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“We all of us have limited amounts of energy,” said novelist Doris Lessing, “and I am sure the people who are successful have learned, either by instinct or consciously, to use their energies well instead of spilling them about.”
Yes, it’s true, and if you want to know why financial resolutions are made—and broken—every January, it’s likely for two primary reasons:
1) Most of us have spent more than 100% of our limited amounts of energy before even getting to the discussion of personal finances. We’ve got nothing left in reserve to give to this important topic. Most of us spend more time and energy planning this week’s meals or next summer’s vacation than we spend on planning our retirement—over our lifetime—and it’s not because we’re idiots. It’s because we’re wired to overvalue our present and near future and undervalue that which is further down the road. This wiring, by the way, is also not faulty—because we all have a higher probability of eating dinner this Friday or enjoying a vacation next July than we do parking a golf cart after 18 holes 30 or 20 or even 10 years from now.
2) When we do get around to financial planning, we expect too much of ourselves. Even, if not especially, those of us who are Certified Financial Planner™ practitioners were often taught to do comprehensive financial plans—meaning plans that took every aspect of someone’s financial life into account and provided an exhaustive slate of recommendations that, if we’re honest, would only be achievable to implement if someone made that effort their full-time job for several weeks. However well-intentioned, these plans broke every behavioral finance rule in the book; most importantly the one that says if you give people too many to-dos, none of them will become to-dones. (And indeed, studies suggest that up to 80% of financial planning recommendations are—wait for it—never implemented!) I am a huge advocate of comprehensive (modular) financial planning—we need to be aware of the whole in order to address the parts—but I think comprehensive financial plans are little more than an expensive paperweight. Made of paper.
So, what can we do about it? Well, let’s break the “we” down to two groups—financial advisors and everybody else. We’ll start with my recommendations for financial advisors, because I believe the onus is on us, as credentialed professionals, in rendering the oft-unheeded advice, to do a better job delivering it.
Most of us have been taught to eschew emotion as demonic and adulate deferred gratification as divine. That’s a shame because most of the decisions people make regarding money—bad and good—are driven by emotion, not logic. And furthermore, you can’t eat deferred gratification. So, what do we do?
As for emotion, in lieu of ignoring it (at best) and demonizing it (at worst), we can learn to both explore it and harness it. And while it works for a few, especially those who build a media empire around a “You’re stupid” schtick, forever preaching from the deferred gratification pulpit has been unsuccessful for most, especially because of battling the biology of hyperbolic discounting (referenced above). But research by Hal Hershfield suggests that we can increase our interest in funding the future by using our imagination to animate it. I’ll invite you to imagine how you might integrate that into your planning.
And how can we help people accomplish more? By asking less of them. It’s that simple. In my work, I never give a client more than three recommendations at a time or a time horizon of more than a year—and I always find a way to tap into their emotion—their “why”—connecting each financial goal to a life goal.
Well, for starters, read my suggestions for advisors and work with someone who gets it. The economist who coined the term “behavioral economics” (and won a little Nobel prize), Richard Thaler, told me, “If the main thing that a financial adviser does in a session with a client involves looking at spreadsheets, then they’re not doing their job.” Wow—strong words. He concludes, “It is as much psychology as it is finance.” “As much” seems like a lot, no?
Just for fun, take Thaler’s advice and ask your financial advisor if he or she knows the difference between System 1 and System 2, and how they’ve employed those findings in their client experience.
But even if you’re a do-it-yourself-er, start by adopting the suggestion I gave to advisors: Accomplish more by expecting less of yourself. Don’t try to reallocate your portfolio, increase your auto coverage’s personal injury liability limits, research the cash value accrued in your life insurance policy, explore the impact of Alternative Minimum Tax and Qualified Charitable Distributions on your 1040, update your beneficiary designations, overhaul your cash management system, redo your estate planning documents, and open three 529 plans for your kids all at once. Choose no more than three at a time, work only on one at a time, and allow the success you have checking those boxes off to fuel your motivation to tackle the next on the list.
Then, consider applying more and better energy and attention to your financial planning by setting aside some quality time to review it, not whatever’s leftover after you’re spent.
Personally, I review my budget and cash flow every Saturday morning—or at least 46 or so Saturdays each year. That 30-to-60 minutes at the beginning of my day is driven by a very strong cup of coffee, a stronger album that will power me through the process of budgeting (I use YNAB—You Need A Budget—and have for many years now) and results in the predictable catharsis that comes with knowing exactly where I stand financially.
Lastly, remember Doris Lessing’s admonition to use our energies well, “instead of spilling them about.” Yes, much of that which saps our energy is very worthy—our meals this week and our next vacation, to name a couple. But most of us also spend a decent amount of energy spilled on another episode of Ozark (however thrilling) or another accounting of the number of likes our last post received.
We are, whether we like it or not, the Chief Financial Officers of our respective personal domains, so opting out really isn’t an option, and the only one who pays for our failures is us, and those we love.