Managing our expectations-how we got into this mess and how we will get out

I was recently discussing with a friend what caused so many people to get themselves into financial trouble and why many people have trouble coming to grips with their situation and how to dig out of it. One of the reasons, I believe, is that too many people people created too-high expectations of what standard of living they should enjoy, while too few sat down to run the numbers, to see what they could afford.

A major factor, I believe, is our tendency to compare ourselves to those around us. As this recent article in the New York Times shows, our perception of reward and danger is shaped by what we expect of ourselves and the world. http://www.nytimes.com/2012/01/14/your-money/the-importance-of-setting-expectations-whether-high-or-low.html. And a lot of the ups and downs of the national financial psyche can, I think, be explained by our individual and collective inability to manage our expectations.

We tend to measure our social and personal standing in the community by what the people around us are doing, saying or thinking. When everyone was spending money on new cars, new houses, and other trappings of success, that raised the bar for those of us who measured ourselves against others. It did not matter that those people were running up mortgage or credit card debt to spend beyond their means. We had to do as well....

This of course creates a self-fulfilling feedback loop. We spend and buy because others are doing so. More money goes around, and the expanding money flow creates jobs and apparent well-being. But if the spending is fueled by increasing debt, as it was until 2008, the appearance is an illusion that sooner or later has to come to an end.

I believe we are now in the negative flip side of that ever-upwards-spiralling loop of expectations. This started with  the crash of harsh reality, when things start going wrong. Small things at first, but then worry sets in, then fear.  Instead of everyone expecting that the real estate market and the stock market will go up forever, now we fear the worst, and expect that the future will be just as bad as we think the present is, or worse.

Neither our inflated view of the ever better future, or our current expectation of doom is rational. For the past few years since 2008, the smart money has been sitting on the sidelines waiting for fire-sale bargains. That may be ending, but I believe far too few people are ready to invest in people and projects that, viewed outside the lens of expectations, make a lot of sense. We have, in a word, become too fearful for our own good.

The problem was (and still is in my view) that so few people learned to manage their expectations. So few individuals know how to do simple financial planning or care to keep a basic budget, to see what they could afford. Even today, so few people I see and so few business owners I counsel can really tell me what they have to spend to survive. We suffer from a studied blindness to simple personal finance. That has gotten many into trouble and until that changes, the root problem remains.

The key to managing expectations is found in the article I refer to above. Hope for the best, but plan for the worst. Maintain a positive outlook, but one tempered by and grounded in objective facts. Make decisions based on an objective non-emotional assessment of the present, but with a positive outlook. Be grounded in the real numbers that a budget, or cash flow projection shows.  Actively market and sell to new customers. Look for new opportunities. Remember that the past is not prologue to the future and every day is a new day. Above all, remember that things go in cycles.

We help people and businesses every day to get relief from debt, and to take back control of their business and personal financial lives. For more information, please visit our website at http://www.nv-njlaw.com