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The Psychology of Personal Finance: How to Have a Healthy Relationship with a Limited Budget

Finance

Photo Credit: www.thebalance.com

The human mind and money have an overly complex relationship.

A cause of shame, anxiety, depression, and oftentimes thought as a source of happiness, people have long associated money with emotions. And this is why people seldom handle their personal finances logically.


Despite it being in their best interest, people don't save money. People spend too much out of excitement or too little out of guilt. This is especially true for people with a limited budget. Studies show that people with constrained personal finances invest their emotions heavily with money.

So with that in mind, here are the key concepts you have to understand in order to have a healthy relationship with money:

Understand your finances
Having a healthy relationship with anything entails having a deep understanding about it. A good grip on the limits and potentials of your personal finances can help manage your expectations and rationalize how you see money. A provocative think piece published on the New York Times highlights how people feel happier with cash on hand rather than investing that cash, even if the latter makes much more long-term sense.

In many contexts, talking about finances is still taboo. At work, people don't talk about remuneration. In gatherings, discussions around debt rarely come up. And even at home, any dialog on managing money almost always end up emotionally charged. To attain financial literacy, you have to pierce this veil and have a grounded approach on managing debt, expenses, and savings.

Understand the game

Contrary to what you might think, consumers aren't that savvy. Marketers around the world have always tapped into the fact that emotions are the greatest drivers of consumption. People buy things when it has an emotional presence or relevance.

Knowing the pain points of being a consumer and how marketing utilizes your emotions to target your wallet are the best ways to get ahead. Tricks like making the medium sized drink almost as expensive as the large one to point you in that direction is an old one that remains effective to this day.

An online survey commissioned by the housing charity Shelter found that families who rent suffer from anxiety. Especially in highly coveted markets, you need to be aware of certain unsaid rules that can make survival difficult for the uninitiated. For instance, in one of Yoreevo's guides to NYC real estate, the site reveals how co-op square footage in the city is almost always overstated. This makes it very hard to compare units based on stated size alone.

These are just some of the reasons why the vicious cycle of anxiety, depression, and guilt in spending is also fueled by consumerism. But you can do something about it. Having a healthy relationship with spending means discerning your needs and wants and making sound financial decisions from that discernment.

Furthermore, unhealthy notions of your financial capacity or situation may even lead to a decreased capacity to make money. Some CEOs in this interview think they won't get funding if VCs uncover that they have mood disorders or are stressed psychologically.

Understand yourself
The most relevant emotions related to money are guilt, shame, fear, and envy. Being more conscious of when and how these feelings come up when you spend, save or invest will help you to be more mindful with money.

Mint recommends you forgive yourself when you miss a credit card bill or overspend. Beating yourself up over financial mistakes can end with you sinking even deeper into the cycle of guilt and shame.

This should go without saying: never make major financial decisions when you're emotional or in a vulnerable state. But it's easier said than done. Creating powerful habits or rituals like taking a jog or eating a meal first before deciding can aid in disengaging from emotional decision making.

A deep understanding of yourself is key in having a level-headed approach to managing or even growing your finances. Personal finance is really one of those fields where emotion fails and logic thrives.

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Business

How These Co-Founders Exited for $100M Without Any VC Funding

When their frustration with current fabric care options had fashionistas Gwen Whiting and Lindsey Boyd worn out, the two entrepreneurs made it their mission to start a new niche and launch their very own at-home, eco-friendly laundry detergent line.


With a mission of turning an everyday domestic chore into a luxurious experience, these entrepreneurs not only conjured up an idea for an unconventional product line, but they successfully built their business while turning down the offer of every venture capitalist to knock on their door.

Gwen Whiting and Lindsey Boyd co-founded The Laundress in 2004 after dealing with their own personal frustrations with limited clothing care options. Whiting, having worked at Ralph Lauren in design and Boyd having worked at Chanel in corporate sales, soon accumulated a stylish wardrobe of designer pieces as perks of their jobs in the fashion industry. However, the duo quickly realized that the maintenance required for upkeeping these items were far from adequate. Laundry products on the market at the time did not cater to delicate textures and fabrics such as tweed blazers, cable-knit cashmere and silk blouses. Taking their clothing to the dry cleaners also proved hopeless as their clothing would often come back with stains or even be ruined despite the overload of chemicals used to clean them. With nowhere left to turn, Whiting and Boyd were determined to create their own laundry solutions designed for specific fabrics.

Not only did the entrepreneurs develop the business expertise needed to finally begin their own company, but they also shared the same educational background that equipped them to pursue their unconventional business venture. Whiting and Boyd met in college as students at Cornell University majoring in Fiber Science, Textile, and Apparel Management and Design. The pair was introduced by a mutual friend and instantly knew they would become business partners. "It was inevitable that we were going to have a business together. We are both extremely entrepreneurial by nature, and it was one of the connections that we instantly shared" said Whiting. After focusing on pursuing their own individual careers for a while, Whiting and Boyd quickly discovered a void in the fabric care marketplace when their clients would continuously inquire about the upkeep of their designer pieces.

The entrepreneurial duo was committed to researching and developing their own eco-friendly laundry products and soon launched their own at-home solutions for specific fabrics like silk, wool and denim, which ultimately eliminated the need for dry cleaning for those particular items. Despite their products filling a necessary void in the market, it quickly became challenging for the founders to persuade people to shift their focus away from traditional laundry care options in order to try their products. However, Whiting and Boyd believed in their mission for the Laundress and bootstrapped from the very beginning, refusing all venture capital funding with the goal of growing organically. In order to be successful, they had to get creative in fundraising. "In the very early days, we funded business development by hosting a 'for profit' party at a New York City restaurant and inviting friends, family, co-workers, etc. to support our new venture. That was pre-Kickstarter and an inventive way to make everyone feel a big part of our decision to be entrepreneurs," said Whiting.

While turning down VC funding as new entrepreneurs seems unimaginable, it is as equally unfathomable to consider how these women gained national traction without social media, all the while hustling to fund their business. For Whiting and Boyd, who started their business before social media existed, it was imperative that they promote their brand by leveraging the resources they had available to them. The CEO's were one of the first to sell consumer goods, let alone detergent, online with the goal of reaching a national audience. Despite having limited retail distribution, they leveraged the power of their website and became featured in publications on both a national and international scale. "Before social media platforms existed, we nurtured our own Laundress community with engaging content on our website, step-by-step tutorials on our blog, and one-on-one communication through our Ask The Laundress email," Whiting explained. With technology evolving and the birth of social media platforms, the founders expanded the conversation about their products from website, blog and email to platforms like Facebook and Instagram.

As female entrepreneurs, Whiting and Boyd faced additional hardships as misconceptions about their mission ultimately proved to disappoint more than it encouraged them. As women selling luxury detergent, there existed a preconceived notion that funding would be more easily attainable based upon their gender.

"Everyone thought it was easy to access capital as female entrepreneurs, but it was actually very challenging. We had this unique and disruptive idea within a very traditional space and it was hard to get people on board at first. It's been a continuous journey to educate people in fabric care and home cleaning," said Boyd.

Reflecting on their journey as entrepreneurs, the founders express no regrets about refusing to accept venture capital throughout the process. "Over the years, we could never quantify the cost benefit of VC funding so we continued to grow organically and remain independent by funding ourselves with credit cards and loans," explained Boyd. While their decision proved fruitful, the duo expressed their consideration towards other entrepreneurs who may not be able to fully fund their business as they grow. Because funding is a situational experience, entrepreneurs must ultimately do what is best for their business as no one path is optimal for every entrepreneur or every business.

With an increasing amount of women entering entrepreneurship with their own unique set of products or services, the CEO's offer up one piece of advice on how female entrepreneurs can be successful in their endeavors.

Whiting: "Our advice to anyone looking to build their brands: Have a strong business plan and vision. If you are not disciplined to write a business plan first then you are not disciplined to start a business. Get your ideas down so you ask yourself the right questions; it helps you get organized and plan next steps."

Boyd: "Create quality products without sacrificing the ingredients—no cutting corners. What you create should be the most important piece. Stay passionate, and trust your instincts and follow your gut—something woman are awesome at!"