A few weeks ago I was in a conversation with someone who had experience in finance, so the topic of discussion went that direction. I admitted that we tend to pay in more taxes than are owed every year so that we have gotten refunds in the last few years rather than having to pay. I was then informed of something I already knew. This is not a good way to manage money. We are essentially giving the government an interest-free loan when we overpay.
I have mentioned before that I am very interested in personal finance. I think that how a person manages his or her money says a lot about him or her. I don't know that a lot of people who dole out financial advice truly understand that.
The first two full years that Golden and I were married I did not really take the time to properly fill out my W-4 form. Because of this mistake, we ended up owing a significant amount of money to the government at the end of the year. Because of this, I am willing to give the government the loan for the peace of mind that I will not owe the government when April fifteenth rolls around. Mathematically, it makes sense to dramatically reduce my withholdings. Psychologically, it is not worth the stress.
I think this is probably why a lot of people don't have good financial habits. The strategies that people attempt to follow don't fully take into account the psychological fortitude necessary to implement them. This is something like going on a crash diet. There is no point in drawing up an ambitious budget if it is not realistic over the long term.
One of the biggest financial psychological hurdles I have faced is knowing how much to set aside for retirement. Any time I read on saving for retirement or use one of those retirement calculators (curse those things) I walk away with the opinion that I need to be saving more than a normal person can realistically save. I believe this is more due to fear mongering than to whatever my financial situation happens to be. I think most people would think the same way. I think that these sources are trying to scare people into saving more than they will need, but I think it can serve the opposite effect. I can imagine how this information would make some people not even bother to try saving. Without the fear mongering, I would bet that more people would actually be saving for retirement.
So, I think that one of the rules for determining who can provide personal financial advice should be whether that person sees finance as simply numbers, or if that person understands that how people treat money is an outgrowth of their personal set of virtues and vices. You don't give most people good financial habits by telling them they should save or they will go bankrupt. You give people good financial habits by playing to their specific personalities.
For a relatively simplistic view of what I am talking about, I did find one columnist who addresses how different types of people can establish good habits. It is a little cheesy, but at least it acknowledges that there is more to money than math.
Subscribe to:
Post Comments (Atom)
18 comments:
When I interned with American Express Financial Services the summer before we were married and until I had Nicky I learned a lot more then I realized. The problem was we weren't set up to handle what I knew. I had to find what was a realistic and psychologically good alternative for us.
I have to admit some of it I have forgotten. I recently bought--don't laugh--some of Suze Orman's stuff. She talks about having a "relationship" with your money. Again, a bit cheesy, but she has a point. Her point is that if you work hard for your money and then don't want to talk about it or deal with it you have a bad relationship with it and you won't be successful with what you earn. She even points out that many people don't really know what they spend or what they earn because of being intimidated by money.
It's been a nice brush up for me on things I already knew and a good process for the next steps for us with our investments and estate planning. I am considering a living revocable trust now and understanding the difference between it and a will. I can't imagine being single and not having a trust now that I understand what it is. When I learned about it at the age of 19 I did not fully understand their value.
I enjoy Suze's TV show (Saturday nights on CNBC). I am getting a little annoyed at her peddling her newest book, but that is probably because it is not targeted at me.
She does a very good job, though, of picking up when what appears to be a financial issue is not really about money.
My financial skills are pretty limited. I prefer to keep it simple.
It is interesting that you see some of this advice as fear mongering...
Can saving money really be different for different personalities and is it really that difficult? You either save or you don't. On can choose to spend or not to.
Forrest,
This is one that I that I will wholheartedly disagree with you on.
You seem to imply that people make big decisions in a calculated fashion like robots and don't let personality influence them at all. I am not sure where you get this idea. I think this is a situation where you are writing off the possibility that other people behave in a way differently than you do.
A quick Google search picked up the following article that more or less states that emotions impact the way people save.
http://www.investmentnews.com/apps/pbcs.dll/article?AID=/20070604/FREE/70531027/1029/INSURANCE
There is a lot of fear mongering in regard to retirement, especially with retirement calculators. The reason I believe this is that when I run a calculator the response regarding how much I should save is often well beyond what I think is possible (Note that different calculators provide different results). From what I know about American finances, I believe I am somewhere in the average range when all factors are considered (though it is possible I am not average). I also believe I am fiscally responsible. If I, as a roughly average American who is fiscally responsible, believe that what the calculator is telling me is not realistic, I can think of two possibilities.
1. The average American is screwed in regard to retirement.
2. The calculator overcompensates and recommends to save more than is necessary.
To be fair, there is probably a reason number two is true beyond fear mongering. A calculator will typically assume a stream of contributions that never increases. I should assume that when I am forty or fifty I will be making larger contributions to retirement than now in my twenties. I don't know that the difference will be that huge, though.
Needless to say, I choose to believe number two. However, if I allowed myself to believe number one and I was a short-term thinker who didn't consider middle-aged wages, I could see ceasing retirement contributions and enjoying the money now. This would all be for psychological reasons.
It's definitely influenced by emotional responses! I have spasms of learning about financial things and doing something but mostly I try not to think about it because all those calculators have made me realize we are screwed in regard to retirement. Which of you is going to let us live in your basement when we retire?
Can you contend with water leaking into your living quarters? :)
I'm sorry, but what are you wholeheatedly disagreeing with me about?
All I did was pose a question? I am just curious about what this so-called personality business has to do with the act of saving.
Also, in your comment back to me you switched from the topic of personalities to emotions. Try to keep on the same subject. (yes, they are different.)
also a note of correction, you wrongly assumed that i am writing off the possibility that other people behave in a way differently than me. You don't think me to be that stupid to think everyone is like me, now do you?
You cleary didn't understand my question. My comment was short and you replied with a research paper. This is probably best left for a verbal conversation.
I am disagreeing to, "You either save or you don't. One can choose to spend or not to."
I had to either write a long response or none because my reasoning wasn't short.
I do think that if someone uses emotions to make a decision, the emotions have to be based on personality rather than rationalization. Regardless, we can discuss this offline if we need to take it any further.
"You either save or you don't. One can choose to spend or not to."
-This is so true. It is that simple. The same is true with food when it comes to diet and health. You either eat healty or you don't. Unfortunately, a lot of times I choose to eat junk food, so I can't complain when I gain weight and have high blood pressure.
Oh, and my personality is one where I would rather eat junk food all the time. But I have to go against my personality to do what is right.
"You either save or you don't. One can choose to spend or not to."
From a literal sense this is true. From the sense that was implied by the context, that personality doesn't play a major role in financial decisions, it is not true.
Please note that I am not saying it is impossible for people with certain types of personalities to have good financial habits. I am saying that the typical "Save or you're doomed to be a pauper" advice doesn't work with a lot of personalities, so a different approach should be adopted.
...but, you still have to save, somehow, regardless of your personality. There is no other way around it.
I don't care how one does it or how much they feel comfortable saving - that is not what I am talking about and maybe that is what you mean by "personality." For everyone, that part is different, but the act of saving is the same - put money away for future use.
Getting people to make good decisions (saving and otherwise) is what I am talking about. With some people you can say, "You really need to save," and that's all they need to hear. I would suspect those people are already saving, though.
Some people are able to quit smoking just because they decide to. Some people aren't. I think that is largely due to personality and psychological fortitude as well. People who try to stop smoking have several different options to help them stop that work to varying degrees with different types of people. I think that financial advice should be varied as well, so that it suits more than just the people who already have the fortitude to follow through on necessary steps.
...don't forget that nicotine can be addictive, which is why it is hard for people to quit.
You think that financial advise should be varied, uhh...last time I checked it is. there are a lot of options and advise and different ways to put away your money.
Having a ton of options for where to put your money is not the same as having varied or targeted advice. If anything, that is something the advice will have to overcome, because the myriad of options will intimidate many of the types of people I am concerned about.
"Having a ton of options for where to put your money is not the same as having varied or targeted advice."
What's that suppose to mean in context of what I just said. Do you even read or do you just look for words.
I said (read above) there are a lot of options and advice and different ways to put away your money... (notice the and between each of those words.)
I am just saying that I have heard a lot of different advise for different types of people and their comfort zones, along with that advise comes different types of options (or plans) on how to put into effect their strategy based on their comfort level.
You are saying that you only hear fear mongering advice. Oh well! Maybe some day you'll hear what you want to hear.
I really wish that I could spell "advice" consistently.
Post a Comment