The Evolution of Money Management and Why it Matters to You

The Evolution of Money Management and Why it Matters to You

Views on what constitutes effective money management vary considerably because people have different personalities, priorities, values and goals.  However, people also tend to develop deeply ingrained opinions about what effective money management is based on the different economic environments that they (or their parents) have experienced.  This often contributes to the development of habits which are extremely hard to break.  The good news is that when people are entrenched in sound money management habits they are unlikely to change.  The bad news, of course, is that people are equally unlikely to change their poor money management habits.

So how do you know which money management habits to keep (or to develop) and which ones you need to change?  To help you decide I will briefly summarize the evolution of money management in our society since the early part of the 20th century until now.  As I do so, pay careful attention to the ways of thinking that you identify with the most, because that will tell you where your strengths lie, and also where you might need to improve.

The Depression Era Traditionalist

The roaring twenties was a time of seemingly boundless financial prosperity, and people spent money as if there would be no tomorrow.  But the stock market crash of 1929 and the onset of the Great Depression brought all of that to a screeching halt.  Banks failed, businesses went bankrupt and jobs were scarce.  In short, financial optimism had gotten so far ahead of reality that the systems holding everything together (the stock market, government, banks, industry, etc.) buckled under the pressure.

It’s hard to overstate how profoundly the Great Depression affected the people who lived through it (and their children in many cases) in terms of how they learned to manage their money.  I call such people Depression Era Traditionalists, and some classic traits they exhibit are:

  • A strong work ethic; a willingness to get one’s hands dirty to get the job done.
  • A low level of needs; the ability to live simply on the very basics.
  • A high level of discipline; the ability to make sacrifices over a long period of time in order to save.
  • An appreciation for even the smallest luxuries and conveniences.
  • Mental toughness; the ability to suffer financial setbacks and keep fighting.

I believe that each of these traits are positive ones, but those who subscribe to the Depression Era Traditionalist approach also have ways of thinking that can hinder their financial progress such as:

  • A strong aversion to any kind of risk (which can lead to missed opportunities).
  • An unwillingness to embrace new ways of thinking and doing things.
  • A deep-rooted mistrust in financial institutions such as banks and the stock market.
  • A tendency to live in fear that the next economic catastrophe might be just around the corner.
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