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Beat the Recession With This Ancient Secret

By John Rosevear - Updated Apr 5, 2017 at 7:08PM

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A timeless approach to a very current problem.

Have you been living large in recent years? Maybe a little too large?

If so, don't beat yourself up too badly. You have lots and lots of company. You weren't the only one buying those giant houses being cranked out by Toll Brothers (NYSE:TOL), or buying lavish baubles from Tiffany (NYSE:TIF), or riding a new high-end Harley-Davidson (NYSE:HOG) while making "low monthly payments."

Pick up any newspaper right now, and there's a good chance you'll find a story about the challenges your fellow consumers are suffering right now.

Even if your lifestyle hasn't seemed so ostentatiously opulent, family expenses might be stressing you out right now. Maybe you splurged without thinking about it a few too many times.

Maybe you tapped your home equity or carried a credit card balance to make things a little easier for your family, and you're now facing some hefty bills.

Or maybe you were doing fine, but that bonus you were counting on was eliminated, or your spouse got laid off, or you're just looking to batten down the hatches and beef up your emergency fund.

Whatever your situation, odds are you're facing a grim fact: You've got to cut back. And cutting back is hard.

Why your brain fights your budget
There are all sorts of reasons why it's hard to curtail spending. Some are obvious, of course. But many aren't -- and many stem from ways in which our brains are wired to look at the financial world.

As researchers in behavioral finance -- the study of how and why people make decisions about money -- will tell you, a handful of basic tendencies deep in our brains drive a lot of what seems like irrational financial behavior.

For instance: Research has established that people feel as much as twice the pain after the loss of a given amount of money as they feel pleasure from gaining the same amount. As a result, losses have a much bigger influence on people's preferences and decisions than equivalent gains. This is why people hold stocks that have gone way down, hoping that they'll "come back" even if the company's fundamentals have deteriorated sharply. There are folks out there who bought NutriSystem (NASDAQ:NTRI) at $60 or Crocs (NASDAQ:CROX) at $40 and are still holding on, despite seeing 80%-95% losses. If you ask them why, most will say something like, "I can't bear to sell." They don't want to realize -- in both senses of that term -- their loss.

Likewise, it's hard to realize -- that word again -- major cuts in one's personal spending until there's a catastrophe that makes the situation desperate -- a layoff or a foreclosure threat, for instance. As long as we view these cuts as losses, our subconscious brains will fight them -- and trying to beat one's lizard-brain back with willpower and grim determination doesn't work for most in the long run, as millions of dieters will tell you.

To make lasting changes in our spending patterns, we'll need to go another route.

The ancient secret and how it can help now
I've said before that the "secret key to wealth" is to spend less than you earn. This works for giant corporations -- how do you think that Berkshire Hathaway (NYSE:BRK-A) (NYSE:BRK-B) came to be sitting on an enormous cash hoard and in a position to pounce on the best opportunities when the economic crisis hit? -- as well as it works for individuals.

And it works for individuals making a little money as well as it works for those making a whole lot of money. Putting it into action isn't hard -- I outlined a plan here, but it's pretty simple: Learn where your money is really going, come up with a realistic plan for spending that leaves you with something extra every month, and use that extra to pay down revolving debt -- and once you're debt-free, start saving it.

Those who succeed with the "secret key" do so because they look at it as a fun project with a worthwhile goal -- not an awful austerity plan requiring misery and brutal self-discipline. They succeed because of their mind-set -- and it's that mind-set that is the key to beating the recession.

The big takeaway
If you approach cuts in your spending as something awful that's being forced on you by the economy, you'll struggle. If you approach it as something deeper, as a choice to build real wealth rather than just the appearance of wealth, your chances of success go up exponentially.

We here at the Fool have been saying for weeks that in crisis, there is opportunity. That applies to your own financial situation just as it applies to beaten-up stocks. If you need to make changes now, look at that need as an opportunity to start yourself on a road to wealth. You may find that you start sleeping better than you have in years.

Read more on smart spending strategies for challenging times:

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Fool contributor John Rosevear has no position in the companies mentioned. Berkshire Hathaway is a Motley Fool Inside Value selection and a Motley Fool Stock Advisor pick. The Fool owns shares of Berkshire Hathaway. Try any of our Foolish newsletters free for 30 days. The Motley Fool has a disclosure policy.

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Stocks Mentioned

Berkshire Hathaway Inc. Stock Quote
Berkshire Hathaway Inc.
$439,528.92 (-0.59%) $-2,620.08
Berkshire Hathaway Inc. Stock Quote
Berkshire Hathaway Inc.
$292.07 (-0.29%) $0.84
Tiffany & Co. Stock Quote
Tiffany & Co.
Toll Brothers, Inc. Stock Quote
Toll Brothers, Inc.
$48.05 (-1.21%) $0.59
Nutrisystem, Inc. Stock Quote
Nutrisystem, Inc.
Harley-Davidson, Inc. Stock Quote
Harley-Davidson, Inc.
$37.27 (0.43%) $0.16
Crocs, Inc. Stock Quote
Crocs, Inc.
$73.61 (6.56%) $4.53

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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