Why is it that people who seem to have more than enough money often watch what they spend and take great measures to protect their wealth? On the other hand, why do some people who clearly need money put little effort into getting it and continuously make poor financial decisions?
When I first started my career, I assumed most of my clients would simply take the logical steps to achieve their financial goals — whether those goals were accumulating great wealth or merely finding the money to finance their passions. I was wrong. Almost 19 years as a wealth manager and copious amounts of research later, I realized this is only true for a very small percentage of the population. There’s a strong correlation between the level of prudence in financial decisions and the level of wealth or success in achieving one’s financial goals.
Unraveling the reasons why some people make wise decisions with their money and why most don’t has intrigued me for almost two decades, and I’ll address what I’ve learned over the next number of posts. Given the vast scale of this subject, these posts will only cover the highlights of each section. I’m also working on a white paper for those interested in digging deeper.
So, why does this happen?
We’ve spent over 99% of our existence as hunter-gatherers, meaning we’ve evolved for a world much simpler than the one we live in. It’s hard for us to deal with many of the current challenges we face today, including how to save, accumulate, spend, and invest the money we work hard to acquire. It’s not surprising, then, that money remains one of the biggest sources of stress for us as a population. A recent study found that 44% of Americans are under a “high level” of stress regarding their finances. This is far from an isolated study, as there are dozens of other studies and surveys supporting this notion as well.
An attitude change
When you think about money and how it affects you, ask yourself the following questions:
How you were raised, the environment you were born into, and the expectations set for you — whether by parents or society — play important roles in how you answer these questions. If you were raised to believe you could achieve anything and your success would allow you to better society and take care of the people you cared about most, then odds are you will not only believe you have that ability, but will also act in a manner that will help you achieve that level of success and affluence.
On the other hand, things would likely be different if you were raised in a less fortunate environment. If you were never encouraged to reach your potential and grew up believing that wealthy people became so by taking advantage of those less fortunate than themselves, it’s more likely that you’d have less of an incentive than in the first example to work hard and become financially successful. I’d argue it would give you a disincentive to do so, especially if the peer group you have spent most of your life with shares the same opinion.
The starting place we’re each born into gives everyone an initial advantage or disadvantage, which is further impacted by our genes, peer group, and access to financial resources. However, with few exceptions, your financial potential does not start and end with where you placed in the birth lottery. Your overall psychology — your attitude and belief in your ability — can have a powerful effect on your work ethic and drive to achieve the financial goals you set. It’s something I stress more than anything to my clients, particularly those who doubt their ability and struggle to stick with their financial plans. Once you’ve changed your mindset, the possibilities are endless.
Setting and defying expectations
Expectations play a huge role in financial success. A perfect example of this can be seen with lottery winners. Although there are other factors (to be covered in future posts), one of the reasons why an estimated 70% of lottery winners lose their fortune in a few years is because they don’t believe they deserve to be wealthy. The dissonance between their new found wealth and beliefs causes a level of uneasiness that eventually leads them back to their comfort level. It’s as if we have an internal thermostat that attempts to match our personal expectations with our realities. When the two don’t align, whether you’re ahead or behind, you take action to ensure your reality matches those expectations again. By raising our expectations for ourselves, we can increase this thermostat setting, beginning the process of creating growth and progress in our lives.
After this is done, we can move on to ensuring we have the right strategy in place to achieve the goals we’ve set for ourselves. If you consistently use an inefficient plan you likely won’t be successful, or it will take much longer to achieve your goals. As the old adage goes, “you can try as hard as you want, but you’ll never find a sunset looking east.”
Now that we’ve discussed the importance of having the right mindset, my next post will begin discussing the cognitive errors and blind spots we are susceptible to as well as strategies we can use to make progress in our financial lives.