Is Optimism Bad for Personal Finance?

by Sandy L on November 16, 2010

Frugal Dad wrote a post the other day about doing Financial Fire Drills. Essentially, he said that periodically you should pretend like you’ve had an emergency and see how long you’d be able to last without income. He actually brings up some excellent points about the added costs of unemployment such as higher insurance premiums. In my case, I’d need a car and a phone too.

As I read the article, I realized that I already performed financial fire drills on a regular basis. You see my husband and I work for the same company and due to the nature of our business, layoffs are quite common. About every 18 months or so, the rumor mill would start churning and a layoff would soon follow.  This would prompt a mini fire drill.  I would also clamp down on spending for the 3 or 4 months before the event actually happened.  The last go around however, I was having a baby and our kitchen was completely gutted and so were 2 rooms in my mom’s house. Layoffs actually happened while I was still in the hospital.  This time around, I wasn’t quite as prepared.

Both of our teams got hit very very hard, but I’m thankful everyday that we didn’t have to go through the transition of uprooting our family and finding another place to live and work. Plus, we both liked our jobs.  This, however, scared the crap out of me and I went into debt paying overdrive after that.  Yeah, I paid extra on my mortgage, but I was spending way more money on remodeling than I was on paying down debt. I went on a classic spending diet. I budgeted more rigorously, I started reading Frugal Dad and a few other finance sites, I sold over $2000 of  stuff on craig’s list and funneled all the extra funds to our friends at Wells Fargo. We made a huge dent in our debt pile as a result. We made more progress in a year than we had in the last 5.

Is Pessimism good for Finances?

If I were an optimist, I’d say that if I were laid off, I’d get severance pay plus unemployment benefits. I would tell myself that this is plenty of time to find another job and not have to tap into our savings. I’d also say that the likelihood of us both being laid off is low.

But I’m a pessimist. I always hope for the best, but plan for the worst.  I don’t ever consider future potential earnings in my plans. One of us could get sick or hit by a bus or handicapped and that plan goes out the window. I have loads and loads of life and disability insurance because both of our dads died young and the dark side of my brain says we have a  50% chance of living beyond our 50’s.

Although I’m generally a happy person, I’m always trying to plan for the worst case scenario.   Perhaps it’s my life experience that drives my behavior. Maybe it’s because I’ve experienced lean times already that I want to ensure that I don’t go back there ever again.  What do you think, is it perspective that drives people’s financial actions, or is it optimism/pessimism? Since I know of other people who are responsible with money that didn’t come from humble upbringings, I think that attitude has to be a playing a role somewhere.  I’m not 100% confident in this theory, so I would love your thoughts.

So, I’d like to take a quick poll. Are you a financial optimist or pessimist? Do you have more confidence in your future self than I do?  Do you think being a little pessimistic makes it easier to contribute to the 401K or emergency fund?

{ 9 comments… read them below or add one }

Barb Friedberg November 16, 2010 at 7:48 AM

I’m not going to offer much controversy, because I think in the same manner that you do. Hope for the best and plan for the worst. I am a glass half full woman. But, mentally, I always have a plan B. It gives me a serenity to feel like I can handle adversity when it arrives.

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Nicole November 16, 2010 at 8:12 AM

I like the saying, “God bless the pessimists for they have provided the back-up plans.”

I dunno though, with us, if we weren’t optimistic about someday finding financial independence, there’d be no point in trying to save extra. That little carrot of moving to Mountain View with only one job in hand makes it worthwhile.

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Everyday Tips November 16, 2010 at 8:20 AM

I pretty much just always plan to be able to survive on one income, which we have done on and off for many years by choice. Because of all the time we have spend on one income, we have our spending pretty well controlled and we don’t buy many discretionary items.

I think it is always best to plan for the worst in terms of spending, but not to live like the worst is happening mentally if that makes any sense. I have seen people focus so much on fear that it really spilled over into the enjoyment of daily life.

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Crystal November 16, 2010 at 12:03 PM

I’m with everyone else it seems. I live as an optimist but have backup plans like a pessimist. Just last night, my husband and I figured out how we would budget and save if I took a job that paid half what I make now ($17,500 a year instead of $35,000 a year) – just in case I do decide to take a part-time job and blog the rest of the week or take a full time job that pays really badly…

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Squirrelers November 16, 2010 at 2:00 PM

This is an interesting topic.

On the one hand, I think it’s important to have a can-do attitude toward things, including money. By that, I mean settting goals and thinking positively that you can reach them. If others can do it, why can’t I – is what I think sometimes.

On the other hand, it’s important to plan for different scenarios. In my view, we have to be prepared for the worst. So, along those lines, I try to spend as though I can’t afford things, but work with aspirations to make money. It’s balance, no doubt. I guess I err on the side of striving for the best, but not counting on it at all, and thus preparing for the worst.

Maybe it’s also a matter of looking at it in terms of ambition and risk vs. security and risk aversion. I’m a mix, but strongly slanted toward security and risk aversion with my own finances.

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Sandy L November 16, 2010 at 6:50 PM

Interesting points made by all.

I think goal setting isn’t necessarily a sign of optimism or pessimism. It’s more of a question of whether you believe in fate or not. Are you going to wait for that magical opportunity or person to fall in your lap or are you going to take steps to get to where you want to go? I personally feel more at ease thinking I have control over my future, hence the planning and goal setting.

I’ve worked on some very challenging projects over the years and things never go exactly as planned, so I always have a plan B, plan C and sometimes a plan D. If people have back up plans, does that mean they are planning to fail or planning to succeed? From personal experience, it was the ability to change course mid-project that led to success, not failure. I think it’s important not to get consumed by the what if scenerios, but it’s also an important part of moving forward in life and not getting stuck in a rut.

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Money Reasons November 16, 2010 at 10:15 PM

I hope for the best, but prepare for the worst!

I think it’s better to be optimistic, elsewise you get down on finances and possible start to just spend the money anyway, since you’re don’t believe it’s possible to get ahead…

I understand where frugaldad is coming from and do a similar exercise (just not as far as he goes).

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Molly On Money November 17, 2010 at 10:07 PM

I’m very much an optimist but when we would spiral down into debt I was a nervous stressed out optimist!
Optimism comes much easier now that I’m prepared for an emergency. I don’t have that nagging worried thought in the back of my head constantly wondering if we are going to lose our house or not.
I like your thought on ‘thinking the best but preparing for the worst’.

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Sandy L November 18, 2010 at 5:10 AM

MR – you’re right. I forget the opposite pessimist. The head in the sand person who just ignores spending because it seems like paying things off is hopeless. I suppose you really do have to have hope that this is a better life out there if you work at it.

MoM – I have a very low debt tolerance. Debt feels like prison to me. I love insurance of all kinds because that safety net of knowing I’ll at least not have to worry about the money aspect of a traumatic event like death, illness, or a robbery. I probably pay for a little more than I need, but it makes me feel safer.

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