than you earn.

Self-justification

Coming back to my earlier example, why do most people believe that only if they could earn more, their financial problems would be over? Put differently, why do most people, when faced with increasingly negative outcomes of their spending behaviour continue believing in the fallacy of more money, end of my financial problems? Intuitively, one would expect people to change behaviors which result in negative consequences. It turns out psychologists, decision scientists, and economists have the answer through the self-justification theory, “a process in which individuals seek to rationalize their previous behaviour or psychologically defend themselves against adverse consequences of their actions.

The Brutal Facts

On a lighter note, people stuck to this fallacy only need to be reminded of The Notorious B.I.G.’s 1997 hit single “Mo Money Mo Problems.” On a serious note, I believe, this self-justification has its roots in the unwillingness to confront the brutal fact of spending more than what is being earned. In Good to Great, Jim Collins says “All good to great companies began the process of finding a path to greatness by confronting the brutal facts about the reality of their organization.” Bringing this concept to a personal level; good management of personal finances begins by confronting the brutal facts about the reality of one’s spending behaviour.

Confronting the brutal facts is both brutal and empowering. It empowers the individual to take ownership of the problem not to accept stories that externalize it. If you find yourself always externalizing why you spend more than you earn, then you are not confronting the brutal facts.

I would like to hear from you. Do you confront the brutal facts about your spending?