Skip to main content

Tag: Psychology of Money

It’s a New Year — But You’re Still Not Working with a Financial Planner?!

Written by support@seostats.com on . Posted in Fiduciary, Financial Planning.

We’re a few months into the new year (and new decade!) now. How are your resolutions to “do better” holding up so far?

If you’re like many people, despite your best intentions, there are probably a few things that have fallen by the wayside. There might be some bad habits you still haven’t broken, or some goals that you really want to achieve but still haven’t started working toward.

You might have even told yourself that 2020 was the year you were going to get your financial life together… but you’re still not working with a financial planner.

We might be coming off the excitement of a new year and settling into the gloom that hit in during the cold, dark months of February and March (at least in the Northeast!) — but it’s not too late to get your financial life on track and make great progress this year.

 

Why People Start Working with a Financial Planner

When I first meet someone who is interested in working with us , I always ask why they want to start taking better care of their financial well being now.

I want to know why they reached out when they did — and what changed or entered their life to motivate them to take the action of finally hiring a planner.

You can probably imagine some of the most common answers revolve around major life transitions. They started a family, got a new job, changed careers completely, moved across the country, or came into an unexpected bit of money from something like an inheritance or equity event at their company.

Other people start working with a financial planner because they simply get tired of feeling stuck (or worse, going backward). They say they’re losing track of everything as they try to manage it all on their own; they don’t feel in control or they’re really unsure of whether or not they’re on the right track (or how to get started at all).

These are some of the reasons people want to work with a financial planner. But what about the reasons people avoid having that conversation and beginning the process of putting a plan in place?

Here are the 3 main reasons why I hear people don’t want to work with a planner — and why I believe it’s worth reconsidering.

 

1. You Prefer to Avoid Talking or Thinking About Money

We all cope with discomfort and fear in different ways. For some people, their finances can feel scary (even when there’s nothing actually wrong!).

That fear can actually motivate people to reach out and ask for help… but for others, their coping mechanism is avoidance. They want to stick their head in the sand and pretend their money fears, worries, or concerns will simply go away if they ignore them.

Of course, this is never the case with our problems in life. And when it comes to money, ignoring your finances only makes problems bigger and harder to deal with when you do finally start paying attention.

If you prefer to avoid thinking about your mounting debt, bad money habits, or lack of action with your finances when you know it’s time to do something, you are creating an even more challenging situation for your future self.

Don’t put yourself in a difficult position later in life. The sooner you sit down and face the financial planning you’ve been avoiding, the sooner you’ll get yourself on the right track and moving toward success. It’s never too late to build better habits and pay attention to your money.

 

2. You Want to Do It Yourself

Some people don’t like the idea of working with a financial planner simply because they don’t see a need. Why not just manage your money yourself?

I understand the preferences of the do-it-yourself crowd the best out of all the people who tell me why they don’t want a planner. At one point, I thought I knew my own financial situation better than anyone else. I certainly cared about my financesmore than anyone else, too!

And why would I, a financial planner, need help? Wasn’t I the expert I was looking for? I had all of the training and certifications — I might even have had more than the person who I would hire!

But I quickly realized that the reason even financial planners need financial planners is that it’s really hard to objectively make decisions around your own money. We’re all much too close (and too subjective) to consistently think rationally and unemotionally about our own finances.

My wife and I needed someone to remove the emotions from the conversations around money, and to keep us grounded in reality. Having an independent, third party involved — who is also a fiduciary and is looking out only for our best interests — is priceless.

I understand the desire to DIY. But I think that says quite a bit, that even myself as the trained and certified expert needed to hire another trained and certified expert to ensure I made all the right decisions within my own financial plan.

 

3. You Don’t Have a Lot of Assets Yet

Many times, I’ll talk to people who truly want to work with a financial professional, but believe they don’t have enough money to do so. I understand why people think this — but it’s just not true anymore.

Traditionally, getting financial advice from an expert was something that was reserved for high net worth individuals. You could only have your own financial planner if you had a lot of investments and assets that the planner could manage.

Luckily, that has changed and the options for hiring a financial planner look radically different. There are now more ways than ever for people to get financial planning!

If you’re not sure where to start your search for a planner who will work with you, try professional associations like NAPFA, XY Planning Network, or Garrett Planning Network. All of these groups will help connect you with fee-only, fiduciary CFP’s who may not require asset minimums.

XY Planning Network’s members all specialize in serving Gen X and Gen Y, do not charge asset minimums, and who you can hire for a monthly fee that can range from as little as $50 to as much as $500. Don’t need ongoing help? Garrett Planning members offer hourly planning services.

No matter what your excuses have been in the past, know that the best time to get a financial plan created for you is now — and a financial planner can help you do just that. Working with a financial planner gives you access to knowledge, resources, and accountability to develop the habits and strategies required to reach success.

Looking for more specifics? Click here for our free guide to help you understand the questions you should be asking a potential advisor.

Prefer a quick video? Check out Episode 2 of our planning series “The Build” below to learn more about if you should be working with a financial planner.

The Psychology of Money, Part III: Pay Now But Consume Later and Invest in Others

Written by support@seostats.com on . Posted in Behavioral Finance, Cash Flow.

This post concludes our three part series focused on the psychology of money. Up to this point, we’ve talked about:

1. How buying experiences, instead of material goods, is a better use of our money because those experiences tend to stick with us longer.

2. The importance of making your spending a treat — because the more we have and the more “normal” the things we buy for ourselves become, the less we notice, appreciate, or enjoy them.

3. And finally, we learned that when it comes to being happier, time is a more valuable resource than money itself.

If you want to dive into these topics in further detail, be sure to catch up on the first post here, and then read the second post in the series here.

 

How to Use Your Money to Actually Buy Happiness

Elizabeth Dunn and Michael Norton, authors of Happy Money, suggest that money can buy us happiness.

The problem is, we’re not very good at understanding what actually makes us happy! Therefore, we go and spend our money on all the wrong things and then wonder why more money doesn’t make us more happy.

This final post in this series continues to look at the ways Dunn and Norton suggest we change how we use our money so that we can get more happiness from every dollar we spend. Let’s now look at two more principles the book provides us.

The first is the idea that we should “pay now, consume later,” and the second is that to get the most from our money, we might want to spend it on others instead of ourselves.

 

The Dangers of Credit and Avoiding the “Pain of Paying”

Dunn and Norton explain that “the feeling of parting with hard earned cash can be so aversive that behavioral economists have given it an ache-inducing name: the pain of paying.” In other words, we can actually feel physical pain when parting with cold hard cash.

This might explain why credit cards and options like financing purchases are so popular. In the past, if you didn’t have money for something, you didn’t buy it. End of story.

Today, we can simply charge our purchases to a little piece of plastic — regardless of whether or not we actually have the money available to pay for what we just charged.

Not only are we not physically pulling money out of our pocket and handing it over (swiping a card does not induce the same kind of pain as parting with actual cash), but we get what we want immediately… and we don’t have to pay for it until later.

That allows us to temporarily avoid that “pain of paying” at the point of purchase. We get our stuff and we figure out how to deal with the financial repercussions later. Specifically, 30 days later when the credit card bill comes due.

 

Why You Should Pay Now But Consume Later

It turns out that this strategy isn’t just a bad one for your financial health (especially if you don’t have the cash available to pay those credit card bills). Consuming now but paying later is counterproductive for happiness, too.

Delaying consumption can actually increase our happiness. Dunn and Norton suggest that we flip the usual script and pay now but wait to actually enjoy what we purchased if we want to get more enjoyment from our spending.

For example, you could book an all-inclusive vacation that you will take in 6 months — but don’t just let the charge sit on a credit card. Pay for that trip in full now so you can enjoy it more later in the year.

Again, this benefits you from a very tangible financial perspective, too. I see many people struggle with a simple concept that is critical to building wealth: spending less than you earn.

Credit cards can exacerbate this problem.

I recently worked with a client who had about $27,000 in credit card debt. The good news was that they weren’t accruing interest on the balance because it was on a card with a 0% APR for the first 18 months. In theory, this client could simply pay off $1,500 each month and be debt free.

But our behaviors aren’t that simple, especially when it comes to money.

 

Paying Now Can Help Break the Overspending, Debt- Accumulation Cycle

This person had been in this overspending, consume-now, maybe-pay-later cycle for years. They would pay down their debt, but they never addressed their spending habits that created it in the first place… so it would all just pile back up over time.

This constant overspending and subsequent clean-up process made it impossible for this client to save for retirement. They also had nothing saved for their son’s college tuition.

The client could manage to climb out of debt, but all that money spent on credit card balances meant nothing available to actually save and invest for something more meaningful.

They needed to break the cycle. We took away the credit cards and determined a set amount of cash that could be available for discretionary spending. If the cash wasn’t there, the client was not allowed to spend money.

Changing your behaviors, like cutting up your credit cards and switching to cash instead, will help change your habits — and over time, changing your habits is what will allow you to go from feeling stuck and unhappy to thriving and content with your finances and your life.

 

Instead of Spending on You, Invest in Others

Refocusing where we spend can help make us happier, too. Or perhaps to put it more accurately, who we spend on matters. We tend to like to buy stuff for ourselves… but if happiness is our goal, investing in others might make a bigger impact in more ways than one.

Dunn and Norton provide 3 strategies in Happy Money to execute on this idea:

1. Make it a choice

2. Make a connection

3. Make an impact

For me, investing in others means donating my time.

It’s providing pro-bono financial planning to those who really need it but would otherwise not have access to the advice. It’s having a lunch and learn with organizations like ProAction to answer questions about retirements and investing.

This is a choice I make — and it makes me feel good to give back to local communities and connect with people. And I not only get to make an impact by helping others, but I get to see that impact as people change their behaviors and actions around money thanks to the conversations we have.

Will you make any changes to change the way you spend to increase your happiness? I’d love to hear how you changed a habit or tried something new with your money after reading these posts. Feel free to email me at paul@lakeroadadvisors.com and share your story.

The Psychology of Money, Part II: Make it a Treat & Buy Time

Written by support@seostats.com on . Posted in Behavioral Finance, Cash Flow.

This post continues our series focused on the psychology of money. In our last post, we discussed the importance of automating your savings.

By automating your savings, you remove the need to decide to save over and over. You make the decision once (by setting up that automated transfer) and therefore make it much easier on yourself to establish a savings habit.

If you haven’t read it yet, I recommend starting with this post first. Once you catch up, head back here to continue the conversation.

Today, let’s look at Principles 2 and 3 from Happy Money authors Elizabeth Dunn and Michael Norton. If you understand and use these principles in your day-to-day life — and in your bigger-picture, long-term financial planning — you can enjoy a greater degree happiness when you spend.

In order to achieve this for yourself, you need to Make It a Treat and Buy Time. Here’s what these principles can look like in action.

 

Make Your Spending a Treat

In Happy Money, Dunn and Norton note that “abundance is the enemy of appreciation.” We get used to what we already have — and it becomes harder to appreciate things when we have more than we actually need.

Most of us want to have more because we usually equate that with some form of “better.” When we have more money, we’ll have a better life. When we have a bigger house, we’ll be more comfortable. When we have a nicer car, we’ll feel more confident.

But our enjoyment of things tends to go on the decline once we actually have those things we’ve spent so much time wishing to own. A study of students and chocolate consumption highlights this human tendency.

 

When We Have More, We Might Enjoy Less

Researchers gave chocolate samples to two groups of students. They asked each group to rate how much they enjoyed the samples — and then they told the first group to give up chocolate for a week after enjoying their first piece. The second group, meanwhile, received a 2-pound bag of chocolate to take home with instructions to enjoy as much of it as they wanted.

After a week ended, the researchers gave both groups another sample of chocolate and again asked them to rate their enjoyment. The second group rated their enjoyment as much lower.

“These simple findings depict a powerful barrier to human happiness,” the researchers wrote in their study. “The appreciation and delight we derive from a positive experience may quickly fade when that experience is repeated.”

Using the principle of “making it a treat” means instead of constantly seeking more, try a different approach. Consider what you really enjoy — and temporarily give it up.

This isn’t about depriving yourself. It’s just about making sure that thing you love doesn’t become your new normal. If it does, then like the participants in the chocolate experiment found, you might not enjoy as much as you would if it was a once-in-a-while treat.

Or, as the researchers in the study put it, consider reducing your consumption because “frequently indulging in common forms of pleasure may come at a cost to our wallets or our waistlines.”

Don’t do the same thing all the time; introduce novelty if you want to enjoy your spending more — or, save your spending for special occasions so that its more memorable instead of just more of the norm.

 

Use the Second Principle to Buy More Time

In addition to changing your consumption patterns to get more satisfaction from the money you spend, you should consider changing what you’re actually buying. Instead of buying more stuff, consider buying more time.

As someone who moved away from the rat race of NYC, this really hit home for me. Even if you don’t live in a big city now (or never did), you can probably relate to feeling like you don’t have enough time… or that you don’t get to use your time the way you want.

According to the U.S. Census Bureau, Americans spend more than 2 weeks of the year commuting. That’s more than the average annual vacation time! When you’re living like that, it’s easy to feel like you just don’t have the time for the things that make you truly happy — regardless of how much you make.

Keep that in mind when you consider the big picture. A job that allows you to earn more but takes up a significant amount of your time like this won’t necessarily lead to happiness. You may be better off making a little less and having more freedom over your time.

(Not convinced? A German study showed that “taking a job that requires an hour-long commute each way has a negative effect on happiness similar in magnitude to not having a job at all.”)

 

How to Buy Back Your Time

A shorter commute is probably a good start — but that can require a drastic change in your life, and getting more happiness from the money doesn’t always have to be so complex.

Use your money to buy time for doing things that make you happy. For example, instead of buying a $200 watch, spend $200 to buy back hours of your time by hiring a housecleaner — and using those hours to spend time with your family or to spend more time outside.

Outsourcing tasks is a great way to get more happiness from the dollars that you spend. But more importantly, pay attention to what’s actually going on here when you do this: you value time more than you value money (if not more so).

In Happy Money, Dunn and Norton stress that “seeing time and money as interchangeable resources is wise from an economic perspective. It is counterproductive from a happiness perspective.”

In other words, if you want to increase your happiness, you might want to put time higher on the priority list than money. It might be okay to spend a little, especially if it means buying yourself more time.

 

 

Enjoyed this? Check out our final post in the series The Psychology of Money, Part III: Pay Now But Consume Later and Invest in Others.