Why is Personal Money Management So Hard?

On June 10, 2009, Fidelity Investments announced the results of their second Couples Retirement Study.  They found that only 15% of couples had confidence in each other’s ability to manage finances.  Why is this so hard?

Successful money management is not easy.  There are four major obstacles to financial success.  First, is a lack of education. Second, is the volatility of the market itself.  Third, is our own human nature and fourth is a system that seems to foster distrust.  Let’s look at each one individually, and see how we can overcome these barriers so that we can enjoy life.

The first problem is a lack of education.  Most Americans went through their entire educational careers without taking a single course on personal money management or investments.  Even the language of finance seems foreign.  It is no wonder that many feel overwhelmed.  While it may be impractical to go out and get a doctorate in finance at this stage of the game, a little knowledge can help make you feel more comfortable when making financial decisions.  You can read books, attend seminars, but the best way to learn is through a mentor or coach.  A money mentor or coach is one who will take the time to fully explain your options so you can make informed decisions.  Moreover, your money coach should continue to work with you in the months and years ahead, providing ongoing advice and counsel.

The second problem is volatility.  The market is extremely volatile in the short run.  This holds true for stocks, bonds, CDs, and money markets.  Change is the only constant.  To make matters worse, the most volatile asset classes in the short term are the ones that have performed the best over the long term.  Let’s take a look at stocks.  According to Jeremy Siegel, Professor at the Wharton School of Business, the total return for stocks from 1809 – 2008 was 6.6% per year after inflation.  That might help to provide consolation to us when the market is down.  Far too often, however, short-term volatility just plain scares us.  While historical performance is no guarantee of future results, we can learn from it.  We must understand both the short-term risks and the long-term potential of the various asset classes when dividing up our assets in our portfolio.

The third problem involves our own human nature.  More often than not, these human traits lead to poor financial decisions.  There are a number of financial mistakes that you should guard yourself against.  One is inertia.  Back in the caveman days, inertia kept us out of trouble.  We would be hesitant to walk into a cave not knowing if there was a predator inside.  Our instincts told us to let someone else go into the cave first.  Today, we are faced with so many investment, retirement and insurance options, many people freeze, like the preverbal deer in the headlights.  Unfortunately, the results are often similar.  Not making a decision is usually a bad decision. 

Another problem is our desire to avoid losses.  Studies show that Americans prefer protection against loss by 2 to 1 over a potential gain.  This desire keeps us from achieving the returns we need to maintain our standard of living in the future.  In a real sense, we are safely managing our money into poverty. 

Some people make the opposite mistake.  These folks too often think overly optimistically.  They will invest in a “sure fire” small business or some wild high-tech investment with dreams of “getting rich quick”.  Usually, these get rich schemes end up with the investor poorer.  Being too conservative or too optimistic is equally bad.

The over reliance of status is another financial mistake.  We tend to believe in something or someone we have heard of.  Big-named companies give us the false sense of security.  Last year’s events proved big is not always better.  Some of the largest companies had the largest problems.  A name, after all, does not provide a service… people do. 

Our desire to maintaining the status quo is another mistake.  Inertia and status quo are different, although related.  Inertia is the fear to do anything, while status quo refers to our tendency to put change off to a more convenient time.  Most of us do this when we choose to eat dessert tonight, but promise ourselves that we will start a diet tomorrow.  With finance, this leads us to keep our current investment allocation, retirement strategy and insurance policies in place, not making changes as the economy or their personal circumstances change.  Every financial strategy should be reviewed at a minimum once a year.

The best way to overcome the negative aspects of our human nature is to have structure.  The best tennis players or golfers hire trainers and coaches.  Trainers and coaches provide them with a structure to do what they know they should, but might not without them.  They also provide invaluable insight from an outside perspective.  An investment advisor or money coach can do the same thing for you.  They can help you select the right financial strategies based on your objectives.  They can help you take appropriate action, now and in the future. 

The fourth problem deals with the current financial system that often leads to distrust.  Getting qualified, financial advice is critical.  But many Americans don’t trust their advisor.  The reason may be caused by the compensation methods the industry uses.  Typically, commissions are paid upfront giving the advisor an incentive to provide service early on, but not later.  Life, however, is an ongoing process.  People often feel abandoned by their broker and understandably become distrustful of the industry.  You deserve more. 

Fortunately, independent financial advice is now more available than ever.  We, at Money Concepts, have been providing independent financial advice for over 30 years.  We are not owned or controlled by an outside financial service or insurance company.  We do not sell any proprietary products.  We are free to give you financial planning advice on an unbiased basis.  Our compensation can come from fees, commissions, or a combination of both.  We will provide you with a full disclosure of all costs, fees, risks, and all other pertinent information so that you can make an informed, thoughtful decision.

Please feel free to pass this on to anyone you feel might benefit.  We appreciate all of your referrals.