Don't overspend. And save money.
Those are the two hallmarks of successfully managing money. It really should be easy to have more money than one needs – and yet many of us aren't able to follow those two basic rules, judging from anecdotal evidence and reams of statistics (for instance: 1.2 million bankruptcies in 2012, according to the Administrative Office of the U.S. Courts, which was at least down from 1.4 million the year before).
Plenty of factors explain why some people have difficulty following those two simple money management guidelines. Life is expensive, and not everyone has a six-figure job. Sometimes a medical problem or job loss upends a good financial picture. Still, it's always interesting to ask the question: Why, knowing all that we know, do we still often make bad money choices?
We think buying things will make us happier. "Many people equate possessions with happiness, so the more 'stuff' we have, the happier we are. This isn't necessarily true, mind you, but many people think that way," says Lou Manza, psychology professor at Lebanon Valley College in Annville, Pa. "Therefore, when some people are unhappy, they look to purchase something, and this can be anything – food, clothes, entertainment, a vacation – to improve their mood."
What apparently gets in the way of more stuff making us happier is that old adage, money doesn't buy happiness. While many of us would like to test that idea out for ourselves, the saying is absolutely true, insists James Roberts, professor of marketing at Baylor University and author of the book "Shiny Objects: Why We Spend Money We Don't Have in Search of Happiness We Can't Buy."
Roberts says "our ability as humans to adapt very quickly to changing circumstances serves us well when bad things happen to us, but not so well in the consumer realm." He offers the example of the college student who wants to get out of the dorm, then moves into a rental house and soon tires of having roommates. "Once we have our own apartment, we dream of a small house, then a bigger one, and then a bigger one and the story goes on ad infinitum," Roberts says.
Bad money choices are a habit. Yes, people who buy lottery tickets or expensive shoes they can't afford tend to know their actions are likely to make things worse, according to Chris Hogan, a speaker and executive with the Lampo Group, a company headed by well-known financial education guru, Dave Ramsey.
But some people still do these things because they're accustomed to struggling with money. "A refusal to change spending habits is an active choice," Hogan says, adding that many people tell him they're terrible when it comes to handling money. "Then they let themselves off the hook by saying their parents were bad with money, too."
It kind of is our parents' fault. That is, we spend the way we were taught, according to Eric Meermann, a certified financial planner with the Palisades Hudson Financial Group in Scarsdale, N.Y. "Some people learned early on to exercise prudent personal finance discipline: to spend less than they earn, save the rest and invest," he says.
The others, Meermann says, probably "grew up watching their parents make purchases based on what they could afford."
What's wrong with that? It sounds responsible. Meermann says that too often, people go to the ceiling of what they can afford rather than aiming lower. If you spend less than you need to – buying a lightly used vehicle versus a brand-new car, for example – you'll have more net worth.
We're depressed. Sometimes, Hogan says, people buy things because they think shopping will cheer them up.
We're attempting to impress others or are playing a role. These are also reasons people spend money they don't have. "They're constantly seeking the latest or greatest thing, or they're trying to keep up with a persona or image of someone that has it all together," Hogan says.
So what happens if we do some or all of these things? Can we change? Absolutely, every personal finance expert and psychologist out there seems to think. But they all say it takes some serious commitment to re-wire our behavior and mindset. "Many people don't want to do the work," Manza says. "It's just too hard. But it is doable."
Simon Rego, a licensed clinical psychologist at the Montefiore Medical Center in New York City, agrees, offering up the idea, for instance, that you can budget by making it harder to spend money. "It's harder to overspend if you don't have any money or credit cards available. So, restrict access to them," Rego says.
He suggests locking away credit cards or shredding them if you can't trust yourself with them, or carrying only the minimum amount of cash you need every day.
But Rego also observes that we let our moods influence how we think and act. So if you're worried that the minimum won't cut it and you've trapped your credit card in an ice cube in the freezer, odds are, you'll melt it free before long.
Don't feel too bad, though. Making bad financial choices – while knowing they're bad – is universal, according to Robert Epstein, a psychology professor at the University of the South Pacific and a senior research psychologist at the American Institute for Behavioral Research and Technology.
"Research on self-control over the past few decades shows clearly why people overspend," Epstein says. "When immediate rewards are available, most people ... tend to go for them, even when those rewards are associated with delayed punishment."
[See: 10 Signs You Shop Too Much.]
If that wasn't the case, Epstein says, people would never have unprotected sex or wolf down big slabs of chocolate cake when they're already packing on the pounds. No one who knows they're likely to get a hangover would drink excessively, and there wouldn't be drug addicts.
"I call those kinds of rewards 'dark rewards,'" Epstein says. "Because money will get you just about any reward on the planet when you have some in your pocket or bank account. Or when a bank gives you a credit line, you'll tend to spend now, even if the delayed consequences are negative."
The good news is that most people can learn some degree of restraint because the payoff of not overspending and of saving is high, Epstein says. After all, there's something comforting about having a lot of money in the bank. But he has bad news for some people – think of that ne'er-do-well cousin of yours who never seems to be able to hang onto money.
"Some people," Epstein says, "those we call 'impulsive' – have virtually no ability to resist the dark rewards."