Diversification of assets is the idea that spreading your investments among different assets types that don't rise and fall in unison is one of the safest and surest moves you can make with your portfolio. After all, if any one asset type falls apart, most of your portfolio should remain intact.

According to Lim, you can’t use recent history as evidence that diversification is pointless long term, even if it didn’t help much the past two years.  Michele Gambera, chief economist for investment consultant Ibbotson Associates, says that market behavior in the past couple of years was attributable to the "yelling fire in a movie theater" effect.  Just as the theater audience would rise in unison and race for the exits, investors move in sync away from risk and toward safety in a financial meltdown, as they did in 2008. Once the all-clear is sounded, Gambera says, they march back into the market together, bidding up all kinds of assets.   It's only when economic conditions start to return to normal -- after the movie's over, in effect -- that investors, and investments, move independently again.

I have always been a fan of diversification, albeit a more pared-down, simplified version than most of my colleagues.  I prescribe to the Warren Buffett school of investing, which can be summarized pretty well by referring to some of his quotes:

“Risk comes from not knowing what you're doing.”

Investors who make the biggest mistakes usually make them because they don’t truly understand the word “risk.” When we’re concerned about the volatility of our investments—how much they fluctuate—we’re referring to market risk. 

The fact is, risk can only be measure within the context of timeframe and goals—otherwise, it doesn’t mean anything, because every investment has some kind of risk inherent to it.

There are six different types of risk to think about:

• Inflation risk - The chance your money may not be able to keep up with inflation.
• Principal risk - This is the risk most people identify with.  The money you invest is called your “principal.” Unfortunately, you don’t always make money on what you’ve invested—but you haven’t actually LOST money unless you sell that investment; you’re simply riding the wave (dude).
• Interest-rate risk - If interest rates go up, bond prices usually go down. If rates go down, bond prices usually go up.  Say you invest in a certificate of deposit, locked in for 2 years . . . if interest rates go up, you’re missing out on the higher interest rate you could have gotten during that two year period.
• Market risk - Both stocks and bonds are vulnerable to changes in the economy and to general changes in the markets they trade in.   This is the volatility that causes people to be concerned about the principal invested.
• Credit risk - Credit risk is the risk that a company or individual will be unable to pay the contractual interest or principal on its debt obligations. 
• Liquidity risk - The risk that you couldn’t sell an investment quickly at a fair price to get cash.

In a diversified portfolio with investments that are APPROPRIATE to the person’s individual goals, risk becomes a non-issue.

“Wide diversification is only required when investors do not understand what they are doing.”

The real problem isn’t the market—it’s that people don’t truly understand HOW to diversify their investments.  The industry doesn’t help when its advisors run modeling software that identifies TWENTY-ONE asset classes that a portfolio needs—consider that a lot of funds now have a $3,000 minimum, you’d need a minimum of $63,000 to implement that recommended portfolio—but that’s if you invested exactly the same amount in each asset class, which isn’t typically the case. 

“Only buy something that you'd be perfectly happy to hold if the market shut down for 10 years.”

Markets are actively traded, but that doesn’t mean investors must follow suit to profit.  Sure, there is some fun (for some people) in playing the market to see what can be gained, but that’s the same as playing Monopoly—you’re doing something interesting to pass the time and you don’t actually count on the money to be real at the end of the game.

Investors who adopt a long-term philosophy don’t worry about the year-to-year fluctuations or the news from day to day, because they don’t need to.  Over the next 20-30 years, all they need to do is let their investments grow; rebalance to take gains; and make sure the portfolio continues to work in concert with their goals.

One of them—by Roger Lowenstein—discusses how the actions of individuals are judged more harshly than the actions of business.  Individuals are called immoral if they walk away from a bad investment, but businesses are simply acting in their best interest.  The article mentions that John Courson, president and C.E.O. of the Mortgage Bankers Association, recently said that homeowners who default on their mortgages should think about the “message” they will send to “their family and their kids and their friends.” Courson was referring to the rising numbers who are voluntarily choosing not to pay—not to people who have no choice.

Voluntary defaults by individuals are a new phenomenon. According to the article, the housing collapse left 10.7 million families owing more than their homes are worth. So some of them are making a calculated decision to hang onto their money and let their homes go. Is this irresponsible?

Lowenstein points out that businesses make such calculations routinely. Morgan Stanley recently decided to stop making payments on five San Francisco office buildings. A Morgan Stanley fund purchased the buildings at the height of the boom, and their value has plunged. Nobody has said Morgan Stanley is immoral.

The moral argument perpetuates under President Obama, who has encouraged homeowners follow the “responsible” course.  HUD-approved housing counselors are supposed to counsel people against foreclosure which means a lot of the time, they are counseling people to throw away money. In Lowenstein’s article, a University of Arizona law professor, Brent White, notes that a family who bought a three-bedroom home in Salinas, Calif., at the market top in 2006, with no down payment (then a common-enough occurrence), could theoretically have to wait 60 years to recover their equity. On the other hand, if they walked, they could rent a similar house for a pittance of their monthly mortgage.

There are two reasons why so-called strategic defaults have been considered antisocial and amoral. One is that foreclosures depress the neighborhood and drive down prices. But in a market society, since when are people responsible for the economic effects of their actions?

The other reason is that default (supposedly) debases the character of the borrower. Once, perhaps, when the local banker held onto your mortgage for 30 years, they occupied a moral high ground.  But Lowenstein points out that these days, lenders typically unload mortgages within days (or minutes). And not just in mortgage finance, but in virtually every realm of our transaction-obsessed society, the message is that enduring relationships count for less than the value put on assets for sale.

Mortgage holders sign a promissory note, which is a promise to pay. But the contract explicitly details the penalty for nonpayment — surrender of the property. The borrower isn’t escaping the consequences; he is suffering them.

White, of the University of Arizona, is surprised that more people haven’t walked, according to Lowenstein’s article. He thinks the desire to avoid shame is a factor, as are overblown fears of harm to credit ratings.  White has argued that the government should stop perpetuating default “scare stories” and, indeed, should encourage borrowers to default when it’s in their economic interest. This would correct a prevailing imbalance: homeowners operate under a “powerful moral constraint” while lenders are busily trying to maximize profits. More important, it might get the system unstuck. If lenders feared an avalanche of strategic defaults, they would have an incentive to renegotiate loan terms. In theory, this could produce a wave of loan modifications — the very goal the Treasury has been pursuing to end the crisis.

Lowenstein’s point is that no one is saying that defaulting on a contract is pretty or that, in a perfectly functioning society, defaults would be the rule. But to put the onus for restraint on ordinary homeowners seems rather strange. If the Mortgage Bankers Association is against defaults, its members--presumably the experts in such matters--might take better care not to lend people more than their homes are worth.

I have told clients for awhile now that a bad financial situation doesn’t need to be perceived as a character flaw or a sign of weakness, it just IS.  The best way out of it is to set your ego aside and figure a way out of it.  Thank goodness for Lowenstein’s article.  Finally, some media reinforcement that it’s irrelevant what other people think about your financial situation; only YOU are experiencing the repercussions.

There is an interesting website called YouWalkAway.com that has a calculator that tell you whether or not it makes sense to walk away from your mortgage (access it here).   

The only caveat I have about these articles is I hope when you read them, you take notice of your emotions . . . I’ve spoke to some people who feel so indignant and outraged by the inequity, they believe they are justified in dumping their homes.  This concerns me, because I don’t think ANY financial decision should be made under the influence of strong emotion.  I think if a person is feeling anything other than frustration and concern over their own personal situation, they need to look at their underlying motivations for walking away. 

People are tired of being cheap, cutting back and sacrificing. I have been amazed over the past two years how quickly consumerism switched to cutting back; it seemed like the day after the major crash, Target had already come out with a commercial showing people enjoying life without spending a lot.  And they came up with one of my favorite terms, “frugalista.”  You know, instead of fashionista.

Frugal fatigue doesn't have to mean that you are tired of saving money and are going to spend the day binge buying your way through Nordstrom (or in my case, Barnes and Noble).  It can also be that you are simply tired of following family around to turn off the lights behind them.

Living frugally is not any different than if you were trying to eat healthy; occasionally you eat something that didn’t fit into your healthy goals, but you get back up and get on track. Don't beat yourself up because you slipped and bought $150 worth of books when you were sitting around recovering from a broken ankle (oops);  enjoy the books and simply make a commitment to return to your spending plan.

It’s true in meditation and it’s true with saving money:  it doesn’t matter that you couldn’t keep it going for as long as you hoped, the REAL achievement is returning to the practice immediately once you become aware of your mental (or financial) wandering.

Way back when, my frugality “shift” started as a set of rules that I told myself to adhere to . . . here are some, purely for entertainment’s sake:

Use all of the shampoo, moisturizer, and makeup even if it doesn’t make your hair the shiniest it’s ever been, or give you that perfect, flawless complexion.  I used to decide I didn’t like one product, go out and find another to replace it, and then toss the first.  I had to institute a RULE to break this habit—LEAVE NO PRODUCT BEHIND.

EAT THE SOUP.  I used to buy food and then never eat it because I didn’t FEEL like it . . . so I created this rule to make sure I wasn’t buying more food to take the place of the food I already had but that I hadn’t eaten yet.  So, now once a month or so I take an inventory and pull that stuff out of the cupboards and freezer . . . I went for almost a week once before I had to go to the store again.

30-DAY WAIT PERIOD.  I usually do my research before buying something major, but with books I can go overboard.  So I never go to bookstores unless I know EXACTLY what I am buying and I can go in, get it and leave right away.  Everything else goes on my Amazon list and the book has to stay there 30 days before I allow myself to buy it, within my book budget.

HOUSE COFFEE.  I kicked the Starbucks spending habit over ten years ago, but I still like the Starbucks/coffee joint experience, so I switched to house coffee.  Nowadays, I don’t go as much as I used to, so I spring for a latte about once a week.  People think it’s weird I know how often I buy a latte.

Another person helped herself save money by rounding up everything she purchased to the next dollar, and then move that "extra" money to savings at the end of the month.  Someone else I know has a jar in the kitchen that receives all of the change and dollar bills hanging out in her purse once a week.  So, people do what works for them.

The biggest challenge is to remember WHY you are being frugal when you’re being stared down by something you really, REALLY want to buy on impulse.  Buy it or not, if you remember to RETURN to your practice as soon as you can, you’re going to achieve a special peace of mind; the kind only money in the bank can give you.

I can identify.  When I started making what I considered “good” money I bought a lot of stuff for the people around me.  I’d pick up lunches; buy extravagant gifts . . . until I realized that when the rubber met the road—after taxes and savings—my spending power didn’t increase as much as I thought it would.  I still needed to be aware of my spending, no matter how much I was making. 

In Trent’s case, his behavior resulted in a lot of debt and unhappiness.  I have a friend to thank for first igniting my self awareness about the issue; she REFUSED to allow me to pay for her.  She saw our income as completely irrelevant to our relationship, and it forced me to question what my premise was for paying for everything.

I think it was because I wanted to be seen a certain way by certain people—I felt professionally successful for the first time in my life and no one could really tell (with the hours I was working). 

I think it also was a way for me to justify the long work hours . . . if I was making really good money, then everyone would understand why I just wasn’t available anymore.  Or, they would appreciate me more when I WAS there.  Aside from the actual money issue, I started to feel like every time I saw someone socially, I had to give something—and you can’t always be the giver in a friendship, it’s exhausting.

And, I come by it naturally . . . my parents always picked up the check when we all went out to eat.  After my epiphany I had an intervention and made them stop immediately!

At any rate, I quickly figured out that none of my relationships were any better because of the money I spent.  They were better when I was actually mentally present to have one.

Here are some of the things that both Trent and I learned:

Recognize that you don’t have to buy stuff to be valuable to others.  Hard as it is to believe sometimes, true friends are just in it for the magic of you :o).

Commit to not buying anything for anyone else.  Whenever you go out with a group of friends, TELL yourself that they are going to buy what they consume, and you’ll buy what you consume.  If it helps, remind yourself what you could buy for yourself that much quicker if you abstain from paying for others—the bathroom reno?  New car?

Do stuff where you don’t have to buy something.  I’ve found I am just as happy hanging around my place with a friend than going out—and we don’t get as distracted when we’re trying to catch up.  Or, another friend and I go walking together (when I’m not on crutches) which is still an absolutely free activity.

Don’t worry about losing a “friend” who expects you to buy for them.  It’s true, I lost people in my life when I quit buying stuff---but by then I had realized that they weren’t really my friends.

Talk about it to your closest friends and spouse.  Once you actually verbalize it, your true friends will say stuff like, “Yeah, that’s crazy; why should YOU pay for all of us?” and do cool things like tell the waitress you need separate checks, or step ahead of you in line at Starbucks to buy their own drink.  They help keep you strong if this is a particular problem for you. 

Someone commented to me recently that I never have stuff about investments in my blog or newsletter, even though I provide advice in that area.  What I told him is that issues like the one I am writing about today are the REAL reason people don’t become wealthy---not what their investments are doing.  Those are the tools we use to augment our situation, but only the individual and his behavior can create a better financial life.  That's the REAL Superman.

I am telling people that right now, their credit is like a minor car accident . . . not particularly good for them, and the insurance company will most likely ding them by raising their premium, and they’ll have to go for awhile to prove again that they are safe drivers.  That doesn’t mean they are going to have to stop driving.

The accident may have been their fault, or it might have been someone else’s fault.  Either way, you still end up with a crumpled bumper. And only you know for your situation what the right thing to do is.

The credit score isn’t the issue.  If you have good cash flow and a nice cash reserve, you’ll still be able to get the things you need.  If you don’t have good cash flow and don’t have a good cash reserve, then making a move that will ding your credit might be the only choice you have.

Just like money is not inherently evil, neither is credit.  The whole reason for our credit crisis is because no one took responsibility for managing risk.  So, the worst damage occurs to people’s financial situation when they aren’t taking responsibility for it.  If I am in a bad situation money-wise, then something I did caused me to be there because I didn’t take responsibility for looking at my situation realistically.

If overuse of credit has gotten you someplace where you’re not happy, then you shouldn’t use it anymore.  It’s sort of like food—some people can eat a lot of sugar and white flour and be fine, and others it runs them into zombies.  You just have to know what is right for you.

The key indicator for me of when someone isn’t looking at themselves and credit realistically is if they have a justification for everything—the reason they do that is they are defending a position.  And you can’t defend a position and move to a better one at the same time.

So, if you’re feeling the credit crunch right now, this is a perfect time to imagine what your life would look like without using credit at all.  Our futures are built on what we can add to our lives, and losing the perfect credit score is never going to prevent someone from missing out on something if it is truly important to them.

The point is, there is no blanket, right answer for everyone, which is why it is so important to be in touch with your situation.  With awareness comes the clarity we all need to make good financial decisions.

“[Frugality] is a necessary evil early in your adult life — like getting an education. Most people are never frugal and, as a result, never rich either. A few people are rich as a result of frugality, but they never stop being frugal, so what’s the point? They live like poor people their whole lives.

The correct approach is to start out frugal when you first go out on your own, then gradually shift to an enjoy-life mode where you live up to your means.”

Note that Reed never says to live beyond your means. You live below them until you’re established. Once things are running smoothly, it’s okay to spend on the things and experiences that make you happy.

I don’t have a “habit” that keeps me in debt, but I am very conscious of thinking frugally if I identify an area of spending that seems excessive.  Most people are embarrassed to tell you what they actually spend on coffee every month—I was at one time too.  Or books (my favorite thing) . . . I am MUCH more careful now about giving myself a waiting period so I don’t compulsively buy books.

I try to stay conscious because I want to know that when I spend my money, I am spending it on something I want, and not because I haven’t given it enough thought and I am buying by default.  It’s fine if I want to spend money on coffee or books, as long as I know what tradeoffs there might be.

So, frugality continues to be a strategic exercise long after debt is an issue, because this mindset helps people stay in better financial shape than they would otherwise, and allows them to take advantage of new opportunities as they become aware of them!

At first, it was just a convenience, no big deal . . . and then I watched a friend’s toddler-daughter unwrap her gifts 2 years ago.  There was so much STUFF that the little girl couldn’t even focus . . . there were dolls, and princess outfits, and random toys and play structures.  My friend was actually shocked and embarrassed at how much stuff people sent her daughter . . . she had thought that she and her husband would give her daughter her primary gift, with little trinkets from other people if they cared to give.

It was a deluge of plastic princess pink pandemonium.  The little girl became so exhausted just unwrapping gifts that she actually gave up.  No one could walk in the living room.  Where was my friend going to store all of this STUFF?

And, being the financial geek that I am, I couldn’t help but think how much money spent here could have gone to a college fund?!?

I’m not against traditional gifts, especially if you know it’s something the recipient will use or enjoy.  But with layoffs this year and the general economy, wouldn’t it alleviate some stress to NOT give gifts to everyone you know?

My family feels a little smug that we have escaped the gift-giving social conventions and never looked back (so we must be annoying to talk to –sorry about that!).  I get asked, what do we do on Christmas instead of opening gifts?  The short answer is, whatever we want, but we have been known to:

• Play games
• Watch movies
• Talk to each other (radical, I know)
• Cook together

My best friend and I never exchange gifts, and that just proves to me she’s a true friend . . . if I had to stress about buying a gift for her, that would detract from the friendship.  A couple of years ago, she surprised me by being in town on Christmas and called me to see if I wanted to catch up for an hour or two.  We ended up at a Subway, because it was the only thing that was open, and I got to be one of the first people to hear that she and her husband were pregnant . . . if I were worried that I didn’t have a present for her, or too busy opening my OWN presents, I might not have gone!  Instead, I have the hilarious memory of hanging out at a Subway with her (and asking her inappropriate questions about the pregnancy) while it was starting to snow outside . . . and that’s the ONLY thing I remember about that Christmas.

Now that I don’t “do” gifts, that’s how I like my holidays . . . relaxed, fun with plenty of time to spend with the people I enjoy most, INSTEAD of spending all of my time buying things for them.  You’ll be surprised at how little you miss gift giving!

Before Mint, your only options were keeping a self-generated tracking report in excel or using Quicken.  Quicken takes too long, so people end up abandoning it, usually after putting in hours to get it set up.  With Quicken, you download your banking into Quicken and go through each expense, verifying its category. The process takes an hour or so, mainly because you have to go online to look up check payees and verify something was what you think it was.

If you fall behind, it’s really difficult to get back on track and caught up, because then you start dreading doing it knowing how long it’s going to take.  How will you remember in December why we withdrew $100 from an ATM in September?

A lot of people were initially nervous about Mint’s online security.  But in the comments of Get Rich Slowly’s early review of Mint, Founder and CEO Aaron Patzer wrote: “You’re safer on Mint than with online banking. Mint has a read-only connection to your bank; there’s no money transfer in Mint.”

He also pointed out the physical security, proactive account activity alerts, and that Mint uses Yodlee on the back-end. (Yodlee has been in operation for 10 years without a major security breach.)

After you get past the security issue, a lot of Mint’s features might help you avoid what made Quicken fail as a tracking tool, such as:

It’s online. You can log onto Mint whenever and modify transactions, if needed.  Because you can do it on the fly, it’s easier to keep up with it (plus I think Mint does a better job of assigning categories than Quicken ever did).

It’s simple. When you open Mint, the accounts are listed down the left-hand side and the budget is on the right. The budget is a bar graph showing how much you’ve spent in each category for the month and how much was allotted for that category. Simple.

It has alerts.  You can set up alerts for the low balances, bill reminders, credit available, unusual spending, over budget, interest rate changes, trade commission charges, bank fees, large deposits, and large purchases.

I haven’t spoken to anyone who doesn’t like Mint after they try it, so it may just be the thing you need to FINALLY gain clarity around your spending.  Now, go get set up!  www.mint.com

Four years ago, J.D. was buried under $35,000 in debt from various consumer and home-equity loans and despaired of digging out.   So, he started his blog Get Rich Slowly (www.getrichslowly.org) to chronicle his climb out of debt and today the former cardboard-box salesman is debt-free and building wealth through careful budgeting and investing.

His smart, can-do postings are stuffed with helpful resources and contagious enthusiasm about the joys of financial freedom.  Along the way, he developed twelve key beliefs that form the core of the Get Rich Slowly philosophy:

Money is more about mind than it is about math.  When we overspend, we’re making mental mistakes, not math mistakes.  We all understand the math.  Fortunately, we can do things to trick ourselves into making the right choices, and eventually those choices will become second nature.

Goals are important. Without financial goals, you have no direction, which makes it easy to spend money on things you’ll regret later.  But if you know that you’re saving for a house, for your daughter’s college education, or for a new car, your goal will keep you focused.

Spend less than you earn.  Track every penny you spend.  Avoid debt.  Avoid debt.  Avoid debt.  Easier said than done, I know, but the fundamental rule of personal finance is this: in order to get out of debt and build wealth, you must spend less than you earn.  There’s no way around it.

Pay yourself first.  Before you pay your bills, before you buy groceries, before you do anything else, set aside some percentage of your income to save.  Start small if you have to — even 1% is good — and increase your savings as you’re able.  Aim to reach 20%.

Small amounts matter.  Don’t be frustrated if you’re only saving $25 per month.  Though the going seemed slow at first, these small moves help develop good habits.  And don’t underestimate the power of just one small change. When J.D. cut his cable bill from $65/month to $15/month, that extra $50 made a huge difference for him.

Large amounts matter, too.  It’s good to clip coupons to save money on groceries, but it’s even better to shop around for the best deal on a mortgage.  Everyday frugality can save you a little money consistently, but by making smart choices on big ticket items, you can save thousands of dollars in one blow.

Do what works for you.  Each person is different.  What works for one person may not work for another.  There’s no one right way to save or to invest or to pay off debt or to buy a house.  Don’t believe anyone who says there is. Be willing to experiment until you find methods that are suited to your life.

Slow and steady wins the race.  The most successful people are those who work longest and hardest at something they love to do.  Find ways to make frugality fun.  Recognize that you’re in this for the long haul. You’re making a lifestyle change, not looking for a quick fix.

The perfect is the enemy of the good.  Too many people are reluctant to start getting their finances in order because they don’t know what the best first step is.  Don’t worry about getting things exactly right. Choose a good option and do something. Optimize later.

Failure is okay.  It’s okay to make mistakes.  Even billionaires like Warren Buffett make mistakes.  We learn from failure. Don’t let a single mistake drag you down.  It’s better to have tried and failed than to never have tried at all. Use failure to learn how to do better next time.

It’s more important to be happy than it is to be rich.  Don’t become obsessed with money and wealth. Remember Scrooge!  Money gives you more options, but happiness makes life worth living.  I believe that if we’re able to stay happy and in control of our lives, money actually becomes easier to manage.

Do it now.  It’s easy to put things off.  But the sooner you start moving toward your goals, the easier they are too reach.

I like perusing J.D.’s blog every day, so that I can pick up tips and tricks and stay focused on my own financial progress.  Check it out!

The good news is, once you become aware of these errant thoughts, it’s usually pretty easy to pick up on “wrong thinking” in someone else.  However, you might still need to draft into service your own special thought police to monitor your thinking mistakes.  Don’t worry, I find that your spouse or partner will be more than happy to enlist after you spend a week pointing out all of his or her thinking errors!

Here’s the top ten:

All or Nothing.  All or nothing thinking typically uses words like “always” “never” “every” and it only allows room for two alternatives—when we know in reality, there are hundreds of shades of gray.  Activist Eldridge Cleaver illustrated this perfectly when he said, “You are either part of the problem or part of the solution.” Dramatic as that sounds, there are MANY other options.  I see a lot of all or nothing thinking when people start to discuss saving their money—some people tend to think they need to save gobs of money or it isn’t worth it.  Of course, they reality is that even if you can only save a small amount per month, it’s the HABIT that matters, not the number.

Overgeneralization.  Overgeneralization makes assumptions based on inductive reasoning, which means if something happens one time, you assume it would happen all of the time.  An example of this might be if one investment or mutual fund did not perform particularly well, a person might assume that ALL funds in that fund family are bad, or even all stock market investments are bad.

Mental Filtering.  Mental filtering relies on the “misleading vividness” of an example not sufficient to support a premise.  “My friend went and saw a financial planner at XYZ company and s/he totally messed up my friends finances, so I’ll never go to XYZ company for advice.”  It probably feels like those two things are related, but the fact is that there are many good and bad planners at ALL financial services firm.

Disqualification.  Disqualification makes it impossible for someone else to offer a premise because you create a situation that “disqualifies” their assumptions.  You might tell a family member, “You just don’t understand the stock market, so you can’t relate to what I am saying,” or “You’re a man, so you can never imagine how difficult childbirth is.” Disqualification usually happens when a person is being challenged for a statement they made and they have no logical evidence to defend it.

Mind Reading / Fortune Telling.  Mind reading and fortune telling are two ways to jump to conclusions.  Mind reading happens a lot when you assign thoughts and intentions to someone before you have any evidence and then act accordingly.  This comes into play when you assume that your husband’s quick glance over and his comment, “You look nice,” means that you actually look like a fat slob.  Fortune telling predicts what is going to happen once you have assumed to know a person’s intentions—in the case of the compliment, you decide that your husband is going to act like a jerk all night based on his “insult,” and freeze him out.

Magnification / Minimization.  Mag-Min usually kicks in when you get a strong feeling about someone and if it’s a BAD feeling, you magnify their bad characteristics and minimize the good.  Everything they do is evidence toward your opinion of them.  It’s also used when catastrophizing a situation and either imagining the worst possible outcome, or being psychotically optimistic. 

Emotional Reasoning.  When you take two unrelated statements and put them together, it’s usually emotional reasoning.  “I feel stressed, so I need to go buy myself something to feel better.”  People have to do a lot of things in spite how they are feeling at any given moment, so if you find yourself using emotional reasoning, you need to look deeper at your premise.

Should/Must.  The statements “I ‘should’ save more” or “I ‘must’ get a handle on my spending” causes one to create a world where the only option is to rigidly adhere to the “rules” at all times, or alternately not enter the world at all.  The person optimistically feels like they are on the right track by expressing the “must,” but don’t ever actually get to the action because they are waiting for the conditions to start doing things perfectly.  It’s called MUSTurbation.

Labeling.  People like to explain behavior and events by naming them in absolute terms, and the language is usually colorful and emotionally loaded.  My best example of this is my mother’s road rage; when someone does something perceived to be “wrong” in my mother’s eyes, they are an idiot (actually, they are something a lot worse, but this is a G-rated article).  Never mind that they might be having a coronary, or just narrowly avoided a wreck . . . if they make a mistake in front of my mother, that person is officially an idiot (please don’t tell my mother about this article, or I might be the next idiot).  Another “loaded” comment I hear from time to time is, “Anyone who is in debt is just irresponsible,” which isn’t true of most of the people I meet.   Then someone else would say, “Anyone who says that ‘people in debt are just irresponsible’ is a jerk.” My mother would call them all idiots too, thus perpetuating the judging spiral.

Personalization.  When people attribute their (or someone else’s) influence or control as the cause of certain events that aren’t actually within their control, that’s personalization.   The statement “My child is spoiled rotten; I must be a bad mother” doesn’t try to pinpoint the real issue so that she could take decisive action. Personalization leads to guilt, shame, and feelings of inadequacy. On the flip side of personalization is blame. Some people blame other people or their circumstances for their problems, and they overlook ways that they might be contributing to the problem---“The reason our kid is spoiled rotten is because YOU buy him anything he wants”---instead of investigating their own behavior and beliefs that may have contributed to the situation.

There are countless examples I could use relevant to people’s money situations.  You have probably seen yourself in one or two of these thinking dysfunctions, which is half the battle.  Once you have self-awareness about what you’re saying and thinking, then you can start to reframe things.  The act of reframing will almost certainly free your mind to explore new perspectives and ideas—which will likewise improve your relationship with your money.