Two emotions that make us broke

July 30, 2012 — Leave a comment

July 30, 2012

Recently, I met with a group of Freshman at Tulane University in New Orleans to talk about money and careers. My main question was this:

How long will it be before you’re earning a million dollars a year?

Their majors ranged from business to engineering with some liberal arts degrees thrown in as well. Even more interesting, they were part of a group from inner city Los Angeles who were given special scholarships to attend Tulane. How do you think they answered that question?

Before I tell you, let’s talk about the two emotions that consistently make us broke – desperation and optimism. When we are optimistic, we are willing to take on the world and the large amounts of debt that can come with it. Optimism is why I amassed over $50,000 of consumer debt only one year out of college. I knew I would succeed in the real world; only later did I learn I wouldn’t make money as fast as I was spending it!

Garrett Hardin put in perfectly in Living Within Limits when he said, “Since man, an optimistic animal, usually presumes that ‘we’ will be rich later, conservatism was refined as living on credit cards.” We all hope to be doing better in a couple of years, and we often plan our financial future based on that! This is what keeps us from saving now and spending later.

Optimism can be seen in all sorts of debt – houses, cars, student loans, credit cards, etc…. Basically anything we think we can spend money on now and pay for later. It took quite a bit of optimism for us to take out a mortgage on our house and be confident we can make the payments every month.

Optimism is a powerful thing, and I don’t advocate living a life of pessimism. However, when it comes to managing your money, sometimes a little pessimism can pay off big time. What would happen if you lost your job tomorrow? What would happen to your family if you died in an accident? The more you think about and plan for these negative events, the better financial shape you’ll be in.

What happens when those negative unforeseen events happen? You become desperate. Desperation is second emotion that makes us broke.

It’s easy to see how desperation can make us broke. It usually doesn’t happen all at once, but is a confluence of items that continually pile up and make us feel we can’t keep our heads above water. It might start with a broken down car, continue with health issues or a house repair, and get even worse with a job loss. What the heck are we supposed to do now?

Many people turn to the only things that keep them going until the next month – credit cards and pay day loans. Neither of these are good things, but sometimes we have no other choice.

What’s the best way to avoid going into debt because of desperation? The quick answer is to save up a starter emergency fund of $1,000 so you have something to turn to instead of the vultures mentioned above. From there, follow the steps in the OWN IT plan to take control of your money.  This is what I used to finally pay off my $50,000 of debt and start saving money.

Back to the Tulane students. Out of the ten students who I asked at what age they’ll be making their first million, all of them but one said they’d be between the ages of 23 and 27. They didn’t have any specific plans or strategies, they just thought they’d be the best in their fields and the money would come. We do a great job of teaching confidence and optimism, but we don’t do a great job of teaching financial reality.

If you’ve been doing your homework, you know how long it takes to save one million dollars. If not, time to study up!

 

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