Broken Window Theory And Why It Matters To Your Financial Well-being

Broken Window Theory And Why It Matters To Your Financial Well-being

Andy Hunt: Researchers studying urban decay wanted to find out why some neighborhoods escape the ravages of the inner city, and others right next door—with the same demographics and economic makeup—would become a hell hole where the cops were scared to go in. They wanted to figure out what made the difference.

The researchers did a test. They took a nice car, like a Jaguar, and parked it in the South Bronx in New York. They retreated back to a duck blind and watched to see what would happen. They left the car parked there for something like four days, and nothing happened. It wasn’t touched. So they went up and broke a little window on the side, and went back to the blind. In something like four hours, the car was turned upside down, torched, and stripped—the whole works.

They did more studies and developed a “Broken Window Theory.” A window gets broken at an apartment building, but no one fixes it. It’s left broken. Then something else gets broken. Maybe it’s an accident, maybe not, but it isn’t fixed either. Graffiti starts to appear. More and more damage accumulates. Very quickly you get an exponential ramp. The whole building decays. Tenants move out. Crime moves in. And you’ve lost the game. It’s all over.

A Conversation with Andy Hunt and Dave Thomas by Bill Venners, Part I, Artima Developers

In their famous book The Pragmatic Programmer, Andy Hunt and Dave Thomas talk about software craftsmanship and the importance of fixing the small problems in your code, the “broken windows” so they don’t grow into large problems. If you are from the software development background, I would highly encourage you to read this book. It’s one of the best programming books I have ever read in my career.

What Are The Broken Windows Of Your Financial Life?

More often than not, you may notice seemingly harmless habits in your financial life and choose to ignore it. You may look at some aspects of your finances and say, “Nah… That’s just a one-off thing. I’ll never do it again.” or “It’s not going to happen to me.” or “It’s not important. I’ll do it some other day.” Such seemingly harmless signs often act as precursors to bigger underlying issues which can crash your best-laid financial plans and sink your financial boat.

Today, I’ll share a few “Broken Windows” that I have come across in my personal life and how it kept me from living a financially peaceful life.

1. Living With Debt

If you consider building wealth as similar to building a house, I would consider becoming debt free as the foundation of your house. Carrying any form of debt, especially consumer debt like auto loans, student loan or credit card balances, can prevent you from building wealth. If you want to build a structure like a house, you need to have a solid foundation.

Until you pay off all of your debt, you are at the mercy of your creditor and will always find yourself adjusting your life around payments and due dates. Your first step is to break out of this pathetic situation and become debt free. Before I read about personal finances, my attitude towards debt was simply to view it as monthly payments. If I can afford to make a monthly payment, I can afford to buy it. I never really looked at the true cost of a purchase. There is a steep price you pay when you buy things on credit. Although you become eligible to buy a car or some other fancy toy with a monthly payment, it then eats up your cash flow, each and every month. No matter how small it may be, you are now forced to make payments every month towards that purchase.

Photo by Ahmed zayan on Unsplash

What’s the big deal you may ask? Well, the habit of looking at purchases as simple monthly payments encourages your mind to think short term. This can be a dangerous habit since your medium and long term goals can take a back seat, due to the short-sightedness of your spending habits. There is a high chance, the adrenaline rush you got from that purchase you made on credit, prompts you to make more such purchases. Before you know, you have built a monthly calendar full of EMIs. I urge you to take a step back and look at the true cost of ownership here. Think twice before you rush to buy things on payments. I simply believe, if you can’t pay cash for it, you can’t afford it. This is not about some fancy math or interest rates, this is about habits. Work on them and you’ll get your biggest ROI.

Action Item

Whether you follow debt snowball or debt avalanche method or your own method, I want you to eliminate all of your consumer debt from your life. You can’t win with money if you are saddled with debt. Get rid of your payments. This will be the first step toward building a strong financial future. Become debt free!

2. Not Having An Emergency Fund

When you don’t have a margin and live your life on a tight budget, every small bump on the road feels like an emergency. You get stressed about that unexpected car break down or that unplanned visit to the doctor’s office. You get stressed about all things unplanned. It’s not a fun way to live your life. I have been there and it’s not someplace I would like to ever go back.

Once you have tackled all consumer debt in your life and you find some wiggle room in your cash flow each month, focus on building a 3-6 month emergency fund ASAP. Build that margin into your life. Treat this task as if your life depends on it and get that money lined up as quickly as possible.

When things are going smoothly, you’ll often wonder why you need an emergency fund. You’ll even crib about the modest interest it might be earning in a savings account. Remember an emergency fund is your insurance policy against Murphy’s attempts to derail your life. Once you have your emergency fund line up, sock it away in an online savings account or a money market account and forget about it.

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YNAB, a budgeting tool has this concept of “age of your money“. It basically indicates the number of days that have passed since you earned the money to the day you spend it. I want to extend this concept to your emergency fund. The older your money gets, the less likely will you feel the urge to use it. I would even go to the extent of saying that since you have saved the emergency fund in a separate account, you tend to “forget” about its existence. Just avoid any urge to tap into your emergency fund unless it’s an absolute an emergency.

Remember that you prepare for war during times of peace and not when you are in the middle of one. So build your emergency fund before there is a need for one.

Photo by Daniel Tausis on Unsplash

Action Item

Work your tail off and gather every single dollar you have at your disposal to save towards emergencies. You need to accomplish this task on a war footing. At the time of saving, it might seem like a huge pain, but trust me on this; when Murphy knocks on your door, you’ll be far from panicked. Having a cushion between you and life is a feeling that can’t be described in words. Save yourself some grace and sock away a decent emergency fund. This will avoid an emergency from turning into an catastrophe.

3. Spending Without A Plan

One of the first things we did when taking charge of our finances in 2018 was to start tracking our spending. You’ve got to know where your money is going. If you have been spending money without a plan, tracking your spending itself can seem like a huge task. But it can be extremely rewarding task since it gives you great insights into your spending patterns.

A lot of times, people shy away from the concept of budgeting since it feels anything but fun. There is a mental barrier that many people aren’t willing to overcome in order to appreciate the true value of budgeting. I will be honest with you, I wasn’t thrilled about budgeting when I first started it. It felt like a constraining activity and I wasn’t looking forward to it. But then I still went ahead and started budgeting. In the beginning days, I struggled a lot to estimate how much money I would need to spend on a certain category since I wasn’t sure if it was too less or too much. You’ll often find torn between following the budget and being the free spirit. But don’t give up. It’s not uncommon for most people to feel discouraged at this point and give up after a month or two. For us, it took about 90 days before we started getting a handle on our monthly budget. Until that point, it was all hit and miss. I want you to know that it is completely normal to overshoot your budget in the initial days. Everyone who starts off budgeting faces this and it’s ok to fail.

If you are still skeptical about the real value of budgeting or simply can’t choose the right method to budget, I would encourage you to check out my article on choosing the right budgeting system.

If none of that rhymes with you, I encourage you to try what Paula Pant from Afford Anything recommends, The Anti-Budget. But start with a plan on how you are going to spend your money every month.

Action Item

The main objective of this task is to take control of your spending. It doesn’t matter what budgeting technique you finally choose, but start paying attention to your spending habits. Watch where your money is going and decide if it’s the right place it needs to go.

Your success with this process lies in constant improvisation and focusing on spending your money on stuff that matters to you and cut back on stuff that doesn’t. Of all the broken windows you want to fix, I would urge you to work on this one since I personally felt I got the maximum returns on this one.

Dave Ramsey is right, once you put together your first written budget, you’ll suddenly feel like you’ve got a raise.

4. Giving Up On Your Dreams

We spent an incredible amount of time in our lives to build wealth and care for our loved ones. We want to build a life of our dreams. It makes total sense to do everything within our powers to protect that dream. I am often reminded of this scene from Pursuit of Happyness. It is one of those scenes that reminds you that it’s up to you to protect your dreams. You’ll find a lot of detractors and naysayers along the way, who try to dissuade you from pursuing your dreams. Don’t listen to them. It’s your life and it’s your dream and only you can bother enough to protect it.

You’ve got a dream? It’s your responsibility to protect it

When you get caught up fulfilling the responsibilities of your life, you can often lose sight of your dreams. It all begins with small things like giving up on hobbies due to hectic work schedule. Over a period of time, you’ll lose touch with a side of yours that loves to dream.

Our hobbies or passion projects often let us express our creative sides. Once you shut it down, you don’t have any avenues to let out your creative energy. Do this over a few years, you’ll experience what people often call a ‘Burn Out’. It’s very easy to ignore the hobbies or defer passion projects saying, “I don’t have time for this. I’ll just get back to this hobby once I accomplish some random milestone in my career, etc etc.” Do yourself a favor and start dreaming again!

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Having been in corporate life for more than a decade now, I can tell you how important it is to not give up on your dreams. I have experienced burnouts quite a few times in my career. I love my work and I can’t imagine doing anything other than that for a living, yet I feel it’s important for me to pursue my hobbies or my passion projects. It can be a small activity like reading a book or my recent interest in blogging about personal finance; these are opportunities for me to fulfill my creative ambitions. It helps me recharge my batteries and go back to work all charged up. One of the side effects of pursuing my dreams is that it can someday lead to a full-time business or a great side hustle.

For what’s its worth, I encourage you to explore your creative side and reconnect with your inner self. It will help you channelize your untapped energy and can be a great way to avoid burn outs.

Action Item

When I first read Randy Pausch’s The Last Lecture, I took a step back and tried to recollect all activities from my childhood that made me happy. What were my dreams? What did I want to do when I grew up? For me, it was participating in a debate competition or even creative writing. I loved doing all of these. I get completely immersed when I am doing any of these and lose track of time.

I sincerely urge you to dig deeper and find out what your dreams are. Don’t let them die a silent death. As disconnected as they may seem from your other pursuits in life, I still urge you to chase them. If not for anything, it can be your secret weapon to recharge your batteries when you feel exhausted and consumed other responsibilities of your life.

5. Lack Of Safety Nets

One of the critical factors that can determine how successful you’re going to be in your finances, is the safety nets you have built into your plan. It’s wonderful to go out there every day and make a bank. You might be absolutely killing it at your workplace or in your business and might be all set to build great wealth, but if you don’t have your ‘safety nets’ in place, you’re going to get hurt. Life is full of surprises and uncertainties. No one can predict what’s going to happen tomorrow but you can definitely build some safety nets into our plan.

I am talking about products like life insurance policies that can protect you and your loved ones from unexpected events in life. If you have dependents in life, consider buying a simple Term Life Insurance policy of at least 10-15 times your annual income. It’s one of the most basic and effective safety nets you can have in your financial plan. This will ensure your dreams don’t fall flat if you happen to leave behind your loved ones midway.

Along with term life insurance, I would also explore other insurance products like an Umbrella Insurance policy to protect your assets in case you find yourself being sued for. I would encourage you to stay away from other forms of life insurance products like whole life or cash value policies. They are simply not worth it. I would never use an insurance product an an investment vehicle since they are never good at it.

Another important aspect of financial planning that often gets ignored is Estate Planning. If you have put in efforts to build assets and have loved ones that depend on you, it becomes your responsibility to sort out the Estate Planning activities while you are still around. I would highly recommend you go meet an estate planning attorney and come up with a comprehensive plan on how your estate will be handled after you leave.

If you don’t have sufficient disability insurance from work, consider shopping for one. It can be a real lifesaver when you get disabled and can’t get back to making the same levels of money you used to.

This is hands down one of the important activities of financial planning. I can’t stress enough on this. A good defense is as important as any other strategy you might have developed to build wealth. It pays for itself. Go ahead and complete this task.

Do you have your safety nets in place?

Action Item

An insurance product like term life insurance can help you replace your income or provide money to build wealth in your absence. Until you are self-insured, I look at it as one of the most basic safety nets you can have in your financial plan. Even if you think you have enough wealth to be considered self-insured, I would still look at carrying some level of insurance to give that extra cushion. Shop around for a term life insurance and buy one.

Once you’ve tackled the insurance needs, look for a good estate planning attorney and educate yourself about all the ways you can protect your assets. It’s one of the best investments you’ll ever make as part of your financial planning. Don’t ignore this. Having an estate plan in place is a way of saying to your loved ones, “I love you and I care for you.”

Have you lived with similar broken windows in your life? If yes, what are they? How did you fix them? Share your experience in the comments. I would love to hear from you.

10 thoughts on “Broken Window Theory And Why It Matters To Your Financial Well-being”

  1. That’s interesting about the windows. I’d never heard about that experiment before, but I guess it makes sense. People’s perception is their reality. Which is why so many people in debt seem to simply accept that broken window as a fact, not something to be fixed.

    I’ve always raced to pay off any debt we accumulated (mainly medical bills, some student loans) so it’s hard for me to imagine being complacent with debt. But in a more literal sense I did have a gap in our retaining wall to the back yard for, like, three months before I finally got it fixed. And I only did that because homeless people from the park started wandering into our yard and taking stuff from the freezer out back. So I guess I get complacent about things too.

    • I often find this with keeping my house tidy. If my wife and I don’t clean up stuff for sometime it just piles up and we can often get too comfortable with it. It tends to become normal. That’s what inspired me to look into the aspects of my finances and how it was causing me to lose my peace of mind.

      I am glad you treat debt with a level of disgust and never let it accumulate and I am that way too. I can’t stand it.

      I am sure you’ll find a lot of parallels in your life where you can see this theory play out.

  2. The book Pragmatic Programmer is also my favorite book! I enjoyed the detail with the different steps in this article. Talking with an estate planner is something I should do in the next few years.

    • That’s an excellent book and I often love to correlate stuff I come across in other aspects of my life and apply it to personal finance.

      I am yet to put together my estate plans too. I think i will first begin with a will and then take it from there.

  3. The broken windows idea makes me think of the zero-tolerance approach to litter and graffiti in New York in, I think the 90s that was meant to lead to a significant reduction in crime (although the effectiveness of this was questionned by the Freakanomics guys).

    I think that there’s a lot in what you say. I’ve been working on the idea of marginal gains in the past few months. I’ve got the big things that you talk about in your post largely under control but, what I realised is that there was a lot of low hanging fruit to be picked to optimise a lot of small things in my life. In some ways it was finding those broken windows before things got too bad and fixing them one by one. You fix enough windows and, in time, the entire neighbourhood starts to improve!

    • Yes I loved the Freakanomics book and their findings. For me it was about the items I listed that I felt had been holding us back. I really wanted to fix them and set the house in order.

      I am glad you didn’t have a lot of big ticket items to fix. I also believe incremental progress helps when tackling debt or saving for a big ticket item.

  4. I feel like part of the challenge for people in setting aside money in an Emergency Fund is simply the lens through which they view the need. When we use language such as, “unexpected or unplanned” (not trying to pick on the author specifically) we’re already inclined to believe that these are simply chance happenings. If we’re reasonable in our assessments about what can occur in life, it is should be expected that cars, hot water heaters, our bodies, etc, will break and be in need of attention, repair, etc. at some point. The only unexpected aspect of these events is the “when”, not the “if”. If we shift our outlook to reasonably expect such things to happen, maybe sacking away a few dollars that you reasonably know you’ll need at some point won’t be such a barrier to saving for the so-called “unexpected” events in life.

  5. @BB,

    Thanks for sharing your thoughts. I have personally experienced a few unexpected events that helped me fund them without going into debt.

    1. A very close relative of mine needed money urgently and they couldn’t borrow it due some constraints. They are very close to us and I was able to loan them money when they need it badly. It was one of those cases where I haven’t been able to give money (even a 1000$) because I wasn’t having any cushion in my finances.
    2. I recently found out that I owe about $4,000 in taxes this year (the first time since I usually get refunds or very little money owed) and I didn’t sweat too much since I had a good emergency fund.

    The other incidents like car break down or heater replacement or something like that can be reasonable estimated. I still feel I would sleep better knowing I have some buffer to deal with such incidents and not having to disrupt my other financial goals.

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