In 1843, Charles Dick­ens pub­lished the clas­sic - A Christ­mas Car­ol. Since then, it has formed the ba­sis of many a Christ­mas con­cert. To­day it will form the ba­sis of an im­por­tant les­son in per­son­al fi­nance. This col­umn is based on a book ti­tled “The Fi­nan­cial Wis­dom of Ebenez­er Scrooge: 5 Prin­ci­ples To Trans­form Your Re­la­tion­ship with Mon­ey” by Ted Klontz, Brad Klontz and Rick Kahler.

The sto­ry gives a great in­sight in­to why in­tel­li­gent peo­ple of­ten make poor fi­nan­cial de­ci­sions.

Achiev­ing fi­nan­cial suc­cess is very sim­ple: spend less than you earn, save the dif­fer­ence, in­vest wise­ly. If you are able to do this con­sis­tent­ly you would have no mon­ey prob­lems. Ex­cept we are now in the midst of the hol­i­day sea­son and so we re­alise that spend­ing less than you earn sounds sim­ple enough but it is very dif­fi­cult to put in­to prac­tice.

This is be­cause fi­nan­cial suc­cess is more than math. If it were, we would see far few­er peo­ple strug­gling with mon­ey as every­one ba­si­cal­ly knows what they need to do to have a bet­ter fi­nan­cial out­come. The math­e­mat­ics of mon­ey is not the prob­lem. The psy­chol­o­gy of mon­ey is.

Re­cent re­search in fi­nan­cial psy­chol­o­gy shows that all of us have un­con­scious be­liefs about mon­ey, formed pri­mar­i­ly in child­hood, that op­er­ate be­low our con­scious aware­ness. These be­liefs gov­ern our fi­nan­cial be­hav­iors. These be­liefs are al­so not ra­tio­nal con­structs; they are emo­tion­al frame­works built from our ear­li­est ex­pe­ri­ences with scarci­ty, abun­dance, se­cu­ri­ty, and un­cer­tain­ty.

Ebenez­er Scrooge pro­vides a great ex­am­ple. The pop­u­lar read­ing of his char­ac­ter is sim­ple: he was greedy and miser­ly. But a clos­er ex­am­i­na­tion re­veals some­thing more nu­anced and more trag­ic. Scrooge was not pur­su­ing wealth for its own sake. He was man­ag­ing anx­i­ety through ac­cu­mu­la­tion. His hoard­ing be­hav­ior was a sur­vival mech­a­nism, not a char­ac­ter de­fect.

The crit­i­cal flash­point in Scrooge’s child­hood was aban­don­ment. Left alone at board­ing school while oth­ers went home for Christ­mas, his take­away was that peo­ple can­not be trust­ed, but mon­ey can. This cre­at­ed his core mind­set: Mon­ey equals safe­ty. There­fore, spend­ing mon­ey felt like spend­ing his own safe­ty, which ex­plains why part­ing with even small sums caused him phys­i­cal pain.

It is im­por­tant to un­der­stand, es­pe­cial­ly in the sea­son that what we see as self­ish­ness or greed might very well be a need for safe­ty. Don’t judge.

Scrooge was “rich” in net worth but not “wealthy” in qual­i­ty of life. His bank bal­ance was high, but the cost of achiev­ing it had been the for­feit of every­thing that makes ex­is­tence bear­able. He gave up con­nec­tions, joy and mean­ing. He had con­fused the means with the end.

Fi­nan­cial trans­for­ma­tion

What makes A Christ­mas Car­ol psy­cho­log­i­cal­ly bril­liant is its struc­ture. The three ghosts do not ar­rive ran­dom­ly; they rep­re­sent the se­quen­tial stages nec­es­sary for any gen­uine trans­for­ma­tion in our re­la­tion­ship with mon­ey. These three ghosts mir­ror a key con­cept in per­son­al fi­nance. We all have three selves. A past self, a present self and a fu­ture self.

The Ghost of Christ­mas Past forced un­der­stand­ing. You can­not change a be­hav­ior un­til you un­der­stand its ori­gin. Scrooge is com­pelled to wit­ness the for­ma­tion of his mind­set, which is based on be­ing the lone­ly child.

He was the young man choos­ing mon­ey over love, the grad­ual hard­en­ing of his heart. The ghost shows him that he was not born greedy; he was made greedy by fear.

Think back to when you were a child. You may have wit­nessed par­ents fight­ing about ex­pens­es and learned that mon­ey caus­es con­flict. Per­haps you ex­pe­ri­enced sud­den loss of sta­tus and de­vel­oped an ob­ses­sive need for se­cu­ri­ty. Per­haps you grew up in abun­dance and nev­er de­vel­oped the ca­pac­i­ty to de­fer grat­i­fi­ca­tion. These ear­ly ex­pe­ri­ences pro­vide you with a pro­gram­ming that runs au­to­mat­i­cal­ly in your adult life, un­less we be­come con­scious of them.

The Ghost of Christ­mas Present forces aware­ness of cur­rent re­al­i­ty. This is the most painful stage be­cause it re­quires con­fronting the col­lat­er­al dam­age of our fi­nan­cial past. Scrooge be­gins to see the Cratchit fam­i­ly as poor in cur­ren­cy but rich in con­nec­tions. They have what he lacks de­spite hav­ing a frac­tion of his wealth. He al­so sees him­self through oth­ers’ eyes: an ob­ject of mock­ery and pity.

This stage asks un­com­fort­able ques­tions. Is your fru­gal­i­ty ac­tu­al­ly pru­dence, or is it fear mas­querad­ing as virtue? Is your gen­eros­i­ty gen­uine care, or is it at­tempt­ing to pur­chase ap­proval? Are you sac­ri­fic­ing re­la­tion­ships for a bank bal­ance? The present self must ac­knowl­edge the gap be­tween fi­nan­cial suc­cess and life suc­cess.

The Ghost of Christ­mas Fu­ture forces mo­ti­va­tion through con­se­quences. Scrooge sees his death. He leaves un­mourned, his pos­ses­sions stolen, his mon­ey mean­ing­less. This is not about fear of mor­tal­i­ty; it is about con­fronting the ul­ti­mate fu­til­i­ty of hoard­ing. The ques­tion in the sto­ry is piv­otal for all of us: If you con­tin­ue on your cur­rent path, what will your life look like in 10 or 20 years?

I pre­vi­ous­ly wrote about the con­cept of “three selves” - past, present, and fu­ture. I al­so wrote about why the present self so con­sis­tent­ly be­trays the fu­ture self. The phe­nom­e­non is called the “em­pa­thy gap”, and it ex­plains the dis­con­nect be­tween our fi­nan­cial plans and our fi­nan­cial re­al­i­ty.

Most peo­ple ex­pe­ri­ence their fu­ture self as a stranger. This is not metaphor­i­cal; re­search shows that when we think about our fu­ture selves, dif­fer­ent parts of the brain ac­ti­vate than when we think about our present selves. Our fu­ture self is, neu­ro­log­i­cal­ly speak­ing, an­oth­er per­son. And we are no­to­ri­ous­ly poor at mak­ing sac­ri­fices for strangers.

This em­pa­thy gap man­i­fests in the pref­er­ence for small­er im­me­di­ate re­wards over larg­er fu­ture ben­e­fits. It is why we know we should save for re­tire­ment but in­stead make pur­chas­es to­day that sab­o­tage long-term fi­nan­cial se­cu­ri­ty. The math­e­mat­ics says in­vest; the psy­chol­o­gy says con­sume now.

Scrooge’s trans­for­ma­tion re­quired him to col­lapse the em­pa­thy gap. The Ghost of Christ­mas Fu­ture made his even­tu­al out­come vis­cer­al­ly re­al. He felt the lone­li­ness, ex­pe­ri­enced the mean­ing­less­ness, wit­nessed the waste. His fu­ture self be­came re­al to his present self, and that emo­tion­al con­nec­tion en­abled be­hav­ioral change.

The Five Prin­ci­ples

The trans­for­ma­tion Scrooge un­der­went overnight typ­i­cal­ly re­quires more time for or­di­nary mor­tals, but the prin­ci­ples re­main con­sis­tent.

First, is aware­ness. What are the un­con­scious rules gov­ern­ing your fi­nan­cial be­hav­ior? In our fam­i­lies we would have heard “Mon­ey is the root of all evil”, “I don’t de­serve wealth,” “More mon­ey will solve all my prob­lems,” or “There will nev­er be enough.” These be­liefs feel like facts but are ac­tu­al­ly emo­tion­al con­structs.

Sec­ond, chal­lenge the thoughts. Sub­ject them to ra­tio­nal scruti­ny. Is the be­lief ac­tu­al­ly true, or is it mere­ly some­thing you in­ter­nal­ized as a child? There are thoughts that may have pro­tect­ed you as a child, but it may be sab­o­tag­ing your well­be­ing as a suc­cess­ful adult.

Third, learn the me­chan­ics of mon­ey. Knowl­edge is pow­er and learn­ing things like how com­pound in­ter­est works, how mar­kets func­tion, how risk and re­turn re­late, al­lows you to have a ra­tio­nal ba­sis to coun­ter­bal­ance the emo­tions.

Fourth, de­fine what true wealth means for you. This is not about a num­ber in a bank ac­count. Wealth is the abil­i­ty to use fi­nan­cial re­sources to sup­port your au­then­tic life goals and val­ues. For some, this means time free­dom. For oth­ers, it means ca­pac­i­ty for gen­eros­i­ty. For still oth­ers, it means se­cu­ri­ty against un­cer­tain­ty. The de­f­i­n­i­tion mat­ters be­cause it de­ter­mines whether your lad­der is placed against the cor­rect tree.

Fifth, an­chor the change through ac­tion and ac­count­abil­i­ty. Scrooge’s trans­for­ma­tion was sealed by im­me­di­ate ac­tion; buy­ing the turkey, vis­it­ing his nephew, rais­ing Bob Cratchit’s salary. Change re­quires you to change.

You on­ly change when you adopt new be­hav­iors, but new be­hav­iors re­quire sup­port sys­tems to pre­vent re­gres­sion to old pat­terns.

Scrooge’s re­demp­tion came not from mak­ing more mon­ey but from chang­ing mon­ey’s pur­pose in his life. He shift­ed from us­ing mon­ey as pro­tec­tion against peo­ple to us­ing mon­ey in ser­vice of peo­ple. This is what trans­formed him from “rich” to “wealthy”.

Scrooge awak­ened on Christ­mas morn­ing as a new man. The trans­for­ma­tion was pos­si­ble be­cause he con­front­ed his fi­nan­cial psy­chol­o­gy hon­est­ly, un­der­stood its ori­gins, rec­og­nized its costs, and chose dif­fer­ent­ly. The same trans­for­ma­tion is avail­able to any­one will­ing to ex­am­ine their re­la­tion­ship with mon­ey with equal hon­esty. The math­e­mat­ics of mon­ey is straight­for­ward. The psy­chol­o­gy of mon­ey is where the re­al work hap­pens.

Ian Nar­ine is a fi­nan­cial con­sul­tant who knows that fi­nan­cial prob­lems are rarely about the math. Send ques­tions and com­ments to ian@ian­nar­ine.com