The seven challenges of personal finance – why managing money is so hard

If you’ve ever made countless resolutions to “finally” bring your “finances” in “order”, only to be derailed again due to one challenge or other, to be flummoxed at the exact same spots as before – you’re not alone. There are as many solutions to the problem of solving personal finance for good as I can count into the four and five figures. Yet the problem continues to be intractable for many, compounded by the frustration of having followed yet another new app or mantra, only to fail again.

The reason managing money effectively is so hard for most people is that the task is actually a knotty mess of seven separate and some almost intractable challenges. Applying techniques or practices pertaining to just one discipline or approach can be tempting, but frequently ineffective.

Why does this understanding matter? Getting to the bottom of this challenge is important not only for the individual, but more importantly for anybody attempting to craft a solution that goes at least farther than most others in helping the individual achieve the life they care most about. Without this clarity, at best we will end up designing poorly-thought out solutions, and at worst, misleading our intended audience of what they can reasonably hope to accomplish with our latest financial gizmo or magic app.

As we delve deeper into these barriers, you’ll quickly see why it’s so hard to design (or find) an all-encompassing solution that gets the job done in a scalable and effective way.

The seven challenges

Challenge #1: Trojan horse problem

Think of any personal finance task you need to finish. Most likely, it’s just sitting on your to-do list looking like an innocent one-line item: “Refinance home loan”, for example. But the problem is that this small task is actually a bundle of a huge number of much bigger tasks.

Because there is no easy and natural way to make that work “visible”, we’re likely to run into challenges almost as soon as we start tackling the task – we simply don’t know where to begin and what to do next. And if you’re trying to get this done in the small slivers of time and attention you have available between your regular tasks, good luck with that!

The solution to this problem is the fancy-sounding term “workflow management” – all that means is to simply flesh out the individual tasks that are bundled into the larger task, and figure out the sequence of which one needs to come first, and which second, etc.

Challenge #2 – The “eyes glaze over” problem

Imagine you’re training to be a doctor. Instead of having your curriculum neatly laid out and split into textbooks, and learning materials and classes, you’re given a random list of articles, books, websites. There is nothing in there to tell you what is important or credible and what’s not. You don’t know how long you have – you’re expected to design your own schedule , figure out the sequence as well as a method to absorb all this knowledge.

And oh, there will be a test sometime (date unknown), when you will be presented with a real, live patient. Your job is to diagnose him or her correctly, and ensure they don’t die on your hands. Feeling any stress?

When you have a vast amount of knowledge to absorb, and no cohesive means to make that task easy or even doable, you are suffering from cognitive overload. There is much discussion and debate in educational circles about how best to manage this in the classroom, and yet little attention is given to this big problem in the task of managing one’s money.

Worse, in the name of disclosure, companies are encouraged and even required to inundate potential customers with reams of information, most of which the hapless user doesn’t have the cognitive equipment to be able to deal with.

Until there is a way to whittle down all this mass of data and information into small, digestible bites of relevant information, we’re going to continue to drown in a sea of information but die from thirst for insight and understanding.

Photo by Anthony Martino

Challenge #3 – The search costs problem

Like the perennial dating quandary, personal finance is also besieged somewhat by the “is there a better option out there for me” problem. In economics this is denoted by the term “search costs”, referring to the time and money you have to spend to figure out what options are “out there”, and how to find the ones that are best suited for you.

This is easier in some areas than others – and is also probably the one single problem that technology has best helped to solve. After all, it takes no more than a couple of clicks to surface a vast number of options for almost any financial product.

However, there are still big areas of opportunity here in the more “opaque” products and markets – you may know the options, but it’s still very expensive and risky to find the ones best suited for you. For example, it’s still extremely difficult to find the “best” or right financial advisors, or estate planning attorneys or CPAs – surfacing them may be easy, but effectively filtering and evaluating them is still pretty hard.

Challenge #4 – The decision support problem


A key aspect of effective money management comes down to making the right decisions – not just in terms of products but also in terms of actions – should I act now or postpone this decision? Should I buy this widget or that? Should I pick this feature or that?

The problem with decision support is that complexity rears its ugly head, and it is simply beyond the technical and even cognitive capacity of most individuals to unravel the criteria, the rules and guidelines. Think of the last time you had to pick a mortgage loan for example. ARM or fixed rate? Points or no-points? How do you compare all the different fees and costs among 25 different options? In the absence of simple and understandable rules, making these decisions becomes overwhelming, with most people just defaulting to whatever is presented by the salesperson as the “best” option (best for whom?) so as to cut off the pain of decision making.

Challenge #5 – Behavioral and cognitive bias problem

Closely following its cousin of decision complexity, comes the group of human biases that are very hard to disentangle from. These behavioral biases are very hard to break, even after you have been shown in your own case how your biases are impacting your actions and choices. For example, most people use a simple rule called the “availability heuristic” in assessing risk. If something can easily be recalled in the mind’s eye, it’s judged to be more likely even if that’s not true. So you judge a shark attack to be much more likely than the possibility of meeting with an accident within a couple of miles from your home – the latter of which is orders of magnitude more likely than the former.

Needless to say, biases like these are heavily used by unscrupulous sales people to peddle needless product coverage. But even leaving them aside, it’s incredibly difficult to de-bias ourselves effectively as we make some hard decisions on our finances.

One of the single best and longest standing solutions to bias is to create emotional and psychological distance – which is effectively what people do when they hire a third party professional to make these decisions for them. While that’s a fairly effective solution, assuming skilled advisors, there’s a question of how many people can actually afford such expert help.

Photo by Daniele Levis Pelusi

Challenge #6 – Objective advice problem

The financial services industry is plagued by the incentive bias problem almost more than any other industry except possibly healthcare, mainly because the dollars at stake are massive, and the difficulty of objectively evaluating products is very high. Regulators’ attempts to solve this problem range from disclosure (but see the cognitive load problem above), to imposing stricter rules on what products and how a professional may sell or recommend to a client or customer.

I see this challenge as being the greatest in the realm of credit products. While there is definitely a lot of disclosure, there is very little objective and user-centric advice available in the credit arena. For example, just because you qualify for $200,000 in student loans for your nursing program does not mean that it’s the best option for your life. That decision would require you to take a good hard look at your earning prospects in the nursing field, and what that means for your debt load over the next 10 or even 20 years. Today there is nobody in the field who is obligated to provide that, or even raise the question.

Challenge #7 – Execution problem

Assuming you’ve overcome all the challenges above, you still have to actually go through and do all the things you need to do to implement your decision or complete the intended action. This is less of a problem in the simpler, more transactional areas such as credit cards, and more likely to flummox you in the more complex transactions such as borrowing and investing.

Regardless, there are still numerous rules and small-print provisions that can and do trip up even the more conscientious of us as we go about doing the things we want to do. The key question here is: how do we make the actions and execution across all areas as painless as, say, applying for a credit card online.

Summing up:

You can easily see why even the “simplest” of financial tasks has the potential to rapidly become a nightmare to complete – leaving denial, neglect and the path of least resistance the most attractive option for many, if not most. I’m as guilty as the next person in this regard, which is why this problem has special poignancy for me too. What makes this especially stinging is this unstated assumption and expectation that if you as a consumer didn’t solve all these problems yourself, then it’s not only your problem, but possibly even a matter of shame.

Photo by Kristine Weilert

Avenues of hope

So is there no opportunity for hope? Are we all doomed to wander in the dark alleys of confusion, too much information, and a biased mental hardware set up as far as our finances go?

Turns out that the answer lies in a combination of technology, behavioral science and better product design. Each of these problems is solvable, if not in its entirety, at least enough to make it no longer a make-or-break issue for the layperson trying to balance their checkbook while ensuring a financially secure future, and all this without getting a Ph.D. in finance either.

  • Here are some interesting pointers that are already proving their worth:In the area of complexity, research is showing that simple rules called heuristics, often beat more complex algorithms and decision rules in effectiveness. For example, a group of small business owners vastly improved their ability to manage working capital when given a simple rule such as “set aside a month’s salary first before paying anything else”, versus being given long and complicated formulas to calculate working capital. Heuristics are also used to great effect in fields as varied as fire-fighting to emergency department prioritizing decisions with stunning effectiveness.
  • In the area of cognitive bias, exposing a user to repeated trials, for example through a game structure, vastly improved their ability to make complex financial decisions by simply creating a practice space with no downside.
  • In the area of workflow management, there are already plenty of well-proven productivity approaches that are rooted in simplicity and psychological attractiveness. These can, with a little ingenuity, easily be adapted to suit tasks in personal finance, vastly improving outcomes and individual satisfaction in completing them. Kanban, which is the Japanese productivity system that originated at Toyota, is one simple example that was commercialized brilliantly by the Trello app in the realm of personal productivity.

There are many more such solutions and examples – the key to note here is that no problem is intractable when approached by a determined and committed effort to tackle it, not perfectly, but just well enough to “break the back” of the problem, so to speak, with simple and elegant approaches that don’t require tremendous effort or investment.

This is the hope that makes me believe that one day everyone of us can tackle that “simple” monster of a task we’ve been dreading, easily and effectively.



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