In my years of studying financial psychology, I have worked with many people. From farmers and small-business owners to students, parents, teachers and financial advisors. If my experiences have taught me anything it is this: when it comes to money, we all have issues. But we all can get better.
Rich, poor, experienced or green, we can all learn to have a better relationship with our money. No matter where you are starting from, learning these rules, and developing the habit of coming back to them when you get off track, will help you get to a stronger place financially. As advisors, you can help your clients develop stronger financial thinking by learning these three rules, and helping clients to incorporate them over time.
Rule 1. Listen for the Story
Every financial decision starts with a story. A person’s relationship with money is almost never about the numbers. It is about the stories we tell ourselves because of those numbers. This is why one client can feel satisfied with a middle-class lifestyle while others feel constrained on several million dollars a year.
Each of us has come to believe certain stories based on our upbringing and our experiences with money: stories about who we are and who we are not, stories about what we can and cannot do in the world. This is where our relationship with money is rooted, and this is where sound money management begins.
It starts with a story.
Some people, having watched their parents lose sleep during the housing crisis, will shrug off any suggestion of real estate in their own portfolios. Others believe deeply that life is too short to worry about tomorrow, and are painfully underprepared for retirement. All of us have felt the pull of marketing campaigns that tap into our personal hopes and goals. We buy clothes, cars and homes that reflect the way we want to feel about ourselves. Taken together, these day-to-day financial choices add up to a lifetime of financial health, or instability.
As advisors, recognizing that every financial decision is based on a story can help you to tap into your client’s underlying financial narrative. For tips and tools on how to help clients to change the stories that may be working against them, there are some wonderful resources in Mind Over Money (Klontz & Klontz, 2009), Strangers in Paradise (Grubman, 2013), and of course my own new book, LOADED (Newcomb, 2016).
Rule 2. Help Them Choose Healthy Strategies
The stories we believe lead us to choose certain strategies for meeting our needs. A person who believes that ‘good’ parents pay for their kids’ college tuition in full may sabotage their own financial security in order to nurture their children. This strategy may meet some basic needs (caring, nurturing, knowing they matter, etc.) but it threatens others (security and basic survival in retirement).
The goal of a sustainable financial plan is that it will meet today’s needs without sabotaging the needs of our future self. In order to do this, you can help clients to recognize the difference between a need and a strategy.
Needs are constant, but strategies are flexible. Even the frivolous items we buy on impulse are attempts to serve a fundamental need such as fun, comfort, ease or relaxation. Simply cutting back on expenses without addressing the underlying needs that those expenses are meeting is a recipe for unhappiness. This is why so many people set out to make financial change only to find themselves ‘cheating’ on their plan.
A sustainable and satisfying financial plan is far more like a map than a diet. It’s a plan for meeting all of your needs with your limited resources.