The Money Complex Just Got Less Complex

I haven’t written in awhile for a couple of reasons. Number one, work and my practice have been really busy (as you can imagine). Number two, our culture has been on a rollercoaster ride to match the dips and loops of the market. Each day seems to usher in a whole new socioeconomic “reality.” It astounds to me how quickly our society has pivoted to embrace values of frugality, simplicity, and human connection over consumer expression. As someone who works from a systems perspective, this is mind-bending stuff. It also feels slightly schizophrenic.

It puts me in mind of Arlene Modica Matthews’ book, Your Money, Your Self. In her book Ms. Matthews talks about the five-layer “Money Complex” which resides in each of us. Whenever we are poised to make a financial choice or action, our process gets filtered through each of these layers:

Layer 1: Intrapsychic Response – Feelings, reactions, the "little voice" of truth in your head.

Layer 2: Family Training Response –What you learned or saw in your family and how you interpreted that as right or wrong.

Layer 3: Social Training Response – What you believe is true about others, especially those you admire.

Layer 4: Technology Based Response – Is there a financial instrument (such as a credit card, HELOC, floating 0% balances) that will enable me to take – or avoid – this action?

Layer 5: Pack-think Response – The pressure you feel to do what everyone else is doing or not doing.

Certain layers are stronger or weaker than others depending on the individual and the situation.

In recent years financial stress has ticked quietly higher as our debt levels rose and certain middle-class givens started to stretch out of reach. The Intrapsychic Response Layer (“this feels terrible, something is wrong here”) was ignored while the Social Training Layer (“people like me have this, it's the normal thing”), Pack-think Layer (“I certainly don’t want to be the ONLY person who doesn’t have that”) and Technology Layer (“I can have it if I charge it and just pay the minimum”) ran the show.

This seismic cultural shift seems primarily driven by the about-face in financial technology – the loss of cheap, easy credit along with job insecurity and the end of perceived wealth from a stock boom and housing bubble. When the technology abruptly changed the culture did, too.

I didn’t have a name for it then, but I feel like the last two or three years of my practice might be summed up as Layer 4 Mania. People have been completely distracted by the myriad of financial instruments and scams. Our culture has mistaken the ability to buy something as the ability to afford something.

What we’re experiencing now is a hard, painful look in the mirror. The Intrapsychic Response Layer is screaming, and it’s finally being heard.
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Amanda in the WSJ: Keeping Spending in Check

Different life transitions bring with them different financial challenges. For young people just entering the workforce post-college, the challenges include establishing a professional identity, developing a budget that balances their new expenses with their new income, and managing all of the stresses that come with any period of transition or change.

One of the ways that people often blow off emotional steam is with spending. How do you know when the spending -- particularly deficit spending -- is worth it? Figuring that out can be confusing when the new laptop or suit is something you "need" for your new professional life.

In my financial counseling practice I have an easy rule of thumb for figuring out when people are spending based on mood versus based on necessity. Was the purchase made on the spur of the moment or was it planned for? If it was done on the fly, there's good chance that anxiety, unease, or insecurity was responsible for the impulse to buy. Rationalization after the fact won't make up for that.

Shelly Banjo writes the Starting Out column in the Wall Street Journal and asked me how young professionals can Keep Spending in Check.
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Amanda in the NY Times: A Conflict that Came in the Mail

Spouses are always doing little things "for each other's good." In the past I may have taken it upon myself to retire some of my husband's more-than-gently-worn socks (to all the TSA agents who were privy to the site of his big toe poking through in the security line: you're welcome).

MP Dunleavey writes in her Cost of Living column for the New York Times about another case of marital editing, this one having to do with catalogs that (did not quite) arrive in the mail.
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Reading, Writing, and Relevant Cost?

As a high school student, I never learned economics -- home, macro, or otherwise. Interestingly enough I went to a math and science-focused magnet school, so I was better prepared to handle infinitesimals than interest rates.

In fact, my personal finance education started right about the time I walked into mu college bookstore to buy my textbooks and was handed a Visa application. Fast forward a few years and I was the proud carrier of about 10 platinum cards and a whopping amount of gut-churning, insomnia-producing debt.

I learned most of my early economic lessons the hard way - by mistake.

Unfortunately it seems that my learning experience is the norm. In today's New York Times Freakonomics blog Stephen Dubner asks, “Are We a Nation of Financial Illiterates?” The sad answer is probably yes. And Stephen turns to Annamaria Lusardi, a professor of economics at Dartmouth, who has some answers that make sense.
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Your Creditor is Silently Judging You

You stay below your credit limit, pay your bills on time, and always pay more than the minimum balance due. Yet your creditor mysteriously raises your interest rate and cuts your credit line in half. What gives? Maybe it was because you swiped your card at the bar or at a massage parlor, and the lender's scoring model deemed your purchasing behavior a credit risk.

Lenders, insurers, other financial firms (and, increasingly employers, landlords, cell phone carriers, and the voting public) have always used credit scoring models to make decisions about people. While we have some very general information about the design of the most widely-used models, many lenders use proprietary formulas based on their own evaluative criteria. In the case of CompuCredit's Aspire Visa, these criteria allegedly included individual spending behavior.

The Federal Trade Commission recently filed suit against CompuCredit accusing them of "deceptive" marketing practices because they did not properly disclose to consumers that they monitored spending. The suit alleges that when the cards were used at places like tire and retreading shops, massage parlors, bars, billiard halls, and marriage counselors (really? marriage counselors?), CompuCredit cut their credit lines.

Now keep in mind, the legal issue here is not that a lender monitored purchasing behavior and used it to evaluate the terms of credit. The legal issue is that the lender did not properly communicate the policy to cardholders.

But the relevance to consumers is far broader, because this suit gives us a glimpse into the heretofore secret world of credit scoring. Consumer advocates have long suspected that purchasing behavior is included in scoring models but because the models were protected as intellectual property there was no way of knowing for certain. As Jennifer Silver-Greenberg writes in BusinessWeek:

With competition increasing, databases improving, and technology advancing, companies can include more factors than ever in their models.... The worry is that companies may tweak the credit scoring system in unfair or biased ways, weeding out or limiting borrowers based on race, gender, or sexual orientation.
Personally, and this is my opinion here, I would say of course creditors are monitoring purchasing behavior. If they can do it, they are doing it. It's simple human nature to want to know things about others, and creditors are not any purer than the rest of us. They have the additional incentive of being in business with their customers, so if the mechanism exists for them to gather the information then I think we can safely assume that they will do so.

The concern is not that financial institutions are gathering the information, the concern is in how they are evaluating it. "Scoring model" sounds analytical, but in reality all models that evaluate data are exactly as biased as the person or people developing them.

Models are, in effect, hypotheses. You come up with a hypothesis, you enter the data, and you discover if the data predicts the outcome that you are expecting. If it does then you consider the hypothesis valid. It's reliable if it gives the same valid outcome again and again.

The problem with the credit scoring model is that it's only being selectively tested and only by the same biased people who developed it. In the natural and social sciences we cannot say, "Hey, psychotherapy and antidepressants are more effective in treating depression than psychotherapy alone. Don't ask me how I know this, just buy my medicine." The scientific method dictates that we present all of it -- our hypothesis, subject selection, testing process, data gathering, analysis -- and encourage others to try exactly what we did and produce the same results.

People might not be so outraged about creditors analyzing purchasing behavior if we were allowed to shine the light of public scrutiny on their scoring model.

This particular instance with the Aspire Visa also just smacks of moralism. Why is using your credit card at a bar or marriage counselor so bad? What about people who use a credit card "convenience check" to pay their rent -- that seems more indicative of financial instability than a night out at the pub. We can't ask the lender these questions because their process is protected.

In our complex financial world, selectively directing the quality and availability of credit products has profound social consequences. We've already seen how institutions were able to perpetrate bias (consciously or unconsciously) in the subprime lending market. With credit so interwoven into the social fabric, do we have a right to public oversight of how lenders make their decisions?
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Seminar: Remain Calm, Create Wealth

If you are in the New York area and are looking for a hands-on, solution-focused personal finance seminar I would like to recommend the June 30th session of Remain Calm, Create Wealth. MP Dunleavey (personal finance journalist, MSN Money contributor, and New York Times Cost of Living columnist) and Galia Gichon (founder of Down to Earth Finance) will guide participants through setting up a quick financial plan, establishing a strategy to control spending, and setting investment goals. Register here!
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Is There a Doctor in the House?

In my financial counseling practice sometimes I have to deliver bad news. Whether it’s showing a client how his income doesn’t support his already modest lifestyle or helping a family understand the terms of their unmanageable debt, I am there when painful economic realities are revealed, often for the first time.

My role in these scenarios is not unlike a doctor sitting down with a patient to give him a poor test result. Given this parallel I watched with interest a lecture by Elly Hann D.O. on How Best to Deliver Bad News to Patients and Family. Dr. Hann, a hospice physician specializing in palliative care and pain management, emphasized the importance of communicating bad news clearly and compassionately so that the patient is able to begin organizing his thoughts around the diagnosis and treatment plan.

Without the doctor’s effective communication, patients remain stuck in a state of anxious confusion. These feelings compromise the patient’s ability to trust his doctor and follow through with necessary treatment.

While this all seems obvious in a medical model, it really made me think about our socio-financial model and how we meet consumers’ needs for assessment (diagnosis), communication, and support.

In the medical model the doctor is the expert, the one with the information. The doctor is required to be the patient’s advocate without any conflicting loyalty. Thus the patient can trust the doctor to decide and to act in his best interest.

In the financial world, one can retain similar unbiased expertise in the form of a fee-only financial planner or accounting professional. These services are excellent but can be prohibitively expensive for all but the most affluent. Some professionals offer pro bono or reduced-fee services through local non-profits or public agencies but these programs are spotty and not scalable to the population at large.

In the absence of expert guidance what has happened is that we’ve made “doctors” out of lenders. We assume that because lenders incur risk the market drives them to become experts on how to extend credit, at what competitive terms, and to whom.

This is not a patient- or consumer-based model. This would be like a person going into a hospital with pain in his shoulder and being told by the radiologist, “Hey, what you need is an x-ray,” and then the orthopedist countering with, “But if you sign up with me now I will give you an excellent deal on this cast!” How is the patient supposed to determine what to do with something as complicated as his health?

Our financial world has become similarly complex. Many consumers feel lost, anxiously confused about how to diagnose their own needs, identify the right course of action, and organize themselves around a plan.

Anxious confusion poisons the whole system. We can see the erosion of trust in the lending establishment. Whereas once consumers put too much faith in the promise of credit, now you see people suspicious of lenders’ motives to the point where they feel the system is out to get them.

I definitely see a need for a more widespread combination of consumer advocacy, information, and support. Right now all of those functions are operating somewhat disjointedly. For example, I can provide expert communication and support in my counseling practice, but I must partner with financial services professionals to get clients the information and analysis they need. The financial services industry has the information, but is mostly geared at helping already stable people protect their security and not at being a consumer sounding-board. Consumer advocates exist, but they often take an adversarial, system-focused position that is not necessarily based on the needs of the individual consumer.

I’m writing this post as a real thought-in-progress. Our socio-financial set-up seems inadequate but I don’t know what the right answer is. It’s hard to point to the state of the health care industry as any sort of positive example, but I think that the doctor metaphor is helpful in illustrating the vacuum that currently exists. This is not generally a comment-heavy blog, but if any readers have an opinion on this I would be glad to read it.
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My Future's So Bright, I Gotta Buy Shades

In The Secret Life of Money, Tad Crawford offers this revolutionary concept:
Keeping the symbolic value of money in mind....we can gain a new view of debt, seeing it not as merely an obligation to be paid but also as a statement about how our inner richness will be expressed in the future (italics added).
That is actually completely brilliant. Until I read that I had not heard the phenomenon articulated so clearly.

When it comes to understanding how money doesn't work in a person's life, debt is often where the narrative begins. Debt is the manifestation of some sort of imbalance, either internal or external (or sometimes both).

An external imbalance may be quite difficult but it's usually pretty straightforward. Perhaps a major life crisis affected a person's finances, or their resources are simply not adequate for their needs.

An internal imbalance, on the other hand, can be many things. It may be around self-concept, such as when you buy things to try to feel like a new person or to correct for some felt deficit. It may be around impulse, when the desire to buy something rises up and cannot be deferred. There are a million ways we might be slightly skewed in perception, judgment, mood, etc. and all of these can affect how we use money.

What I love about the Crawford quote is how artfully it captures a distortion of both self and time. It shows how debt is a way of not fully living life in the present, but rather projecting oneself forward into some fantasy future where money is more abundant (along with approval, achievement, and sex, most likely).

This more affluent future-self is perceived as the true manifestation, and the debt is simply the price we pay to express our confidence in that belief.

I see this again and again in my counseling practice. When people arrive at a point whereby they can no longer afford to sustain their debt, they experience an accompanying personal crisis. It is not that they are so attached to the things that they bought on credit. It is that their coveted future self -- who is much more real to them than the life they live in the day to day -- must be sacrificed to come to terms with the reality of their financial position.

The good news is that most people who get appropriate support through this crisis come out healthier on the other side. It's true one can amass huge amounts of debt but there is pretty much always a limit. Being forced to a financial reckoning brings many activities that are effective in re-aligning the temporal distortion and the imbalance in self-concept. Tracking spending, for example, reinforces connection to the present and helps a person to remain grounded in their life as they actually experience it.

Unless there is true mental illness, a derealized existence actually gets pretty uncomfortable after awhile. You only get one life. Spending all that "future richness" wastes so much more than just money.
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Explanatory Styles and Financial Baby Steps

This morning as my daughter was learning to pull herself up in her crib, I became aware of how I kept my hand on her back, supporting her. Without thinking about it I maintained a presence that was close enough to mitigate a swift fall that might injure, but not so close that she couldn't experiment on her own (and perhaps get a minor bonk or two to the head as she went along). It occurred to me that even this small activity of learning a new skill was a template for her in how she would see the world.

Our experiences shape our beliefs, and experiences are quite subjective things. My daughter's experience of her new activity might be "I am so strong!" or "The room looks different from here." Should she fall, her experience would indicate "Well, that was unpleasant but I sure liked standing while I was up -- maybe I'll try again." Or if the fall was enough to hurt or scare, she might believe that standing is a dangerous activity that should be avoided.

This is a small example (and one that probably only occurs to a caffeine-deprived therapist whose baby wakes up at a quarter to 6:00), but the idea behind it is well-established.

The beliefs that we use to give meaning to our experiences are generally organized into patterns, or Explanatory Styles. Dr. Martin E.P. Seligman is the clinician who is most often associated with the concept of Explanatory Styles through his work in the field of Positive Psychology.

Awhile back I developed a simple quiz to demonstrate how people bring their Explanatory Style into their experiences with money. The quiz asked respondents to identify the thought or belief that would occur in the following situations:

1) You overdraw your bank account and are charged a $39 fee.
Option A: "I never have enough money."
Option B: "This month I didn't account for some extra expenses that I had."

2) You find $20 in a jacket pocket.
Option A: "This is my lucky day!"
Option B: "I'm so lucky!"

3) Even though you've always paid your bill on time, your creditor mysteriously raises your APR.
Option A: "Maybe a temporary dip in my credit score caused this creditor to try to raise my rate."
Option B: "Creditors are unfeeling beasts."

4) Someone with your creditor's fraud department calls to alert you to suspicious activity on your account.
Option A: "Here is one instance when this creditor actually did something right."
Option B: "Creditors do their best to provide good customer service."

5) Your investment portfolio grew significantly in value over the last couple years.
Option A: "The market did well."
Option B: "I did a good job choosing investments."

6) When bringing some items to the register for purchase, the total price is higher than you'd anticipated.
Option A: "I must have miscalculated how much these things cost all together."
Option B: "Some of these items must have been mis-marked."

The six items are organized into three sets of one positive scenario and one negative scenario. The positive/negative dyads correspond to the three dimensions of interpretation that constitute one's Explanatory Style.

The first two scenarios have to do with the value of Permanence, or how we perceive time. When something bad happens, do we think that such a result is to be expected always? What about when something good happens? Is that a result of something that is permanent (such as a character trait) or is it something that just happened randomly?

The second set of scenarios relate to the value of Pervasiveness, whether something is seen as specific or something that is true across all situations. A jump in APR could thus be experienced as a particular event relating to the one account or it can take on the specter of everything that is terrible about the credit industry. A helpful customer service agent could be seen as either an anomaly or as an accurate representative of overall good business.

The final two scenarios demonstrate the value of Personalization, whether we see the event as due to our own actions or whether it occurred because of outside forces. Personalization is the most important dimension when it comes to determining how we feel about our ability to change. A person who sees negative events as universal and always true might still find the will to alter his behavior, but only if he believes that doing so might make a difference. If he believes that he himself is the source of his misfortune then what motivation is there to change?

I posed these six scenarios to a group taking the Seven Weeks to Financial Sanity teleconference organized by Galia Gichon and M.P. Dunleavey. What we discovered was that even people who were familiar with Explanatory Styles and Learned Optimism were surprised how often they identified with the pessimistic/negative statement when it came to money. It seems that we can view the world as generally good and believe in our own positive self-agency, and money can still be an area of our lives where we struggle with destructive frames.

Why is this true? Well, perhaps we grew up in a home where money was treated as a great evil or a cause of conflict. Perhaps the consequences we experienced around our earliest financial decisions were too punitive or hard to bear. Perhaps issues of money separated us from others and caused us to feel isolated.

Perhaps we did not have that supportive parental hand guiding us, preventing the worst spills but still allowing for experimentation and learning. Not to blame parents here -- it's much more straightforward to help a child learn to walk than to navigate the complexities of financial self-care.

Whatever the particular cause (or more likely accumulation and reinforcement of causes), it behooves us to think about how we view ourselves as agents in a money world. The benefit of being an adult is that you can bring events from the past forward into consciousness and apply adult maturity and cognition to understanding them. This new understanding can, with applied practice, become a new cognitive frame that supports healthy financial self-care.
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ING Direct "Funny Money?!" Event on May 21st, 2008

I'm going to be participating in an event on May 21st in conjunction with ING Direct NY Cafe. The event is geared toward engaging artists and performers to think about the ways they use money to take care of themselves. Below is the press release. If you are interested in the event and are in the New York area I encourage you to RSVP to and stop by. All attendees are eligible to sign up for a savings account that starts with a $25 balance, and there are raffles for other financial prizes.

For Immediate Release
Contact: Katie Northlich, ING DIRECT NY Café,, 302-255- 3394; Diana Santana, ING DIRECT NY Café,, 302-255-3407.

New York, NY (5/01/2008)–ING DIRECT NY Café, The Actors Fund, and comedians Rick Younger, Keith Alberstadt, and Mike Siscoe team up to present FUNNY MONEY?!, a night of entertaining and informative dialogue on financial challenges artists and performers face in New York City. On Wednesday, May 21, 2008 at 6:30PM at the ING DIRECT NY Café (45 E. 49 Street, between Park and Madison Avenues), these hilarious comedians lighten up the crowd for the financial solutions provided by Amanda Clayman of The Actors Fund and the savings solutions of ING DIRECT. Entry is free. Food, beverage, and door prizes are provided. Please RSVP to by May 19, 2008.

Rick Younger has made audiences around the nation roll in laughter. From television to the Broadway stage, Rick’s performances have shined on BET's Comic View, It's Showtime at the Apollo, NBC's Last Comic Standing, NBC’s The Today Show, the Broadway musical RENT and popular national commercials for Verizon, Staples, and McDonald’s. His current status as star of The Rick Younger Show, featuring Dean Edwards (SNL) and Todd Lynn (My Wife and Kids), allows Rick to give the audience what they need most – the joy of laughter and the comedic energy of Rick Younger.

Keith Alberstadt has entertained audiences nationwide with his easy-going sense of humor and approachable personality. Appearing on the nationally syndicated Bob and Tom Show, The John Boy and Billy Show (radio), and the Boston Comedy and Film Festival, Keith delivers consistently entertaining performances. He has traveled the globe entertaining U.S. troops in Kuwait, Iraq, and beyond, and has been featured on Country Music Television's "Funniest Video Countdown" and "Greatest Redneck Moments." Keith is a contributing writer for National Lampoon's syndicated "Sports Minute" and for The Complete Sheet, a nationally broadcasted radio show.

Mike Siscoe’s quick-witted, high energy shows keep audiences laughing for hours. Voted funniest comic in San Diego by The Reader (1999), Mike began his stand-up career in 1997 at the world-famous Comedy Store in La Jolla, CA and was soon opening for Tommy Davidson, Jeff Altman, Mitch Hedberg, Margaret Cho and Richard Jeni. Now based in NYC, Mike performs at marquee clubs including Gotham, The Laugh Factory, The Improv, Dangerfield’s, and The Laugh Lounge. He has also been featured in national television commercials.

ING DIRECT, fsb is best known as the revolutionary on-line savings bank whose mission is to “Lead Americans back to Savings.” Operating in the US for 8 years, ING DIRECT has stayed ahead of competitors by providing exceptional customer service, high yielding savings products with no minimum requirements and no monthly fees, and through its innovative Cafés, the face-to-face interaction with the internet bank. ING DIRECT NY Café is the only one of its kind in the NY region and is a focal point for customer interaction and outreach.

The Actors Fund is a nationwide human services organization that helps professionals in performing arts and entertainment by providing programs and services such as supportive and affordable housing, emergency financial assistance, employment and training services, and skilled nursing and assisted living care for those in need, crisis, or transition.
Amanda Clayman, a pioneer in the field of Financial Wellness, counsels individuals and couples on the topic and has developed a number of workshops that support the unique financial challenges facing entertainment industry and performing arts professionals.

Media: For information, press inquires, or interviews, please contact Katie Northlich, ING DIRECT,, 302-255- 3394, or Diana Santana,, 302-255-3407. For more information on the comedians or institutions, please visit;;;; or
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The New Value of Value Consciousness

Which is easier: trying to make healthy food choices when you’re surrounded by people who value nutrition and find creative ways to enjoy food, or trying to make healthy choices when you’re in the midst of folks who binge on transfats and disdain calorie counts?

It takes a lot of effort to moderate our desire for gratification – not just with food but in all areas. It helps when our efforts are seen as positive, valuable, and are reflected by others in our social context.

This is why it is so interesting to me how the media has pivoted lately in their coverage of personal finance stories. People have been in financial distress for years. Years. The unsustainable rises in housing prices, coupled with massive amounts of consumer debt and student loans have been akin to a thin person with 90% blocked arteries. Just because you can fit into a size 2 doesn’t mean you’re healthy, darling.

It’s hard to put yourself on a debt diet when you feel like you’re the only one who has to watch what you spend. But now that we are in a recession, budgeting and frugality suddenly have positive social value. I see evidence of this in how the media has begun to favor stories about efforts to manage family costs over pro-consumption pieces. Open the paper or watch the news, and you will see article after article about how generics are beating name brands and the top ten hot new ways to save.

If you agree that the economic trouble is not new, then how do we explain the new frame?

I think there are two major forces in play. Number one, the problems have reached critical mass. Denial can no longer protect us from being aware of threatening material without great damage to the collective self. What kind of society would we be if we didn’t pay attention to the record number of foreclosures and utility shut-offs? It would seem callous and insensitive to celebrate free-wheeling spending when thousands of people are in crisis.

Number two, when the challenges are external and commonly felt, then the locus of the problem shifts. The experience is no longer framed as “I struggle with the price of gas (because I personally have no money)” but rather “The price of gas is a problem.” When the cause is externalized the ego can still preserve the self as good, and thus activities of problem-solving are seen as good as well. Living on a budget goes from being ego dystonic to being ego syntonic.

This shift in how our media frames the issue may seem incidental to how we as individuals experience it, but it is actually of profound significance. In modern society media serves as the closest thing we have to a collective voice. When that voice does not reflect – with sympathy and affirmation – the individual’s struggle, then the struggle becomes a source of shame and steps to resolve the struggle are usually inhibited.

I think that we as a nation are ready to embrace the ideals of economic contraction. I want to be careful here. I do not suggest in any way that any person enjoys financial distress. Economic troubles are painful and the crises are real. Rather, going back to the point I made earlier I believe these troubles have been present for a long time and it has been a source of unconscious frustration that they’re been rather ambivalently acknowledged. For the past five years at least, people’s anxiety about the economy has been met with encouragement to go out and spend more or to just find another credit product to tide them over until… something (that part was never quite answered).

A brief sidebar – the growth of the Green Movement, especially among the higher income strata, constitutes an interesting complement to the rise in value consciousness. Because the movement promotes conservation as part of ecological stewardship, even those who don’t experience personal economic strain can still demonstrate support of activities of sustainable (lowered) consumption.

In a way, I think people are a bit exhausted by the prolonged pressure to consume. Deficit spending is anxiety-producing, and the individual members of society have been containing those feelings in isolation for too long. Being value conscious is suddenly the thing to be, and I am glad of it.
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MyFICO, Myself

I’m going to go out on a limb here and say that some people need to stop worrying so much about their credit scores. When did credit scores become an obsession? If I see one more article about how people spend hours each month trying to “game” the model to drive their score up a few points, I am going to tear my hair out.

Look, I understand that a higher credit score can save thousands (or tens of thousands) over the course of a major loan such as a mortgage. I’m not saying that the number is unimportant or that we should ignore it.

My point is that I feel like people have a tendency to become overly distracted by their credit score. This distraction can constitute a relatively benign waste of time or may range all the way to financial paralysis or even self-destructive behavior.

For example, I’ve met with several people who have been under terrible duress with their credit cards: late payment fees, default interest rates in the 30-percents, collection calls coming non-stop. But these people are too afraid to take action (contacting a credit counseling service about a debt management plan or even learning more about bankruptcy protection) because they’re irrationally concerned about the effect these actions might have on their credit score.

At the other end of the spectrum there are people like Jeffrey Sheldon (from the credit score article referenced above), a 36-year-old systems administrator in Virginia, who is taking great pains to bring his 740 credit score even higher in hopes of qualifying for the best terms on a planned home refinance:

When Mr. Sheldon was shopping for an auto loan last fall, he first compared rates online. Then, he allowed only two lenders to pull his credit report because he knew that lots of inquiries could drag down his score. Now, he’s making extra payments so that he can pay off the five-year loan in 3 ½ or four years. He figures the lower debt level will boost his score, which is already near the upper end of … the range.

I applaud Mr. Sheldon for doing what he can to save money and reduce his debts. But I see a lot of people who go through these same efforts who are not even planning to take out a major loan in the near future. They want a higher score simply because they see it as some sort of personal validation.

The credit score is tantalizing because it pushes specific psychological buttons. It is seen as completely empirical measure of our behavior (ha!) that provides feedback about our actions. It presents an individual “score” (double ha!) based on that behavior. The score categorizes and ranks us. Additionally, there is the reward for a good score that comes in the form of better terms on loans and therefore saved money (just tell that to all of the borrowers with good credit scores who still got subprime loans).

Let’s take a minute to address these assumptions. First of all, the credit score is not a measure. It is a model. It compares specific financial behavior against the behavior of others in order to predict the likelihood that a person will default on a payment. Period. It doesn’t measure how “good” or “bad” you are with credit – it simply lets lenders know how they can best make money off of you. If you get a high “score” (I’m going to force myself not to put that word into quotes for the rest of this piece even though I’m tempted to – indulge me just this once) lenders know they can make money off of you slowly over a long period of time. If you have a low “score” (okay, I promise that’s the last time) then they need to make money quickly before you are statistically likely to have trouble making the agreed-upon payments.

Why are credit scores so commonly misunderstood? Why are they so broadly applied outside of what the model is designed to capture?

I think people get distracted by their scores because humans are social creatures and thus hard-wired to crave feedback and validation from external sources. Credit scores can seem like the ultimate measure of all the things adults strive to be– mature, trustworthy, and responsible.

A high credit score can also serve as a psychological balm during insecure times or when facing a daunting challenge. It’s as if you say to yourself, “See – Fair Isaac Corporation thinks that I’m going to be financially stable enough to make these payments for the next 30 years. I’m going to believe that, too.”

The reward that we get for having a high score can indeed be of significant monetary value. But the more we try to game the score the more we pervert the validity of the model. This touches on the Observer Bias, where people change their behavior when they know they’re being watched. The Observer Bias can skew the results to the point where the validity of the measure (model) is ruined and must be revised.

Overemphasis on score is also problematic when people focus on the number to the exclusion of the good behavior it is supposed to measure. When we don't take the actions that we need to (such as accepting a short-term dip in score in order to address a pervasive debt problem) or when we lose significant amounts of time or quality of life in order to game the system, then I think we have lost sight of what's important.

Remember that the actual scoring algorithm is kept completely confidential so at the level of specific action we can't even know for certain how our behavior will change the score. For the vast, vast, vast majority if we just pay our bills on time, live within our means, only take out the amount of credit that we can manage, and check our credit reports for errors, then our scores should reflect that we are capable financial stewards without any more self-conscious forms of management.
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Amanda in the New York Times: A New Model for Financial Planning

My involvement in this article started when the writer, M.P. Dunleavey, shared with me something she had noticed over the years. In social situations, when she meets women and tells them she is a financial writer they often respond with almost dismissive disdain about taking responsibility for their financial lives. I reflected that that was interesting to hear, because I feel like I have the opposite experience. When I am in social situations, as soon as I describe what I do I am often deluged with women telling me the most intimate and compelling details about their struggles with money.

We wondered what the difference was. My hypothesis is that women have a lot of anxiety about how they handle money, and would see M.P. as an “expert” who might judge them and tell them that they should or shouldn’t be doing. I, on the other hand, would be seen as someone who would be willing to hear about all of the concerns, difficulties, and failed attempts that might be part of that woman’s money story.

In clinical work you’re trained never to attack a client’s defense mechanism until you understand what it’s defending. So if, for example, someone is in denial you don’t open with, “Hey! Looks like you’re in denial!” That wouldn’t change the defense and it would probably cost you the client.

In traditional financial planning there is an almost exclusive focus on problem solving. This makes sense – what you’re “buying” is the solution. But the problem solving approach is in some cases the equivalent of attacking the defense mechanism. For those whom financial responsibility is wrapped up in a complex cocoon of emotions, it is impossible to get to the solution until the issues have been unpacked and the resistance reduced.

So maybe it is time for a new model of financial planning.
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The Road from Financial Infidelity to Financial Intimacy

The Spitzer Scandal has ignited a firestorm of discussion regarding the broader spectrum of what can be considered “infidelity.” Along with the marital betrayal and the criminal act, many people are also taking note of the breach of financial trust.

As New York relationship therapist Bonnie Eaker Weil notes “Everyone in my practice who is committing adultery is committing financial infidelity.”

While it is not always possible to protect yourself from this kind of event (it’s important in a healthy relationship for there to be trust and autonomy, which means you can’t always be trying to guard yourself from potential betrayal by your partner), you can reduce the chances that you will be blindsided by such an egregious act of deception.

Have a budget.
Have an agreed upon allocation for all family funds. If you have a plan for where your dollars should be directed, you won’t be confused about where your money is (or isn’t).

Each partner should share in the money management responsibilities.

If both partners are involved in executing the financial plan, there is less opportunity for sums of money to go missing or be diverted to unauthorized activities (be they extramarital or simply extra clearance shopping).

Review your credit reports together at least once a year.

Neither partner should ever open a new credit account without the other’s knowledge. Never, ever, ever. Jointly reviewing your credit reports also ensures that you are both aware of how each is managing credit and debt payments.

Financial infidelity is getting a lot of press these days but we should take a moment to consider the positive side of the couples and money issue, too. Financial intimacy calls for open, constructive discussion about how both partners want to use their money. As part of this process each person should feel heard by the other and should see their goals represented in the joint plan.

At its heart, financial intimacy addresses each person’s dearest hopes and darkest fears. It’s a great foundation for emotional intimacy in all areas of the relationship.
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Amanda on MSN: Solutions for a Spender-Saver Marriage

Awhile back I wrote about how when two people plan a life together, "financial intimacy" is rarely a topic that is even on the radar. So what do you do when you find out that the person you're married to is your complete opposite in terms of spending and saving priorities? This article explores how to tackle a difference in money dynamics.
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Amanda on MSN: Does Money Trouble Come in Threes?

When it rains it pours, so the expression goes. But is this true when it comes to your money, or does it just seem that way?
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Amanda on Artists and Money

It really is possible for artists to have a stable and healthy relationship with money! Truly it is!
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Amanda in The New York Times: The Conflict of Spending and Candor

I am quoted in an article on communicating with your partner about spending behavior. My comments may surprise you!
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Money Lessons for Kids (and Parents)

Kids today have a pretty challenging money legacy. From different kinds of student loans to exotic mortgages and default interest rates, the answer to the question “Can I afford this?” has taken a trip down the rabbit hole.

Parents are scrambling to prepare their children for this brave new reality. In an article for the WSJ (subscription required), Jonathan Clements lists four “financial tricks” to try with your children so that they’ll grow up to be money-smart adults:

  • Favoring Today

  • Offer your child his regular allowance, or a greater amount if he's willing to wait a week before getting it.

  • Slowing Spending

  • Give your child his money in the largest denomination rather than a combination of smaller denominations (a $5 bill instead of five $1 bills, for example).

  • Making a Wish List

  • When your child expresses desire for a particular toy or other expenditure, have her write it down on a list. Go back to the list later and ask which items she would like to use her own money to buy or would like to receive as a birthday or holiday gift.

  • Keeping the Change

  • See how your child makes purchasing decisions when he is given an amount of money and allowed to keep the change compared to when you ask for the change back.

    As a clinician, I appreciate how these four activities really do open up the cognitive and emotional processes we use to make decisions about money.

    Favoring Today
    The “favoring today” experiment demonstrates your child’s time preference for delayed gratification. All of us have a time preference for delayed gratification**, which is basically the point at which it becomes worth it for us to trade the opportunity of the present for some potential future gain.

    Many things influence a person’s particular time preference, age first and foremost. For a very young child the future is still a murky concept, and it’s unreasonable to expect a four-year-old to choose $7 next week over $5 this week even though it’s 40% more. A perfect time to start playing with the favoring today exercise is around age nine or 10, when the child develops the ability to conceptualize the future and to compare present gratification against future gain.

    Besides age, the level of perceived deprivation in the child’s environment plays a key role in shaping time preference. Five dollars means more to a person who feels he has very little than it does to a person who feels he has much.

    A person’s early experiences with trust also factor in. Children who are exposed to instability in their caregivers or environment are basically taught to devalue the potential over the concrete present. If a child has learned that a promise for $7 next week might go unfulfilled, he will always opt for the $5 today.

    Slowing Spending
    The “slowing spending” trick employs a person’s “bias for the whole.” In children and adults, bias for the whole refers to the tendency to hold a larger bill in higher regard than the equal amount in smaller bills. It’s easier for us to comprehend the value of $100 when we see a $100 bill. When we see ten $10 bills, we perceive a number of potential values based on combinations of the bills -- $20 here, $50 there – and it’s easier to part with the smaller amounts.

    Using a debit or credit card totally circumvents this bias by taking away the perception that we are breaking any “whole” at all. Maybe we adults should play with this exercise a little more often, too!

    Making a Wish List
    Learning to modify impulses is a cornerstone of maturity. Making a wish list helps children to review their choices outside of the impulse of the moment. When children practice identifying, examining, and re-evaluating their wants it plants the seeds for self-aware purchasing in later life.

    What this also does is start to organize wants for comparison with other wants. When working with clients around budgeting, I have found that this can be a revolutionary concept. Consider the difference between these two questions: “Do you want to go out to dinner?” vs. “Do you want to go out to dinner more than you want cable television?” Wants cannot be considered in the abstract, they must always be evaluated in comparison with the other available choices.

    Keeping the Change
    Some people have an innate preference for saving vs. spending even as children. Giving your child the opportunity to spend or keep the money given to her will show you where your child’s preference is – for that particular moment in time.

    It is totally appropriate for children to experiment with decision-making behavior and for their choices to range all over the place. One week your son may blow every last cent you give him and have to borrow a dollar from his friend besides, another week he may be more penny-pinching than Ebenezer Scrooge.

    Keeping the change is a great mini-lesson on budgeting. For what is a budget after all but a system of allocating amounts for expenses? Five dollars for souvenirs on a field trip is basically a $5 single-item budget. When sonny decides that he prefers some alternative use for the money, be it savings or a future spending opportunity, you are giving him a safe experience in financial autonomy.

    The author of this article expressed it best when he suggested that parents “try these tricks on your kids, talk to them about the lessons to be learned – and then quietly muse about whether you, too, fall prey to these financial traps.” These activities are not lessons in and of themselves. They are a jumping off point for parents to engage their children in developing how money works for them.

    ** See Shlomo Maital's Money, Minds, and Markets. Ch. 3: From Pleasure to Reality, Learning to Wait Begins in Childhood. Basic Books 1981.
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    Financial CPR: C is for Cash Flow Plan

    This post is the first installment in the Financial CPR series. Financial CPR comprises a set of tools to use in the event of a sudden crisis, such as unforeseen unemployment. The following information should be seen as general education and is not intended to constitute individual financial advice.

    Remain in control.
    Though the interruption to your income may be out of your hands, it does not mean that your entire financial life is out of control. Stay calm. You have the power to make choices, minimize the debt or damage to credit that you will incur, and plan for a successful financial recovery once you’re employed again.

    Remember that you always have options.
    Usually the best options are available when you act pro-actively instead of waiting until the problem becomes a crisis.

    Follow the Four A’s to create a Cash Flow Plan:
    1. Acquire information
    • Tally up your cash on hand;
    • Survey your expenses and income to get a complete financial picture;
    • Read your contracts and user agreements to see what opportunities there are to cut or change service plans, memberships, etc.;
    • Solicit price quotes for comparable services;
    • Identify opportunities for “found money” – items you can return to stores for refund or credit, gift cards, etc.
    2. Analyze
    • What can be cut?
    • What must be protected?
    • Are there ways to increase income?
    • Do not make random, haphazard, or emotional changes. Work purposefully.
    3. Adjust
    • Take steps to make the identified changes.
    • Schedule time to make a few calls a day; don’t try to tackle everything at once.
    4. Ammunition
    • This information = power!
    Serenity now!
    Even if you are still operating at a deficit, you can be confident that you have done everything you can to minimize the deficit and put yourself in the best position to get back on your feet quickly once you’re back to work.

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    Financial CPR: P is for Protect Yourself

    This post is the second installment in the Financial CPR series. Financial CPR comprises a set of tools to use in the event of a sudden crisis, such as unforeseen unemployment. The following information should be seen as general education and is not intended to constitute individual financial advice.

    Anticipate problems.
    Look at your Cash Flow Plan and determine which bills you’re going to be late on or unable to pay.

    Educate yourself.
    • Use your Cash Flow Plan as a guide to all your actions;
    • Understand your position as a consumer (How valuable is my business? How long have I been a customer? What rates are fair for other people in my circumstances?);
    • Have a copy of the Fair Debt Collection Act;
    • Read your lending agreements;
    • Learn about your repayment options;
    • Know the terms of default and consequences of default.
    Put your bills in order of their importance in terms of consequences for non-payment. For example, not paying your mortgage could result in eventual foreclosure and losing your house. Not paying your credit card bill in full could damage your credit but will not otherwise threaten your security.

    Know what you’re asking for.
    Before you dial the phone, have a plan for what you want. Do you want to skip payments? Do you want to make interest-only payments for a period of time? (Remember to research what your repayment options are ahead of time.)

    Contact your creditors.
    Taking the initiative to contact your creditors will keep you in the driver’s seat. These companies are much more willing to work with you if you don’t make them chase you down after payments have already been missed.

    Know what you can deliver.
    Your credibility is absolutely priceless. Never promise something you know you can’t follow through on. It destroys your credit and may lead to harsh penalties and punitive action on the part of the lender or service provider. Even if you think what they’re offering you is a “good deal,” DO NOT accept it if you are not able to deliver. It is better to get off the phone without reaching an agreement than to agree to the impossible.

    Try to get the best deal for yourself. Remember, credit terms are not about your value as a person or how likeable you are. This is a business transaction, and you will only get as much as you’re willing to ask for. If you feel like the person you’re talking to is not willing to negotiate, ask to speak with someone else.

    Go up the chain of command.
    Oftentimes the people you get on the phone the first time are not authorized to make a deal. Ask to speak with a supervisor (several times if you need to) and keep going until you get to someone who has the authority to make a decision.

    Don’t take it personally.
    Creditors have been known to use every trick in the book to get you to make an emotional decision if it means they get their money. They will try to make you feel guilty for not being able to make your payment. They will try to manipulate you into prioritizing their payment over your other (more vital) obligations. Do not be fooled. Know your rights and know what you can realistically and reliably deliver.

    Be accessible.
    Even if you can’t make any payment at the present time, you still earn credibility points by staying in touch with your lenders and apprising them of your situation. This doesn’t mean you have to take the time to talk to every single collections agent who calls your house. Make appointments to return their calls, and then follow through.

    Borrow judiciously.
    During a financial crisis there is always a temptation to hold on to your cash and to live on credit. Sometimes this is inevitable, but you always want to think carefully about how you go about it. Get the facts. Credit cards offer flexibility but high interest rates make revolving debt very expensive. Tapping into home equity can be lower cost but puts your property at risk. Retirement accounts are protected from judgment even during bankruptcy – don’t touch them if you can possibly avoid it!

    Think about the long-term.
    Carrying debt should never be the long-term plan. There is too much inherent risk for debt to become unmanageable if anything interrupts your ability to pay. Try to minimize how much new debt you’re incurring during this time by keeping your expenses as low as possible.

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    Financial CPR: R is for Recovery

    This post is the third installment in the Financial CPR series. Financial CPR comprises a set of tools to use in the event of a sudden crisis, such as unforeseen unemployment. The following information should be seen as general education and is not intended to constitute individual financial advice.

    This situation does have an end.

    At some point, the unemployment crisis will be resolved and it will be time to think about how to get back on your feet. Ideally you will have:
    o Kept your monthly deficit to a minimum;
    o Protected yourself from penalties due to non-payment of accounts;
    o Incurred as little new debt as possible.

    Don’t zone out!
    When you have been through a period of high stress it’s normal to want to decompress once the worst is past. You may feel an overwhelming “urge to splurge” and buy yourself those comforts you’d been denying. But before you throw out your budget, take a deep breath and pause.

    Create your Recovery Cash Flow Plan.
    Now that your income is back on track, you will need to move forward with paying your regular bills and addressing any debts you accumulated during the interruption. Your Recovery Cash Flow Plan should allow for the following:

    Net Income
    (minus) Fixed Expenses (reg. housing payment, reg. car payment, utilities, etc.)
    (equals) Discretionary Fund

    Take the Discretionary Fund and subtract your necessary out of pocket costs. Then try to budget for one non-necessary treat if you can, such as a monthly movie with the family.

    Discretionary Fund
    (minus) Out of Pocket (groceries, gas, parking, etc.)
    (minus) ONE treat (if you can afford it)
    (equals) Repayment Fund

    Resume payment on your regular bills.
    Once you have income again, begin making on-time payments on all of your regular bills. This does not necessarily mean that you return to all of your pre-unemployment expenditures. If you reduced your cable package for example, you may need to continue with the lower-priced plan for awhile until you’ve paid off some debts.

    Determine your proposed repayment plan.
    Divide the amount in your monthly Repayment Fund by the number of creditors for an equitable repayment strategy, or direct more of your resources toward certain accounts to give them priority.

    Re-connect with your creditors.
    Using your Recovery Cash Flow Plan as ammunition, contact your creditors and propose the terms of repayment. You may need to negotiate like crazy to get your creditors to accept the plan, and you may not be able to budget for the “treat” at this time. But try to resist at all costs having to miss payments on any of your regular bills in order to repay debts.

    Be secure for the future.
    Once you’ve paid up all of the debts, convert your Repayment Fund payments into a Contingency Fund payment. Try to have three to six months of financial reserves for any future disruption in income.
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