Why we are bad at managing money and what to do about it

Zach Holz identifies the five problems holding us back from achieving our financial goals

From not tracking spending to falling for advertising, there are a number of reasons UAE residents cannot get on top of their finances. Photo: Getty Images

“Money, I don’t know where it goes. On payday I have money, then, far too quickly, it’s just … gone. I feel trapped in this endless cycle where I can’t get ahead!” I can’t tell you the number of times people have told me this, or something very similar.

In my experience, it seems there are five main factors keeping us from being successful money managers.  There are also five fixes, one for each problem, to help you straighten out your finances.

Problem 1: we don’t track our spending

Unless you have a tracking system that works for you, you won't be able to tell why you aren’t reaching your financial goals.  As the saying goes, “we can’t control what we don’t know”.

Solution: get a free spending tracker app on your phone.  I use Spending Tracker — free on iOS and Android.  It takes 30 seconds to enter all your daily purchases and put them in their proper categories.  Once you have this information, you can make better choices about where you want your money to go.  It also helps identify trends that you wouldn't spot otherwise, like when I realised my car was my greatest expense last year.

Problem 2: our brains are conspiring against us

When we make a purchase, our brains send a spike of dopamine into our systems, leading us to feel a temporary jolt of happiness.  This quickly fades, leaving us wanting more: more purchases, more dopamine, less money.  And because there is always more stuff to buy, thanks to the marvel of modern capitalism, we can never really get enough.

Solution: do free fun stuff and achieve that same dopamine spike as when you make purchases.  If you're able to enjoy free activities — a hike, playing board games or yoga in the park — you can start to break the connection in your mind between spending money and happiness.

Problem 3: advertising works  

We live in a world drowning in advertisements clamouring for our attention. It is so omnipresent we don’t even register its effects on how we consume and act.  Before we know it, we’ve spent far more money on things we suddenly need to have, all because of advertising. This can blow our budgets.

Solution: stop impulse buying.  My system for this is to wait three days from when I first feel I have to get something.  If I still feel strongly that I need whatever it is after that time period, I will shop around to see if I can buy it second-hand first.  If I can't, I'll buy it new, but try to get it cheaper. Giving myself that three-day buffer lets me decide if it's something I really need, and usually, it's not.

Problem 4: we admire people that own luxury cars, yachts and designer clothing  

There's a reason we watch Keeping Up With The Kardashians and not Keeping Up With The Dalai Lama, because we all dream about what it would be like to live that crazy life with only the best stuff and experiences.

Solution: realign your thinking and realise those people are chained to jobs in order to have enough money to buy all that expensive stuff.  Once you have a grasp on managing your money and start reaching your financial goals and lowering your spending, you won't need to be trapped in jobs you dislike. You can just leave; that freedom is worth more than a fancy pair of shoes or an expensive luxury car.

Problem 5: we think investing is too complicated

There is an infinite number of ways to invest, and it can feel intimidating to pick the right one to grow your wealth and not get caught out by bad investments. Many “financial advisers” also sell complicated products with pages of fine print. Sadly, those products are made intentionally confusing so that investing stays mysterious and we keep giving our money to these “professionals”.

Solution: learn about index fund investing. It's easy to set up simple investments for yourself that even Warren Buffett, the greatest investor alive, recommends. Simply buy index funds and forget about them.

Managing our money wisely, spending less than we make and investing the difference productively can allow us freedom in our lives to pursue our passions.  We can do the work to determine what it is that makes us feel alive and passionate, not just what we need to do to survive financially. Isn’t that how you’d like to live?

Dubai schoolteacher Zach Holz (@HappiestTeach) documents his journey towards financial independence on his personal finance blog The Happiest Teacher