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Do you ever wonder why your bank account has less money in it than you wish it had? Do you ever question why you can't afford certain things? Do you read personal finance blogs, magazines, and books to find ways to spend less money? If so, and if you're still broke, there's a chance you're in financial denial.
“…people between 18 and 29 years old — the youngest group in the survey — were the most likely to save relatively little: 37 percent said they save 5 percent or less. Another 18 percent said they save nothing at all.” –Bankrate.com
It's no wonder our society is in the financial position that it is today. We're surrounded by constant social pressures to live beyond our means. We have credit cards and loans thrown in our face every day. We can get access to money by simply filling out some information on an application. This makes it easier for us to get things now. Things we may not need, or even want.
It's putting us in a worse financial position than we're already in. It's creating a culture of people who are in financial denial. In this post I am going to explore some concepts to help you decide if you're in financial denial. If you are, let's talk about some ways to start getting yourself out of that mindset. Because guess what? It's crippling you.
Not in financial denial? This might be your opportunity to learn something and help someone who is.
What is financial denial?
In short, financial denial is living beyond your means. It's living in a way that your finances can't sustain. Most of us don't even realize it's happening, either. One of the biggest contributors to financial denial is the concept of keeping up with the Joneses. Or as I like to call it, keeping up with the Wantlings.
We see other people of similar social status to us living in giant homes and driving brand new cars. Yet they can't possibly make any more than we do. These people are what I call ‘fake rich'. They're in financial denial. Yet for some reason we mimic their lifestyles.
In doing this, you may be able to stay afloat for now. Hell, you may even be able to stay afloat for a long time. But eventually your whole financial world is going to come crumbling down. You may also be working for a long time to compensate for that lifestyle. Early retirement isn't even a thought.
Factors contributing to financial denial
These subliminal, societal pressures have created new societal norms. Or what we think should be norms. This means, for example, that paying a monthly fee to own the latest iPhone and have 10 gigs of data to go with it is normal. It means leasing a brand new car every 2-3 years is normal. It means making your first home a new-build in a brand new development normal.
Does that seem normal to you?
It's not. It shouldn't be, at least. One of the biggest factors contributing to financial denial is the concept of monthly payments. If you can afford the monthly payment, you must be able to afford that item, right? Wrong. When I bought my car last year, the sales rep kept pitching the “monthly payment” to me. It was his main selling point.
I don't give a shit what the monthly payment is. Tell me what the total cost is! When I told him this (I did it in a nicer way) he looked at me as if I had three heads. This is just an example of how consumer buying habits have shifted. We don't care what price we're paying for the car, the house, or the phone anymore. We just care about the monthly payment.
Same goes for debt. Many of us don't seem to look at the big picture of our debt. Meaning, how much we owe in total. So your total mortgage balance might be $250,000, but your payment is only $900. Do we even stop to think that we have $250,000 in debt?
This applies to any kind of debt. Student loans, car loans, credit card debt, etc. Are you looking at the overall balances and really thinking about the debt you have? Or are you just focusing on affording the monthly payments?
And what about the iPhone? Apple charges about $34 per month to “own” the latest iPhone. You can “upgrade” to the newest one each year if:
- you've paid half the phone off, and
- you continue to pay the monthly fee
This is a goldmine for Apple, and a terrible deal for you as the consumer. It's putting you in financial denial. The cost of a new iPhone now is $750. That's right, $750. What if Apple said “nope, sorry, no monthly payments this time. You have to pay for the iPhone in cash.”
Would you still spend that kind of money on a phone? I know I wouldn't.
Then there's car leasing. This is the biggest sucker for people in financial denial. You get a new car every year for just a couple hundred bucks a month. I'll tell you what – if it sounds too good to be true, it is. And leasing is too good to be true. Not only is the effective interest rate insanely high, but when you turn the car in, you may get hit with more fees and you'll likely continue your lease payments by leasing yet another new car.
How to shake the financial denial
If you've made it this far you're still with me and something may have clicked. Here are some ways you can start to shake that financial denial now:
1. Stop using credit
Seriously, get rid of your credit cards and stop using them. Even if you're paying them off in full. If you're in financial denial, you have no business using credit cards. Instead, use cash and your debit card. Only buy what you have money for. Give yourself a weekly cash allowance for guilt-free spending ($10-20 is a good place to start) and go from there.
2. Pay yourself first
Most people in financial denial have little to no savings. You've got to start putting some money away now. Set up an auto-transfer from your bank or an auto-deduction from your paycheck to go into some type of savings account. Putting money into a 401(k) is a great idea, but only if you have some type of cash reserve on hand. If you have no cash savings, I'd build that up to at least 3-6 months worth of expenses before investing in a 401(k).
3. Track what you're spending and budget like crazy
I am a huge advocate for not budgeting, but for someone in financial denial I strongly urge against that. If you can't manage your money, you have no business going on a no-budget budget. Track your purchases using Mint or Personal Capital. This will give you a handle on where your money is actually going and where you can make cut-backs.
Next, use a budgeting tool like You Need A Budget. Mint and Personal Capital have budgeting pieces to it, but I've found that YNAB is more involved. It makes you import all your transactions, which puts you more in touch with your money and where it's going.
4. Pay off your debt
Once you've built a cushion of cash savings, start allocating some of that money to debt. I'm all about balance, so you might try the 50/50 method I've recommended before. Basically, take the extra money you have and split it 50/50 between debt and savings. If you are a little further behind on credit card debt and need some extra help, look into credit counseling.
5. Declutter and downsize
Getting rid of stuff you don't need is a great idea, especially if you can sell it and put that money toward savings or debt. You'll also want to consider downsizing things like your car and your home. A car is easier to do this with. If you own your car and the monthly payment is high, sell it and get a smaller, more economical car. If you've paid your car off, this doesn't excuse you. If you have a gas-guzzler, it's time to sell that pig and downsize.
With a home, it's not as easy to downsize, but you can do it. Even if your home isn't worth as much as you'd expect, you have to consider the amount of money you're sinking into it. Things like utilities, your mortgage payment, taxes, and repairs are all bigger when you have a bigger home. Maybe renting is better for you now.
The first step is conquering financial denial is realizing you're in financial denial. And admitting it to yourself. It's not easy. Believe me, I've been there. When I was in my early 20s, I reached a point where I saw the amount of stuff I owned and my credit card debt increasing. My bank account and happiness were decreasing.
A friend helped me realize credit counseling was the best thing for me, so I did it and paid off my debt. Since then I've changed my entire perspective on money, debt, and financial denial. And you can too.
Are you willing to admit if you're in financial denial? If so, I'd love to hear your story, and I'd love to help by offering some advice. If you know someone in financial denial, what types of things will you do to help them? Please share your thoughts below!