How is your money thermostat impacting your finances?
“Limits exist only in the mind” – Unknown
In last week’s post, I explored one of the key concepts presented in T. Harv Eker’s book “Secrets of the Millionaire Mind” – your money personality and how it can impact your financial future. One other concept presented in the book has sparked an “aha moment” in a number of clients and friends and so I wanted to share it in today’s post – the idea of the money ‘thermostat’.
What is your money thermostat?
The money thermostat relates to a person’s comfort level when it comes to their level of wealth. In the area of personal finance, just like in many other areas of our life, our brain is happiest when we are out of “danger” (ie: doing things that are familiar and have minimal potential for pain). It is this subconscious drive to protect us from potential pain and discomfort that keeps us firmly within our financial comfort zone and resists any attempts to move outside it.
Your money thermostat can be most easily seen as the amount of money that you are comfortable having in your bank account. When your balance dips below your comfort zone you’ll tend to rein in your spending and find ways to build it back up to a point where you feel secure. When your balance rises above your comfort zone, for example as a result of a bonus, a tax refund, an inheritance or unexpectedly inexpensive month you’ll tend to spend yourself back down to an amount you’re comfortable with. Last year I met with a client who had just come into an inheritance. A hard-working lady in her 50s, she had raised her son as a single mom and worked in a local retail store. This was a lady who had spent almost her entire working life living paycheque to paycheque. She carried no debt, always drove a used car and worked hard to make sure her bills were paid. She had minimal savings and often her bank account was down to just a few dollars the day before payday. Now here she was with almost $50,000 sitting in her chequing account and she was terrified. In the space of 10 days, she’d bought a new car, given her son some money and all she wanted was for me to take the rest and tuck it away somewhere nice and safe where she wouldn’t have to think about it and she could carry on as she’d always done.
What is your setting?
This drive to stay in the comfort zone is the reason that many lottery winners are broke within five years and 78% of NFL players are broke within two years of retiring from the game. Coming into money doesn’t make you a better money manager than you were before. In fact, the psychological stress of dealing with a bank balance that’s so far removed from where their brain is comfortable often drives people to spend or give away a huge amount of their fortune, not realizing until it’s too late that their wealth is disappearing. This might seem ridiculous until you consider that our money thermostat is largely determined by our subconscious beliefs about money and wealth and our brain is driven to protect us from potentially painful situations. If you didn’t grow up in a wealthy home you might believe that having a large amount of money is challenging (the responsibility of having to manage it/constant requests from friends and strangers for help); that being wealthy is a negative thing(wealthy people are arrogant/greedy/selfish) and having a lot of money might make you too “different” from family, friends, and others in your social circle.
The lower your money thermostat is set, the harder it becomes to build wealth. Not only are you more vulnerable to unexpected expenses but no matter how much you earn your brain will find a way to encourage you to spend the excess in order to keep you in your comfort zone. The good news though is that it’s not that difficult to reset your thermostat. As with making any type of change the first step is awareness. Figure out where your money thermostat is set – how much money do you need to have in your bank account to feel secure? If you got an unexpected $10,000 gift tomorrow, how much would you spend and how much could you stand to leave sitting in your chequing account?
Can you change your setting?
Change comes through awareness, understanding, and action. Once you’ve figured out where your financial thermostat is set, consider how your brain’s desire to protect you from the perceived “pain” of managing wealth could be limiting your ability to reach your financial goals. Once you’ve done that, decide on an action plan to boost your thermostat. Often challenging yourself to keep as much money in your bank account as possible by the end of the month or trying to build your savings account to a certain level is a good place to start. Be aware of how your brain will sabotage your efforts in order to keep you “safe” and then choose not to give in to a shopping splurge, a weekend away or an extra latte just because you have the extra money in your bank account or more credit available than you’re used to. Get excited about your money and put it to work for you.
Try it this month and let me know if it makes a difference to you.