For Success in Finance, Discipline Beats Brains Every Time

March 3, 2009 by  
Filed under Fools of Finance

Not long ago, I wrote a piece on “life’s little money mysteries” which included this well known rhetorical question:  If you’re so smart, why aren’t you rich?

Mr. ToughMoneyLove thinks the number one reason why smart people – most people actually – fail at money and personal finance is a lack of discipline.

I was reminded of this today as I arrived in California on a business trip.  This is the state where financial discipline has all but disappeared from government and from much of the populace.  A severe price is now being paid by everyone.

Also today I read about Alicia Munnell, a professor and director of the Center for Retirement Research at Boston College.  Ms. Munnell is a Harvard trained economist, a former Assistant U.S. Treasury Secretary, a former member of the President’s Council of Economic Advisors, and a leading expert in 401(k) plans.  So what did the eminently brilliant Ms. Munnell recently do?  She confessed to a reporter for Money Magazine that she had taken money out of her 401(k) plan to help pay for her son’s wedding!  Of course, she had to pay taxes on the withdrawal along with a 10% early withdrawal penalty.

That was really dumb.   I don’t care how much she loves her son or that she knew exactly what she was doing – it was a dumb thing to do.  There are a couple of legitimate reasons to take an early distribution from a 401(k) plan.  Paying for a wedding is not one of them.  I don’t think it’s even debatable.

This is not a case where she could justify a bad decision by saying that she could afford it.  If she could afford it, she wouldn’t have needed to invade her retirement funds.  This is not an instance where you can even ask “what was she thinking?”  Lack of intelligence or ignorance are not even close to being factors here.  This was pure undisciplined behavior.  Ms. Munnell could teach a class called “Learn from my Stupid Retirement Planning Decisions.”   In my mind, this action made Ms. Munnell a poster-child for the adage: “Those who can, do. Those who can’t, teach.”

Yes, I am judging Ms. Munnell’s money behavior.  (And there is nothing wrong with that.)  I am doing it to make the point that Ms. Munnell is like so many others (and that includes me).  We let our lack of financial discipline trump our intelligence.  Undersaving, overspending, failing to plan – they all signify undisciplined behavior.  Our intelligence never has the chance to do the right thing.

One of the risks in publicizing bad money behavior by people who should know better is that it tends to make the rest of us feel better about our own poor decisions.  When we feel better about bad decisions, we have a tendency to repeat them.  I prefer to think that some people are placed on this earth to serve as a warning to others.  In the case of really smart people like Alicia Munnell, I say “thanks” for the warning and for teaching us that being financially smart won’t by itself make you rich.

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7 Responses to “For Success in Finance, Discipline Beats Brains Every Time”
  1. It shocks me how often the media gives sympathetic treatment to people who make stupid money moves. Sure, we all do some bonehead things from time-to-time. However, the last thing we need is for some news network to make dumb decisions sound like they aren’t so bad.

  2. Dangerman says:

    “One of the risks in publicizing bad money behavior by people who should know better is that it tends to make the rest of us feel better about our own poor decisions.”

    I think you’ve hit on the secret behind the popularity of The Dave Ramsey show.

  3. Snowy Heron says:

    I think that learning from others’ mistakes is much more efficient than learning from our own mistakes, so I’m glad to read this and get Mr. ToughMoney Love’s opinion on it. Not that I would do it anyway.

    A few years ago, Stan Hinden who wrote personal finance columns for the Washington Post for years and then after he retired he would write the occasional column on retirement finances, confessed in a column that when he retired from the Post he took a single life pension, rather than a pension that would continue to pay his wife if he predeceased her. I was shocked because every article on the subject that I had ever read said you should take a joint pension payment, unless your spouse is independently wealthy (which his was not). Just goes to show that you can’t always take the advice of people writing in the newspapers.

  4. money market trader says:

    snowy heron:

    ” Just goes to show that you can’t always take the advice of people writing in the newspapers.”

    yup. and i think that applies to all subjects, not only personal finance. …yet another example of why people go to non traditional media sources for information and opinion a la Mr TML….

    i work in the markets and therefore have cnbc on the wall all day long. i guarantee that if you listen to the advice of the talking head experts, you WILL lose money in your portfolio.

  5. K-money says:

    Most of money mistakes were related to allowing emotions clouding my judgement, especially fear. But raiding a 401k to pay for a wedding, and someone else’s wedding, at that?! That has to rank up there with payday loans. It is easy to see how one could become smug and complacent when such people do stupid things.

  6. Jim says:

    On the other hand, taken in the context of Ms. Munnell’s total retirement resources, this withdrawal may have an insignificant impact on her future.

    Nevertheless, I agree that this was not the cheapest money she could have used, and not a good example to others.

  7. connie says:

    I am learning everyday if you make a poor
    financial choice it sometimes takes years
    to undo.I have recently learned to live
    without cable,take out and purchasing
    books and cd’s.The savings are enormous
    but the discipline priceless

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