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9 Jan 2012

The Behavior Gap (and an Interview with the Author, Carl Richards)

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by Jesse Mecham

I rarely read personal finance books.

I find them full of the same standard advice, forecasts, projections, etc. And half of them say budgets are worthless (the other half avoid budgets all together). That’s reason enough to avoid them 🙂

But I read The Behavior Gap, by Carl Richards, and I loved it. It’s a personal finance book that doesn’t talk much about personal finance. It talks about you.

I won’t give a chapter play-by-play or anything like that. I just want to highlight a few points that stood out to me.

Before I get to highlights though…I had the chance to interview Carl and that podcast is posted today, so make sure you check it out (iTunes, or here’s a direct link). He shares some killer insights into our (dumb, but normal) behavior when it comes to money.

But back to the highlights.

We’re wired to avoid pain and pursue pleasure and security. It feels right to sell when everyone around us is scared and buy when everyone feels great.

How do you shake that tendency? You set up a plan based on your goals and your values and you avoid the flood of information that is there for entertainment purposes (and to sell ads), not to advise us. But heck, just being aware of this tendency is valuable.

Overconfidence is a very serious problem. If you don’t think it affects you, that’s probably because you’re overconfident.

I just liked that zinger. Not much else to say to it 🙂

My favorite chapter, by far, is Financial Life Planning. I wish that one was available as an excerpt! It emphasizes the uniqueness of YOU and asks you to decide what makes YOU happy. Then you plan your life accordingly. Your finances, just follow that life plan. (A plug: budgets are a mini life plan.)

The ability to build and protect wealth is often inversely related to knowing what’s going on in the market. And it’s certainly inversely related to acting on that knowledge.

The implication is that investing is simple (not easy, Carl’s quick to add). You set up a plan, automate away the day-to-day decisions, and avoid news meant to cause anxiety, fear, and greed. “Go for a bike ride” is Carl’s advice. That’s good advice.

And finally, a great blurb on how financial plans are worthless (Wait, what? Jesse, haven’t you been talking about setting up a plan, and then sticking to it this whole time?).

Financial plans are worthless, but the process of financial planning is vital. A plan assumes that you know what’s going to happen—even though you don’t. By contrast, planning in its truest sense is a reality-based process that allows for life’s unpredictability. It requires us to make decisions based on what’s actually happening, rather than making decisions based on what we hope or expect or fear will happen.

It’s the process that’s valuable, and I think that’s a key insight. This is also why I have no qualms about people adjusting their budgets mid-month. New information, new plan, but always governed by your values.

The Behavior Gap has me thinking about money in a new way. I loved it.

Oh! I almost forgot, Carl wanted to give every YNAB purchaser a copy of his free print Focus, if they purchase his book (thanks Carl!). If you do decide to purchase it, send an email to [email protected] with your receipt and they’ll get you squared away.

(Disclaimer: nothing to disclaim. YNAB doesn’t stand to make a dime if you purchase Carl’s book.)

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Remember, budgeting is not restrictive. You won’t be spending less, you’ll be spending right. You can do this! Today. Right now. What do you have to lose? Except all that debt and stress. (Ok, so kind of a lot.)

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