“Though one may be overpowered, two can defend themselves. A cord of three strands is not quickly broken.”
Ecclesiastes 4:12
Managing money is not for the faint of heart. There are three drivers of financial behavior. When these three drivers are clarified and combined, they provide an exceptional path for investing your time and money in a meaningful life today, tomorrow, and long into the future. Over nearly two decades, I learned that you need to have three components mapped out: your values, your financial system, and your financial tools.
The struggle for many of us, is that we usually only consider one, two – or none – of the three components. Most of us don’t even know the drivers of our behavior, let alone have bothered to clarify them and put them together. For instance, my husband and I had clarified some our values before we were married, and we both were reasonably competent with financial tools. Because we lacked a good financial system, having a financial conversation was difficult. We usually ended with a financial argument. When we clarified our system and values, our arguments all but disappeared. Before I was married, I knew frighteningly little about money management. I had almost no system, and precious few tools. It’s not surprising that I imported what I lacked – a financial system – into my marriage.
1. Values
Values are the principal drivers of how we live our lives. Values drive financial behaviors as much as quantity of money. You adopt and adapt your values from your family of origin: your parents, caretakers, and other around you. If you grew up with little money, you may adopt a value of saving. If your main time to celebrate was Christmas, you may adopt a value of giving gifts during the holidays. One of my biggest drivers to be financially successful came from my relative lack of money growing up. While not poor, and blessed with a wonderful family, lack of financial resources kept me from doing things other kids did, and ultimately made financing during my college years extremely stressful. I adopted my parents’ focus on hard work and discipline, but took my financial stress as a young adult as an instigator for my value of financial independence.
Many of our arguments with family over discretionary spending (spending that does not provide food and shelter) relate to different values and how we want to express them. Sometimes, our arguments are even with ourselves, because we have values that may compete: I wanted to be generous in giving, but also wanted financial independence as soon as possible. It’s hard to aggressively save if you are giving away 10% of your income annually. You often cannot solve your financial problems, because you are attempting to resolve value differences with systems and tools (the two other key components to financial management), rather than clarifying the values directly.
2. System
A financial system is a set of steps and principles, including roles and responsibilities and time-frame, to manage your household financials. A system is the method you use to achieve a consistent result. Your financial system includes:
- Steps and principles you follow consistently
Example 1: You automatically have some of each paycheck deposited into a savings account (principle of paying yourself first).
Example 2: You have a designated tax folder, and every time you receive a tax document in the mail, you place it in that folder. Then, when you are ready to file your taxes, you pull out that folder (steps to file taxes).
- Time/Frequency for when and how often you perform steps
Example 1: You consider charitable giving at the end of the year as part of gift giving (behavior occurs during a specific season).
Example 2: You track and review your spending and saving in an app or spreadsheet and check it every week (behavior occurs at a set time each week).
Example 3: You notice the credit card is higher than normal, and you check your purchases (behavior is ad-hoc, but instigated by a specific surprise cue).
- Location is the physical place you take action (could be more than one)
Example 1: You always pay your bills at your desk at work.
Example 2: You check your balance for your checking account when you remove money from the ATM.
Because your physical environment plays an important role in your habits and behaviors, location is one of the most useful, but also more overlooked, aspects of a financial system.
- People/Roles – who is involved and how they are involved
Example 1: Your spouse manages the retirement savings accounts, and you pay the bills.
Example 2: You call your father when you are anxious about your finances.
Example 3: You are careful not to talk to your children about household finances.
Who you exclude from financial conversations is as important as who you chose to include
It’s important to recognize that the absence of a defined system, is still a system; it is just often a dysfunctional one. A system will always serve a particular outcome, but the outcomes may be negative in the near or long-term.
3. Tools
A financial tool is a static mechanism to support the system. Generally, a tool is a product that you use to support your steps. Tools are what we generally think of when we talk about money management and financial know-how. Some common tools we use:
- Paper filing systems
- Online banking
- Spreadsheets
- Budgeting tools
- Online calculators
- YouTube videos, blogs, articles, and other online resources
If you have all three components defined and in place, you are likely to see some success with financial management. Most people implement systems and tools, while overlooking the values that drive their behaviors. While you can certainly achieve financial security without having articulated values, you may find that you lack some satisfaction in living a meaningful life. Money is one the principal ways we express our values in the world. Whether you clarify your values are not, your system or lack thereof, will undoubtedly demonstrate what matters to you. Take a moment to consider where you are strongest and weakest with financial management: values, systems, or tools.
Photo by Simon Matzinger on Unsplash