Read Time: 4-minutes
Happy Saturday,
Here is this week’s edition of 6-Point Saturday — financial insights to help you make smarter money decisions.
Table of Contents*
*Clickable in the online version.
Point #1 — Your Money and “Optimistic Denial”
Aesop figured out something peculiar about human nature over 2,500 years ago, a trap that can still trip up your finances today. Let’s revisit a classic fable:
“A Fox one day spied a beautiful bunch of ripe grapes hanging from a vine trained along the branches of a tree. The grapes seemed ready to burst with juice, and the Fox's mouth watered as he gazed longingly at them.
The bunch hung from a high branch, and the Fox had to jump for it. The first time he jumped he missed it by a long way. So he walked off a short distance and took a running leap at it, only to fall short once more. Again and again he tried, but in vain.
Now he sat down and looked at the grapes in disgust.
‘What a fool I am,’ he said. ‘Here I am wearing myself out to get a bunch of sour grapes that are not worth gaping for.’
And off he walked very, very scornfully.”
It's reassuring to tell ourselves stories when things don't go our way...
Believing "I didn't want X anyway" is a form of denial and a way to deal with an unpleasant situation.
Unfortunately, this kind of thinking can all too quickly seep into your decisions around your money and career.
This shows up when you start telling yourself things like:
"I’m sure it will work out someday."
"Things will be better after my next pay raise."
"I'll be able to make headway on my credit cards in the new year…"
Tim Ferriss has a term I like for these kinds of beliefs, meant to soothe an underlying fear: "Optimistic Denial":
"Fear comes in many forms, and we usually don’t call it by its four-letter name. Fear itself is quite fear-inducing. Most intelligent people in the world dress it up as something else: optimistic denial.
Most who avoid quitting their jobs entertain the thought that their course will improve with time or increases in income. This seems valid and is a tempting hallucination when a job is boring or uninspiring instead of pure hell. Pure hell forces action, but anything less can be endured with enough clever rationalization.
Do you really think it will improve or is it wishful thinking and an excuse for inaction? If you were confident in improvement, would you really be questioning things so? Generally not. This is fear of the unknown disguised as optimism.”
Combining optimism with denial is a potent mix, as denial on its own is one of the worst mental habits for your finances:
"The reality is too painful to bear, so one distorts the facts until they become bearable. We all do that to some extent, often causing terrible problems." "Failure to handle psychological denial is a common way for people to go broke."
So, let's look at 5 research-backed questions to ask yourself to keep denial from hurting your finances.
Point #2 — 5 Questions to Beat “Financial Denial”
Beyond identifying your strong reasons for change and designing implementation intentions to overcome financial denial, there's a research-backed question set that helps you gain clarity on what's actually at stake.
In 2010, psychologist William Miller and Professor Gary Rose [Miller, Rose, 2010] published a paper reviewing the research showing "Motivational Interviewing" significantly improved behavior change across multiple domains.
The approach works, in part, because it normalizes ambivalence, or the conflicting feelings we all have about change, while encouraging personal autonomy.
Here are five questions from the framework:
Desire: What would be better about my financial situation if I addressed this?
Ability: What skills or resources do I already have that could help?
Reasons: What are three specific reasons this matters to me personally?
Need: What's at stake if I continue avoiding this for another year?
Commitment: What's one specific action I'm willing to take this week?
Your Move: Consider an area of your finances you've been avoiding. What comes up as you answer these 5 questions?
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Point #3 — “I was in denial…”
“At 23, I was renting an apartment I couldn’t afford, living in a city I couldn’t financially keep up with, and living way…outside my means. I was in denial about my personal finances and naively figured the deep hole I was digging myself into would be easy enough to climb out of someday.”
Sound familiar? That’s what optimistic denial sounds like. Let’s continue:
“My credit was [terrible] and I was in about $20k of debt all things considered (car, some student debt, credit cards, interest).
My reality check came when my car was stolen, and I realized I needed to make some major changes in my life or it could really get away from me.
I gave up my apartment, moved back in with my parents, and bought back my car from the insurance company as a salvaged vehicle. I commuted 2ish hours per day to and from my job, declined any invite that would be expensive, “hunkered down and chipped away” at my debt little by little. I even managed to put some money aside for an emergency fund (luckily, since I lost my job in May).
Today, at 25, I can proudly say I’m 100% debt free and never going back. My credit score is now in the mid 700s and climbing and I have learned a meaningful lesson that will stay with me for life.”
The good news: you don’t have to wait for an extreme event in your life, like a car being stolen, to overcome any financial denial you may have.
That's the expensive way to face reality.
The five questions in Point #2 is the cheaper approach.
Point #4 — The “Denial Tax”
It’s one thing to understand that denial can hurt anyone’s finances…
It’s another to put a price tag on it.
Let’s stick with credit card debt denial and use a simple example:
Let’s say someone’s income is around $125,000 and they have $15,000 in credit card debt at a 22% interest rate.
They’ve caught a case of optimistic denial, assuming they’ll “get to it someday.” So, they make around the minimum payments, $300/month, until the card’s paid off. The total cost?
$26,000 in interest with payments until 2037 (!).
Now, let’s say they’ve decided to get aggressive on their debt. They find some subscriptions & other costs they don’t really use anymore. So, they increase their payments to $1,000/month.
In this scenario, they’d be debt-free in a year and a half with only $2,700 in total interest.
That’s over $23,000 saved.
Bottom Line: It’s costly to underestimate the mental side of money. When you put the price of denial in actual numbers, it can be eye-opening — and motivating.
Point #5 — Quotes of the Week
Continuing the “Denial” theme, which of these is your favorite?
"Most men would rather deny a hard truth than face it."
“There’s no difference between a pessimist who says, ‘Oh, it’s hopeless, so don’t bother doing anything,’ and an optimist who says, ‘Don’t bother doing anything, it’s going to turn out fine any way.’ Either way, nothing happens.”
Point #6 — My Questions of the Week
What’s a past financial issue you avoided for a while, but then finally faced (e.g., tracking spend, checking your credit report, tackling debt)? What made you change? How did it feel to accomplish it?
Reply to let me know! I read every response.
Thanks for reading — I hope you found a helpful idea or two.
I’ll see you next Saturday with more.
Have a great weekend,
Benjamin Daniel, CFP®
Founder, Money Wisdom
P.S. Want to take control of your money, stop stressing about your expenses, & feel confident about your financial future? There are 2 ways I can help you:
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Disclaimer:
This material is not investment or tax advice. No responsibility for loss occasioned to any person or corporate body acting or refraining to act as a result of reading this material can be accepted by the publisher.
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