This was an article I posted many years ago, but I still feel is relevant and may be helpful to you today:

Having a difficult financial situation can generate a range of emotional responses from us, which in many cases can actually exacerbate a bad situation and make it a lot tougher to deal with.

As Mullainathan and Eldar explained in their book ‘Scarcity’, people in tight financial situations will often adopt a ‘scarcity mindset’. This leads to the mind becoming concentrated on immediate needs, as well as a greater appreciation for the value of money. However, there are also dangerous aspects to this mindset as it reduces an individual’s focus on time horizons (short-term focus at the expense of long-term) and narrows their perspective.

The scarcity mindset helps explain why we can sometimes find ourselves in a negative spiral; making situations worse by focusing on the short term rather than the long term. This is evident in bad decisions like using payday loans to pay existing loan payments, or missing credit card payments to free-up cash in the short-term, only to suffer from larger payments, defaults and a poor credit score over the long-term. We then find ourselves burying our head in the sand and hoping the problem will disappear by itself. Each of these actions helps the issue build into an unmanageable situation.

One particular client I worked with was suffering from this exact same negative financial spiral. My client had an issue with debt and she couldn’t seem to find a way to live within her means. Her credit and store cards were at their limits, her two overdrafts were full and her monthly spending was still exceeding her earnings. In fact, her total debt was more than her annual salary after tax! The stress of this situation, along with having to care for a young child on her own, meant she was panicking and taking actions that were making the situation worse for her.

I knew we needed to act quickly to break her current thought-process and instil a new mindset that would facilitate a more productive outcome, along with providing clear steps for how to work her way out of this debilitating situation.

I have found that the first step to breaking out of this mindset is to feel gratitude for what you have. When you are truly grateful, you do not suffer the same negative symptoms of scarcity. Following this, I knew we needed it to be her that made the decisions about next steps and take action herself; if I simply told her what to do, she would begin to fix her situation but fall back into it as soon as I was not there to assist her.

This is when I introduced her to my ‘Problem to Clarity Transformation’ steps. The results were so effective that I have now adopted these with all of my clients who feel they are suffering from a negative position. Before they begin, I help them understand and believe that they are going to solve this problem; that very few issues in life are unmanageable and we will find a way to overcome this adversity. Next, I ask them to explain and write down the answers to the following questions (the six steps):

Step One: What problem do you want to solve?

This is the leading question and therefore should be answered as a problem to be solved (and therefore, as a question). For example, “How will I begin to reduce my debt when my current spending is higher than my income?”

Step Two: What solutions are there to this problem?

This requires a list of solutions (between 3–5 good answers) for the problem detailed in Step One. As the problem was explained as a question, this triggers our problem-solving thought process. My client began to come up with solutions such as:

1) Begin shopping at cheaper shops, buy fewer unnecessary items and shop mainly for discounts. Then put the money saved into a separate account, which can be used to make a debt payment at the end of the month.

2) Get extra hours at work or get a second job temporarily, while my friends with children look after my son. Do this until I earn enough money to reduce my debt payments to a level below my monthly income.

Not all of these solutions will be adopted or even usable; what is important is that we start to feel there is a way out of the problem.

The above two steps outline the problem and how to solve it. This is great for knowing what needs to be achieved, but how can you ensure this will be sustained? Our mindset towards the situation needs to change and a clear action plan must be produced. This is where the next steps take importance:

Step Three: What is good about the situation?

It is easy to begin feeling sorry for yourself in a bad financial situation. However, it is true that ‘every cloud has a silver lining’. If you begin to look for the positives, you will begin to feel grateful for your situation. My client found that the lack of money meant she had to be more creative in finding fun things to do with her son. As a result, they had built a closer relationship from doing more things together. This was a more important outcome for her than any amount of money would have been.

Step Four: What is not yet perfect about the situation?

The term ‘not yet perfect’, implies it is a work in progress and will be perfect at a future point in time. On-going improvements will then be made, making it more likely that sustainable changes can be maintained.

This created points such as, “my inability to avoid spending on unnecessary items such as buying pre-made lunches from shops at work” or “that I do not take immediate action with debt payments and let them build into a much larger amount due to late payment fees”. This provided a clear action plan of tasks that needed to be worked on for my client.

Step Five: What have I learned from this situation?

In other words, what lessons will I take on board for tackling this problem and avoiding it happens again in the future? My client had learned the value of money and that she didn’t need the items she was spending money on to begin with, since she did not miss them once they were gone. She also learned that it was possible to live within her means if she did not have such high debt payments.

Step Six: What am I willing to do to fix the situation?

If a situation is not getting fixed by following the status quo, it is obvious that sacrifices need to be made. The first response we usually make when answering this question is, “I am willing to do anything”. However, it is important to break it down into more specific things that we are willing to do. For example, “I am willing to work extra hours”, “I am willing to live a more frugal life”, “I am willing to face my fear and phone the debt collectors”. This then gives an idea of what proactive steps can be taken and what ‘pain’ needs to be overcome to reach the end goal.

By using these six steps, my client not only worked towards fixing her financial situation, but she was also so impressed with her results that she began using the same process to fix other problems in her life, such as her career.

These steps are not a brand new concept; they are an amalgamation of various other problem-solving techniques. However, when we experience the scarcity mindset, it is difficult to tackle our financial issues in a logical and well thought-out manner.

If we take a structured approach to solving our difficulties, such as the technique outlined above, incorporating the solution and our attitude towards the problem, we can truly turn a negative situation into something that feels manageable with a clear, appropriate and achievable action plan — no more burying our heads in the sand!

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