Four Essential Rules for Financial Success by Laura Rowley

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I found myself in the odd position of coaching the second/third-grade basketball team this fall at my daughter’s school. Odd because I’ve never played the game and I’m slightly foggy on the rules. I actually signed up my husband to coach, because he played college basketball and I imagined a lovely father-daughter bonding experience. Then he had to work. A lot. A friend with the same idea signed up her husband, a surgeon.

So the good doctor and I heeded the advice of a veteran coach who suggested we teach the girls some plays, like the “pick-and-roll.” This was a little complicated for seven- and eight-year-olds, but in our first game, they actually did okay. There was only one problem. They had never really learned how to catch a pass. The point guard would pass to the forward, who would immediately drop the ball, which the other team picked up, dribbled down the court and scored — again and again. (Our opponents were fourth graders who had been playing since kindergarten. One of them, the daughter of a Jets football lineman, was about eight feet tall. So they had a slight advantage.) Final score, 35-5.

After the drubbing, my husband just looked at me and said, “First they have to learn to catch the ball.” I thought that was a perfect metaphor for personal finance. I see people do funky things with money all the time, things that make them unhappy and derail their dreams, because they never learned the financial equivalent of catching the ball. With a new year upon us, I thought this an ideal time for a refresher on the fundamentals.

Rule #1: The money has to come from somewhere.

I can already hear a chorus of “well, duh” in the comments section. But if everyone understood how a purchase in one area of the budget depletes resources of another, no one would ever overspend. Everyone would live within their means and make rational financial decisions, the federal budget would be balanced and the American economy would be in spiffy shape. Bankruptcies, foreclosures, massive borrowing and bailouts would be rare phenomena. But that’s not the reality, is it?

Tracking spending is easy when you pay for everything in cash. But checks, credit, debit, and electronic payments all make the trail harder to follow. Toss in payments made quarterly or annually and you have a murky soup of spending.

I use online budgeting software that links to all of my accounts, and lets me set up a budget “envelope” for each category. When I buy, say, Christmas presents, the expense shows up in a “transactions” folder. I click and drag it to the “gifts” envelope, and it goes down by that amount, so I know what I have left to spend for the month.

If I go over-budget on Christmas gifts by $50, the envelope turns red by that amount. I have to transfer money from some other part of my budget to cover the deficit, and then cut back on those categories to live within my means.

Bottom line: Find a tool that forces you to manage the money you actually have, versus operating a fairy godmother budget that will somehow magically balance itself.

Rule #2: Debt is a fairy godmother.

She will empower you with designer duds and flashy jewels — and then ruthlessly take it all away at midnight, leaving you standing in rags. Then she will demand you pay her back three-fold for a single perfect night. Do not use a credit card unless you have the money in hand to pay for the item. Do not charge everything and plan to pay it off with the next paycheck. The job market is volatile. The next paycheck may not come.

Rule #3: The future will be here before you know it. Know what you want from your money.

This rule is about acquiring the stuff you want most in life but can’t pay for immediately unless you’ve won the lottery: a home, a secure retirement, college education for your kids. These goals require you to start early and chip away month after month for years. The more cherished the goal, the easier it is to avoid the frivolous spending that hijacks your long-term plans.

In a study on self-control, Florida State University psychologist Roy Baumeister found that consumers who know exactly what they want are less likely than others to indulge in impulse buying, and are also less vulnerable to the wily tactics of Madison Avenue, sales personnel and the like. The problem stems from uncertain or conflicting goals, which can undermine the basis for self-control and make people more susceptible to external influences.

Know precisely what you want, and remind yourself of the goal by tracking your progress on a quarterly basis.

Rule #4: Habit is everything.

Research has found that self-control is weakest among people who had already performed a prior act of self-control. In other words, we only have so much will power. It’s easy to drop the ball if we have to make half a dozen conscious, deliberate financial decisions every month.

“The resource used in self-regulation and decision-making is quite limited as well as valuable for many different activities, and so people need to conserve it,” Baumeister wrote.

So automate and establish frugal habits: Have money for debt repayment or goals such as retirement and education automatically withdrawn from your paycheck or checking account on a monthly basis. Before you go to the grocery store, check the online circular for sales, and bring a calculator with you. If you go out to lunch during the work day, lock your wallet in your desk and take only enough money for food. And pack a lunch whenever you can — I know someone who saved his home down payment one brown bag at a time.

In short, habits can make or break your financial well-being. As Aristotle wrote, “Some men become temperate and good tempered, others self-indulgent and irascible, by behaving in one way or the other in the appropriate circumstances. Thus, in one word, states of character arise out of like activities… It makes no small difference, then, whether we form habits of one kind or of another from our very youth; it makes a very great difference, or rather all the difference.”

written by Laura Rowley Thursday, January 6, 2011 posted on Yahoo Finance. Laura is author of the book “Money & Happiness” and blog of the same name. Read her previous articles here.