My Finances Sucked Until I Got Over My Fear of Being Poor
When I was four, my mom opened a shoebox in our closet and pulled out something I had never seen before: a crisp pretty 100 dollar bill. Naturally, I shouted: “HUNDRED BUCKETS ?!” She immediately covered my mouth with her hand and whispered: “Do you want the whole world to hear? They can rob us, and we will have nothing left! “
I can’t blame her. We lived in an area with a high crime rate, we had little, and she grew up in dire poverty. Unsurprisingly, she was afraid – she knew what it meant to have nothing, and was afraid to return to it. In the world of personal finance, this is often referred to as the “scarcity mindset.” This is when you make financial decisions based on the fear that you will not have enough.
For a while, this fear really worked for us. This prompted my parents to save thousands of dollars on the minimum wage. This prompted me to develop a solid work ethic. We were afraid of losing what we had, so we worked hard and saved as much as we could with this fear-driven goal in mind.
However, there comes a time when this kind of thinking backfires, and instead, it can end up hurting your finances. Ironically, the constant fear of falling into poverty again can keep you from doing it. Over time, I found that it got in my way more than once.
Don’t be afraid to aim for your earning potential
I’ve already talked about my monetary fears . I was always afraid to ask an employer for a raise because I didn’t want to lose my job. This is a classic example of thinking about scarcity as defined by Debt Roundup :
the scarcity mindset often makes you feel unworthy of wealth and success. You can focus on simply “surviving” and avoiding imminent disaster. Never mind that there is no reason to believe that everything will fall apart; you just want to stay afloat so you don’t take risks – even if it’s just an investment of a small amount of money.
For a while, I didn’t quite understand this fear. I didn’t value myself, and yes, it had a lot to do with my confidence and self-esteem, but it also had a lot to do with the fact that I was afraid to rock the boat.
I worked in a low-paying, entry-level job right after I graduated from college, and a year later I found a much higher-paying job, but almost never took it. Why? Because he was afraid that nothing would work out. It’s hard to imagine a career in which you will never advance because you are too afraid of losing what you already have, but I almost decided to do just that.
Don’t just buy the cheapest item
People with a scarcity mentality focus on defense rather than offense. Instead of thinking about the future and how you will grow, you focus on not losing what you have now . When it comes to costs, it really does seem like a good idea. You want to save your money, so you will probably spend less of it. However, lower costs are not always a smart financial move.
We’ve talked about this before, but sometimes it’s worth spending more on quality items . When you think about scarcity, you lose it. Growing up, we didn’t like quality products from well-known brands. My mom laughed that people only buy expensive things for the label. And for years, I haven’t even looked at well-known brands for this very reason. She was right to some extent, but it was a defensive attitude.
We thought we were being frugal. For us, the cheapest option has always been the smartest; only a fool will spend more. As a result, we bought cheap clothes that did not last long. As an adult with a scarcity mentality, I often bought cheap replacement household goods. And I can’t tell you how many DIY projects I’ve failed because I’m too cheap to hire a professional to get it right the first time. It took a while to get over my defensive stance on expensive items and understand what frugality really is.
Don’t miss out on investment opportunities
When you don’t know anything about investing, it’s intimidating. We always hear bad news about the stock market, so this seems like a big gamble. For someone with a scarcity mentality, this makes the investment downright daunting. Scary enough that if you are like me, you refuse to learn more about it.
For years, I never thought I would invest. I thought this was a thing for rich people who have money to burn and who can afford to throw that money away. I wanted to save my money, so I stuffed it under the proverbial mattress and gave up investing entirely.
However, the more I learned about personal finance, the harder it was to deny that investing is how most people accumulate wealth to retire. Of course, at that time I was not focused on building; I was focused on protecting what I already had. As a result, I wasted time . When you start investing, you understand the power of compound interest , and time is a powerful factor when it comes to compound interest. Of course, I was focused on protecting what I had, so this concept was lost to me.
Don’t let distractions cloud your decision making
Thinking about scarcity can also lead to rash and ill-considered decisions. In a book titledScarcity: Why Too Little Means So Much , researchers Sendhil Mullainathan and Eldar Shafir conduct a series of experiments to see how this way of thinking affects our actions.
They found that fear and pressure over what we lack makes us less polite, more impulsive, and can even reduce our cognitive abilities. For example, in one study, they conducted basic IQ tests on subjects in a New Jersey mall. They drew attention to the self-reported income of the subjects, and then introduced them to the financial problem:
Imagine your car has a problem requiring an expensive $ 3,000 maintenance. Your auto insurance will cover half the cost. You need to decide whether to go ahead and get the car repaired, or take a chance and hope it lasts a while longer. How would you think of such a decision? From a financial point of view, will the decision be easy or difficult for you?
The answer didn’t really matter; the IQ test results were. Without the problem presented to him, all subjects tended to perform the IQ tests the same, regardless of income. However, when the problem occurred in low-income subjects, their IQ scores actually dropped. It’s not that scarcity makes us stupider; the thing is, it expands our bandwidth, strains and distracts. We do not think with our full strength, which makes us vulnerable to making bad decisions.
Financially, this takes the form of debt traps such as payday loans, paying off debt, or deferred payment. Most of us know that these are not the best financial decisions: all you have to do is look at interest rates and statistics. However, when you think about scarcity, it’s harder to objectively think long-term. You are distracted and focused on short-term survival.
How to stop thinking about scarcity
In their book, Mullainathan and Shafir discuss policies and programs that can help people get rid of this thinking, but they also offer some practical advice. One of my favorite ways to change the decision time:
One of the most powerful tools is to simply change when you make very important decisions. We call this bandwidth. We often neglect the importance of bandwidth when making decisions.
In my own example, this could mean that I should have made financial goals and plans in times of abundance (like when I was getting paid) and not during times of stress and anxiety (like when my paycheck ends after paying rent.).
Many finance writers talk about how it all comes down to changing your mindset and embracing abundance instead of scarcity. It sounds silly, but it makes sense in practice. When you can let go of fear, you are more open to risk.
To get rid of this fear, Ramit Sethi uses what he calls the tripod of stability :
… that being able to do big means you can play and take risks in other areas. We can apply this principle in our lives. I call this concept my “tripod stability”. By taking care of big things – my home, my car, my relationships, I can increase my height by taking risks in other areas, such as pushing myself beyond my limits while exercising, experimenting with my business, or traveling to new places.
You could hone this concept in your finances. It doesn’t have to be three areas, it should be enough to make you feel safe. For example, you want to find a higher-paying job, but you are afraid of losing your current one. By following Sethi’s advice, you would take care of the “big things” so that you have less to worry about. For me, this meant having a reserve fund . Knowing that I would be fine in an emergency, I felt comfortable enough to remain open to growth options.
GOBankingRates recommends showing some thanks while you do this. This can be helpful because you are less obsessed with billing, commitments, and what-ifs, and you make fewer defensive decisions. We’ve written a little more about how to accept gratitude .
Finally, Debt Roundup suggests starting with small steps :
Take small steps to increase your wealth. Open a savings account. Invest a small amount of money in the stock market. Increase your 401 (k) contributions. Build your security system, knowing that you won’t miss out on a few hundred dollars here or there in the general scheme of things.
These steps, of course, assume that you have the money to start investing. Depending on where you are financially, your small steps can be paying off your credit card, developing a student loan repayment plan, and learning how to ask for and receive a raise.
When I was in debt, part of my plan was to learn about the next step while I worked on my goal of paying off the debt. Knowledge aside, learning helped me stay motivated and keep track of the prize, rather than complaining about how lame my situation was. It also helped me feel in control. There was little I could do about my situation, but I was in control of two things: how I dealt with it and what I learned about it. This changed my thinking a lot.