How do you stash your cash?

Check out this cool article in Forbes :

Bitter Money and Christmas Clubs
by James Surowiecki, Forbes.com, 02.14.06

To a modern economist, the farmers of the Luo tribe of Kenya have a very peculiar relationship to money. Instead of thinking of one dollar as equivalent to the next, the Luo draw rigorous distinctions between types of money, labeling some money "bitter," which means that it can be used only in certain ways.

According to anthropologist Parker Shipton, if a Luo sells his land and then uses the proceeds to buy cattle, for instance, the tribe assumes that the cattle will die. Not surprisingly, the Luo tend not to use the proceeds of land sales to buy cattle. And when they do need to use "bitter money," the Luo purify the cash in a formal ritual.

At first glance, the idea of "bitter money" looks like a legacy of a traditional society--a relic that has nothing to do with the way consumers and investors handle money in a modern economy. One of the fundamental assumptions of traditional economics, after all, is that all money is created equal. Whether won in a lottery, earned in a paycheck or accrued in a 401(k) account, a dollar is supposed to be a dollar.

And yet the truth is that much of the time people are a lot closer to the Luo than to the rational planners described in economics textbooks. We may not use labels like "bitter" (except when paying our bills, perhaps), but most of us treat different kinds of money very differently. In the words of the behavioral economist Richard Thaler, we engage in "mental accounting," putting our money in different accounts based on how we earned it, how easily we can access it, how long we've had it and so on. And that process of mental accounting ends up having a profound effect on the way we spend and invest. [...]

The basic thesis of the article is that we tend as individuals to look at our money as having a different value depending on how we gained it or where it comes from.

To me, this underlines the "failure" of economic theory, which treats all cash as "equal". At a solo-level, that of the individual, this has a huge impact.

I'm living this myself, in that money that comes from one of my "C" (cashflow) streams goes into my ING.com savings account (my "life savings"). My income stream from my marketing business ("B" or business) goes for personal expenses (clothes, treats, trips). Finally, income from my coaching ("A" or active) stream goes to pay my business bills. This is despite holding a credit card balance, which I could pay off fast if I emptied my ING account - however the life savings money is earmarked for something else, namely cash for a rainy month or year.

Yes, I end up paying more in interest on the credit card than the interest I gain on the savings account. But that's beside the point. Really. (I can hear the financial planner going "tsk, tsk")

It is somewhat irrational, but totally natural at the solo level.

This mental stashing and valuing of money comes up all the time when I talk to prospects.

When a client approaches me and we end up in a needs discussion, sooner or later I reach the point where they say "This is great, Davender, however I don't have the money."

In the past, this used to freak me out (my mental thought went like "hey - did you expect my services to be free?").

Now I realize the psychology that's going on. The success of the conversation now rests on how well I understand three things about the prospect:
- the precise need or want they seek to satisfy (or the problem to be solved)
- how they define a successful resolution of this issue, and
- how willing they are to commit to that success.

When I am able to show the propsect that I truly understand those three items, it always amazes me how the money issue simply disappears.

They've had the money all along. It was just a process of finding out which mental stash they had to open to make the investment.

The key, as a solo, is finding out what envelope your prospect is willing to open, in order to commit to the change they really want to make.

The concept described by the Forbes article reinforces my description of money as simply being a measure of the willingness of someone to invest in the transformation they really want to make. Your prospect is not commenting on your prices (too high or too low), what they are really doing figuring out whether they want to commit their "clean" money to what they say they want.

To sum up, money is commitment.

How much are you willing to commit to create the future you really want?

(No wonder I basically flunked economics in college. The pretty graphs and theories just didn't make sense in my real world!)