3 steps to fix your finances for good

While countless studies by behavioral economists support the fact that humans make economic decisions for emotional reasons -- like competing with the neighbors or being in denial about retirement -- scientists are finding that many financial choices are driven on a neurological level by a primal battle between pursuing pleasure and avoiding pain.

Your money, your brain

How do people then get into financial hot water? George Loewenstein, an economist and psychologist at Carnegie Mellon University and a researcher on a recent study about how the brain responds to different financial stimuli, said in an interview that if the pleasure of spending outweighs the pain of losing the cash, people will spend more.

And when people use any one of the various forms of plastic at their disposal, spending becomes even more pleasurable (as it is divorced from the pain of any actual money loss) -- and even easier to do. Our brains, under the right circumstances, have the ability to hush the negative messages and live for the delight of the moment.

Thus, in order to change a pattern of chronic financial distress, you must first shift your perspective:

• Though it's tempting to look at money problems as being about how you handle cash, dimes and dollars are only part of the equation.

• Beating yourself up with words that belittle your behavior or character -- e.g. lazy, greedy, impulsive, clueless -- won't help you get to the root of the problems you're having.

• When examining your own financial predicament, however large or small, know that you must struggle to gain control over both your money and more-subterranean biological impulses.

First, stop digging

With those guidelines in mind, how does a lasting financial transformation begin?

Based on responses from a dozen people who had taken that all-important first step, there are three parts:

• Hitting the wall. "The people who make really bad money decisions and then turn it around -- they usually have to hit bottom," says Trent Hamm, a 29-year-old dad who lives outside Des Moines and runs a terrific personal finance blog that was inspired by his own financial turnaround.

Though hitting bottom in a financial sense doesn't often mean the kind of collapse described in addiction literature, people who finally decide to fix their financial lives "hit some low point," says Hamm, who reviews dozens of desperate stories every week via e-mail.

For Sheila Adam, a member of the WIR community who lives outside Los Angeles and works in publishing, that moment arrived when she was scraping by on pennies and dodging calls from creditors about her $15,000 in credit card debt.

"I was so tired of it all. I couldn't imagine being that miserable any longer," she says. "It had to stop somehow -- I had ignored my reality long enough!"

• Figuring out how you got here. "Before you can embark on a true change, you have to reflect on where you're starting from," says Amanda Clayman, a counselor who runs a financial-wellness program in New York City.

And she doesn't mean beating up on yourself but taking a period of time to investigate what went wrong.

If instead you take action from that initial point of panic, misery and distress, it's often self-defeating, Clayman notes. "Let's say someone is in debt. When they're in distress, they will try to enact a punitive change: 'I can't shop for clothes. I can't eat at restaurants.' "

That explains in part what happened to Lyndsey, who was pretty good at beating up on herself but less inclined to do the soul-searching necessary to root out bad habits.

Rhodora Bustos, a WIR member who lives in San Joaquin, Calif., says this reflective period can be painful. It took her boyfriend's gentle but constant prodding to get her to face not only how much debt she was in ("About $10,000 on a $35,000 salary," she says) -- but what a giant waste of money that was.

"He said, 'We could be going to Hawaii every six months with the money you're paying to the credit card companies!' " she recalls.

That eye-opening moment helped her to review her finances, find the holes in her budget and pay off her debt even faster.

• Admitting where you're headed. Hamm says that in his observation, a successful first step includes admitting just how bad things could get if you don't change. "That usually scares people straight," he says.

Stephanie, a graduate of the WIR, says it was just such a moment of clarity, at age 26, that motivated and sustained her ultimate turnaround.

The amount she owed was more than her age in thousands, and the future was looming darkly. "I realized that the truth was that if I wanted to achieve the things that I hoped to achieve in my life, I had to start taking action now," she recalls. "Otherwise I would be in the same, abysmal situation."

As Stephanie discovered, facing facts and your future are just the first of several phases in the process of financial transformation needed to achieve lasting change. I'll be writing more about what comes next in future columns.

In the meantime, I'd like to urge anyone struggling with money problems to share your story, face your facts and dare to imagine a different future by posting in the Women in Red message board.

Published Sept. 19, 2007

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