psychology of money

Financial Success: Too Hot to Handle?

Have you ever known someone who spent or gave away a windfall, seemingly believing they didn't "deserve" it? Or were they scared to have more than they ever had? In a recent meeting, a client shared stories of times when she committed financial self-sabotage. When she was on a tear, making what she considered to be "a lot" of money, she began to slow down. The success felt uncomfortable. T. Harv Eker, author of The Secrets of the Millionaire Mind, talks about an "inner-money thermostat," an inner upper limit we have set on financial success.  According to Ken Donaldson, LMHC, an emotional intelligence expert in Seminole Florida and author of Marry Yourself First , the thermostat is set by "history, events, programming, parents, institutions and cultural messages." At one point in my banking career, my thermostat got too hot, too. I was in line for a big promotion that involved a panel interview, and I blew it. People who worked with me couldn't believe the same Holly showed up for the interview who showed up for work every day. Instead of feeling pride and confidence in the opportunity, I remember discomfort and anxiety. It made no sense. Because I thought I might be given the opportunity again, I spent the following year working on the internal and external sources of my thermostat. I improved my inner confidence by joining Toastmasters; and I improved my external messages by consciously surrounding myself with people who gave me joy and support. It worked: the next year, I aced it, and got the promotion. What if you know someone who seems uncomfortable with what they have either earned or been given? Try asking five questions: 1) What money messages do you remember from childhood? 2) Imagine you freely embraced all the financial success that comes your way for the next three years. When that occurs, how will you be spending your life? 3) What would you think about keeping a journal of every unexpected windfall and success you experience for the next 12 months? 4) What one thing could you focus on for those 12 months that would go the farthest toward your financial success? 5) What could you change in order to surround yourself only with people who bring you joy and support? With awareness, time, and the right support network, financial thermostats can be reset so that no matter how hot it gets, you've got it handled.

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Are old money messages piloting your kayak?

One of my findings from some recent workshop participants was that many of us grow up with the same "money messages." Money messages can be either implied or direct. They can range from "Money doesn't grow on trees," to "You can't take it with you!" I find during workshops that if I cover the walls with these money messages, as participants read them, the messages often elicit memories of specific people in their early lives. Often these people are authority figures like a parent, minister, or teacher. Therefore, messages get conveyed to us at a very early age. It is important to recognize how ingrained our money messages are, because they often go unquestioned. When we turn our money decisions over to long held money beliefs, we allow our choices to go on autopilot. We may think we have sufficiently analyzed a decision, when in fact we have done so only after unconsciously putting the facts through our belief filter. While this helps us become more efficient at decisionmaking, it can sometimes lead to decisions we regret. One of my own examples hangs in my garage. It's a kayak. One of my money messages is, "You don't always get what you pay for." My autopilot reaction to this message is to buy the cheapest thing that I think will get the job done. When I went to buy my kayak, I wasn't setting out to race. Further, I was going to use it in Florida, land of lazy alligators and sultry, swamp-fed rivers. So I bought the cheapest model, what my serious (like, Olympics-team-serious) kayaker friend calls, "a floating bathtub." One recent Saturday morning, on an unusually low Suwannee River, my floating bathtub and I were presented with, of all things, rapids. Clumsily navigating the limestone rocks and water, I attempted to skirt an oncoming wave. With no keel to follow my paddle's direction, instead I watched the wave devour my bow and jump in my lap like a spoiled dog. Thank goodness the sun was out. Maybe if I had anted up for a kayak with a real keel, I might have enjoyed a drier outing. Now I appreciate what a little more money might have bought. The better we know ourselves and our money messages, the more likely we are to make better informed, more balanced, and rational decisions when it comes to spending, saving, investing, and sharing money. Walking away from the workshop, several participants said they felt a lot more prepared to face their financial futures. What money messages might you be operating with? And what can you do about it next time? Post your comments here to share or email me privately. I look forward to hearing from you.

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Leaning Down the Fall Line

Altering our natural behavior can be difficult but rewarding.  In some cases, it can be vital.  I am reminded of this every time I go snow skiing.  When I stand at the top and look down the slope, my natural reaction is panic - to recoil and lean backward.  Fearful, riding with my skis out front and my poles behind my shoulders, I go uncontrollably faster.  I focus on the next few yards, unaware of my larger surroundings.  I lose the ability to turn.  As my leg muscles fight the inevitable, they contract sharply and painfully.  Within a few minutes, I am winded. However, if I succeed in overcoming the natural tendency to hug the hill backwards, life gets infinitely better. Instead, when I center myself over the downhill ski, leaning down the "fall line," the skis take over, and do what they were designed to do.  Making a turn is a simple thought, not a fight.  I float on the snow.  I smile.  It is fun. But it's not natural. The freedom that comes from overcoming emotions can be a major accomplishment, a tremendous stress reliever, and sometimes a life saver.  World-class athletes learn to overcome their doubts and trust their coaches. Pilots learn to wear blinders in the clouds and trust their instruments.   By the time we are adults, however, we have been burned so many times that we hesitate. And what does this have to do with finance?  Whether it is spending, saving, investing, or sharing, we often have an emotional natural tendency - fear, greed, anxiety or excitement - that makes life unnecessarily harder.   Some save like Scrooge and erode relationships as a result.  Others of us panic and sell when we open the 401K statement.  Some excitedly share generously, but with emotional expectations or resentments attached.  Still others stay anchored to a house or a business value that may never come back. Approaching money from a centered position, emotion-free, can be as difficult as facing the fall line.   The good news is that, with time and practice, we can reach the point where we actually smile about it.

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Battle Strategies for Rational Behavior

Our brain’s limbic system is emotional; focused on now; and fears loss.  Our brain’s rational cortex system is logical and does not put emotions on time frames. Therefore, successful strategies to overcome our limbic system’s emotional influence on decisions where we need to be rational do one of two things:  1) change the rewards and penalties in future decisions; and/or  2) change the number of “decision points.” Giving Ourselves Rewards and Penalties What kinds of rewards might we set up for future decisions?  They don’t have to be financial. More success comes from social rewards.  Charities tend to use this fact. For example, most fundraising events revolve around the social rewards of belonging to a group, and supporting a good cause.  So before heading out to the event, we can write our check in advance for the amount we wish to give.   In another realm of behavior and choices, rather than attempt a diet solo, we can agree with a group of friends to commit to a weight-loss plan. What kinds of penalties can we set up for ourselves?  In the financial world, we can make funds unavailable. Christmas club accounts; requesting excess tax withholdings; and pensions accomplish this.  We can choose products with actual penalties, like CD’s and annuities.  We can choose investments with high costs to buy and sell, like real estate, or a business. Other penalties we want to avoid are “felt losses.”  We feel a loss when we have to pay to work out or take a yoga class.  To increase the likelihood of doing the desired behavior, we can prepay for “painful” behavior changes. Professionals who charge by the hour could change to flat-fee arrangements to avoid making their client incur a “felt loss” every time they meet with them. Decision Points Another way to trick ourselves is to manage “decision points.”  We should increase decision points for options that are hard to resist, and decrease decision points for options that are hard to do.   Here are some examples: In one study of the “hard to resist” kind, people ate less than half the number of cookies when they had to individually unwrap each one.  The act of unwrapping added a decision point to the process of eating the cookie. In the “hard to do” category, successful savings and investment programs are often automated, eliminating the decision point of manually making a transfer from a spending account. Debtors can request a credit freeze through reporting agencies, forcing them to go through a “thaw request” in order to get more credit. During the 2008 stock market meltdown, Dan Ariely, a Duke psychologist who studies behavioral finance decisions, knew he might be tempted to do something rash in his investment account.  So, he purposely input the wrong password three times so that he would be locked out.  This kept him from selling into the downturn. Think you’re above your limbic system?  Studies find that the cortex consistently overestimates its abilities.  In fact, winning the cortex/limbic battle isn’t…

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Read more about the article Investing Vehicles: Getting You Where You Want To Go
Are you in the right investing vehicles for your destination?

Investing Vehicles: Getting You Where You Want To Go

With the stockmarket falling, it's normal for investors to wonder what kind of investing vehicles to choose right now. Stocks, bonds, even real estate, seem poised to crater as soon as we decide to buy. It's probably the most common question a financial planner receives in times like this - "Where should I put my money?" The media is filled with quick-fix advice on this all-important question. Research has shown that the best long-term predictor of investing success is the percentage we have in stocks vs. bonds. Further down the list in importance is the specific stocks and bonds (or mutual funds) selected.  But, financial products, or investing vehicles, are what sell pop-up ads and keep eyeballs glued to our screens. So, it’s no wonder that this is a common question. The Question Before The Question However, precisely because it is so important, it’s not a question that can normally be answered in an hour, or even two. There is a reason that financial products are called “vehicles.”  They get you where you want to go.  Consider - if you get behind the wheel of a real vehicle, turn on the ignition, put it in drive, and step on the gas without a destination in mind, what happens? You might have some fun and adventure, but not a lot to show for the trip before you have to fill up again. Wild Destinations When investors are asked where they would like the vehicle to go, financial planners often hear something like the following: Rich-Land (News flash: most of us are there already.) Growth-With-No-Risk Land 100%-Guaranteed-Income Land Cake-and-Eat-It-Too Land Whatever-the-Most-My-Portfolio-Can-Make-Me Land These kinds of wild places only exist in Financial-Fantasy-Land. They are too vague for any kind of meaningful map. Having one of these as your sole destination is a recipe for exhaustion and frustration. No vehicle will get you there, no matter what you might hear or read. Fun and Fulfilling Destinations In comparison, what are some examples of fun and fulfilling destinations? Try these: Have $X per year to support my basic living needs beginning in 20__ Replace my car with one like it every 5 years until I can’t drive anymore Spend 3 weeks every year in Scotland beginning in 20__ Put my kids through private school Provide sufficient support for the kids to attend a liberal arts college at age 18 if they want to Buy a mountain house by 20__ Host my children and grandchildren on a cruise every summer beginning in 20__ Build my own boat by 20__ Hold a 50th anniversary party for my parents Open a beachside bistro by 20__ Go to graduate school full-time in 20__ Spend 20 hours per week volunteering at the shelter beginning in 20__ These are real-life goals from real-life people with real achievability. Some of the destinations they knew off the top of their heads. Others took some time to dream, discuss, and discover. In some cases, that discovery was hard work. But once we knew the destination,…

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