Q&A: The 'emotional' factor of money management
You think you have money woes.
“I’ve been laid off from a good, high-paying job, I’ve had horrible credit. I’ve had negative balances in my bank accounts and have been so broke that I had a car repossessed,” writes Lynnette Khalfani-Cox, a money coach, in her new book “Bounce Back: The Ultimate Guide to Financial Resilience.” “I’ve been through a ridiculously costly divorce.”
Khalfani-Cox doesn’t stop there. She racked up $100,000 in credit card debt, faced housing discrimination, poor health issues, and the loss of an older sister who passed away suddenly.
Oh boy.
Despite all of those setbacks, she took back control of her finances, and today, the personal finance expert and author of the New York Times bestseller “Zero Debt” is out to help other people take practical steps to solve their day-to-day money difficulties and build financial security.
Here's what Khalfani-Cox recently told Yahoo Finance about how even when the odds are against you, with determination, skill, and resilience, nearly anything is possible.
Edited excerpts:
So Lynnette, why did you write this book now?
Post-pandemic, a lot of people have had major financial challenges — especially this last year or so. We had layoffs in different sectors. Inflation was a big concern, affecting people's ability to save.
Credit card interest rates started going up a lot. And, of course, debt became a big challenge. We’re at a record level of consumer debt in this country. Many people are just trying to make ends meet.
Read more: Credit card fees explained: 8 types you should know
These particular setbacks, which I call the Dreaded Ds, can be interrelated or layered in nature and hit folks with these one–two punches.
I define the 10 Dreaded Ds as downsizing from a job, divorce, death of a loved one, disability, disease, disasters (natural or man-made), debt, damaged credit, dollar deficits (which really just means I'm broke), and discrimination, which can also pack a punch emotionally and financially.
But your money mantra is not just all about dollars and cents, right?
Correct. People need not only financial strategies for how to come back, but also emotional strategies to find that grit and that perseverance. When something potentially painful or problematic happens to you externally, you have an opportunity, in the midst of all that, to have a transition happen within you.
Even during your lowest point, when you've gone through a divorce, been through debt, lost a job and so forth, the opportunity is there for growth, for learning. It can be a stepping stone to something better. You're not defined by your failures, setbacks, past mistakes or other adversity.
You write about the importance of having faith in yourself. Can you elaborate?
Mindset is crucial to well-being. Physicians will tell you that if somebody has had illness, injury or chronic condition, they tend to do better if they have a positive outlook.
Likewise with your financial well-being. If you have an expectation of a better future, the hope in your mind, the faith, or the promise that things can get better, you’re more likely to act on those positive thoughts in a way that is helpful to you as opposed to detrimental to you.
Otherwise, you're locked in this cycle of either inaction, or a negative spiral, where you're feeling hopeless that nothing you can do can change things in any way.
While you dig into the nitty-gritty of getting back on your feet financially in this book, you stress that money for most of us is all tangled up in emotion. How so?
It really is. I would say 80% of financial management is emotional. People forget when we talk about this subject of personal finances that there is the personal part of it.
From the little things to the big things, our emotions absolutely drive our decision-making. Once you start to be aware of that, you can start to monitor it.
You shouldn't make major decisions, or spending choices, when you're in a euphoric state on a high because you're like, ‘woo-hoo, let's go for it.’ When you're feeling depressed, or anxious, or worried, that's also not a time to make major financial decisions. Better to do it when you're in that emotion neutral zone.
How can we get a grip on this squishy stuff?
Your mental health and your personal well-being are about knowing how to practice self-care, knowing how to create connection and community, knowing the importance of reaching out for help, and knowing which resources to tap. You must understand that it's normal to struggle and to go through those feelings.
What works is having the right emotional preparation and mindset to make better financial decisions. Practicing mindfulness, even simple things like counting your breaths for 30 to 60 seconds and cultivating gratitude can help shift your focus.
Doing things that bring you joy can boost your resilience. Incorporating exercise and relaxation techniques into your daily routine can help you reduce stress.
You have to do the work. To bounce back from a job loss, for example, you need to reflect on what you actually liked about your old job, what you didn’t like at all and be honest about it. What were the things that dragged you down emotionally on that job? What are the deal breakers for you as you look forward to a new position?
What are the indicators of financial health?
It’s a person's capacity to save, spend, borrow and plan. If you're able to save for your near-term obligations and save for the future, that's an indication of your financial health. If you're able to borrow at prime rates because you have a good credit score, for example, or if you're able to not have to take on an excessive amount of borrowing, that's an indication of financial health.
Read more: The best high-yield savings account rates for December 2023
Most of us are notoriously bad at budgeting. Tell us a little bit about your 20% rule.
The 20% rule is a budgeting rule that I have used for two decades with coaching clients…and anybody who will listen. I have never met a single person who has accurately told me their level of spending. Even the best of budgeters undercalculate because of impulse purchases – we all get seduced by these, and we buy stuff on a whim and have emergencies or unexpected events, for example. So always pad your anticipated budget expenses by 20%.
A big issue for Americans of all ages these days is the lack of emergency funds, which has pushed people to raid their retirement funds. How do you separate rainy day funds and emergency funds?
Your rainy day fund is your short-term fund. It is different in size and scope, duration and purpose from the longer-term emergency fund. So the rainy day fund can be anywhere from like $500 bucks to maybe $1,500 bucks tops. You really just need this money to throw at a problem and make it go away. Say, you ran over a nail in your car and needed a new tire, it’s the cash on hand to deal with that straightaway.
An emergency fund, on the other hand, is designed to take care of all of your living expenses and your bills over a three-month or longer span. If your living expenses are $4,000 a month, $5,000 a month, ideally you'd like to have $12,000 or $15,000 — three months worth put aside in that emergency fund.
Read more: What is an emergency savings fund?
An emergency account requires some building, but that's what you want to strive for. The purpose of having that is if you're faced with any of those awful Dreaded Ds, like a downsizing from a job where you have no income coming in, and you need money to cover all of your bills. That emergency fund will cover that. You're not going to amass this overnight. It may require some sacrifices and lifestyle adjustments.
Parting thoughts?
You don't have to be ashamed or reluctant to reach out for help for any personal or financial problem you might be experiencing, or have experienced, and are still struggling with.
Unfortunately, a lot of people who go through the Dreaded Ds suffer in silence. That has long-term ramifications, and it can take them years to recover.
My hope is that anybody who's been through a divorce, who's been through a layoff, who's been through any of the unfortunate natural disasters that we've seen in recent years, that my advice and resources will give them inspiration and a blueprint with real-life case studies, myself included, for how you can recover and and bounce back – even when it feels like the most awful time of your life.
Kerry Hannon is a Senior Reporter and Columnist at Yahoo Finance. She is a workplace futurist, a career and retirement strategist, and the author of 14 books, including "In Control at 50+: How to Succeed in The New World of Work" and "Never Too Old To Get Rich." Follow her on X @kerryhannon.
Read the latest financial and business news from Yahoo Finance
