What do most people misunderstand about money and personal finance? originally appeared on Quora – the place to gain and share knowledge, empowering people to learn from others and better understand the world.
Answer by Scott Sonenshein, Management Professor at Rice University, author of Stretch, on Quora:
People often misunderstand that their relationship with money and how they manage their personal finances don’t exist in isolation of their well-being and the pursuit of their life goals. Since money is a component of our well-being, and a means to supporting our life goals, it warrants careful consideration. The best way to figure out the role of money is to reflect on and define our life goals.
Too often we mindlessly chase after money (and lots of other things too). Sometimes the pursuit of more money might lead us astray from a meaningful goal, such as having enough time outside of work to enjoy family and friends, or the pursuit of a deep interest, such as learning a new language or how to play an instrument. There are even times when we’re so focused on accumulating money that we miss opportunities to do things that would bring us real pleasure, such as a barbeque with friends or a playing a recreational sport.
Don’t get me wrong, earning money is important – there are real needs for things like retirement or a college education. Having a rainy day fund is also necessary. There’s also the pleasure of an indulgence. But how much you need for your long-term needs and short-term needs is a very personal question that too few people think about beyond “more is better”.
With the money we do have, there’s a benefit to being frugal, while cheapness can be a menace. Research finds that cheap people are psychologically pained from spending money, and therefore are willing to sacrifice their well-being to save a buck. Frugal people, on the other hand, take pleasure is using money wisely. They’re more likely to deploy their money to pursue meaningful goals.
In this light, I think we are better served by thinking of money as a means to accomplishing goals, instead of being a goal itself. Start with: what do you really want to do, experience, and contribute through your life? There is such a thing as ‘enough’ money, and there is such a thing as a good life that extends beyond having money (laughter, friendship, intimacy, vigor and vitality, etc.) Keep in mind the ‘personal’ in personal finance – that’s the part almost everyone forgets about.
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