Global Courant
Human psychology and money don’t go well together. If left unchecked, our psyches can easily sabotage financial decision-making, behavior experts said during a panel discussion at CNBC’s Financial Advisor Summit.
“We’re all nuts when it comes to money,” says Brad Klontz, director of YMW Advisors in Boulder, Colorado, and founder of the Financial Psychology Institute.
“The miracle is that everyone is doing well,” he added.
The human brain is wired to make choices that are money losers in the long run, such as buying high and selling low, making a purchase because of the “fear of missing out” or engaging in herd mentality, for example, said Klontz, a certified financial planner and member of the CNBC Financial Advisor Council.
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These shortcomings actually make sense. Many date back to evolutionary processes that took place thousands of years ago across the species or more recently, at an individual level in early childhood, experts said. Parents, culture and socioeconomic status are powerful forces shaping money beliefs from a young age, they said.
In addition, feelings of shame, such as thinking we have too much or too little money, are pervasive, experts added.
This tendency stems from comparing themselves to others in the “tribe,” leading to a sense of need to “keep up with the Joneses,” Klontz said. Households may therefore place undue importance on accumulating an arbitrary amount of wealth — perhaps $1 million or $5 million — when those numbers don’t mean much for overall happiness, he said.
“The number itself has to be very personal,” Preston Cherry, founder and president of Concurrent Financial Planning in Green Bay, Wisconsin, said of a financial target.
“It’s different for everyone. It’s kind of like a fingerprint, so it’s very unique,” added Cherry, a CFP and member of the CNBC Financial Advisor Council.
Well-being is a leading measure of ‘wealth’
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Financial well-being is about more than one’s investments, experts said. It’s about one’s goals and how money can help achieve those desires, experts said.
In fact, a new study by Charles Schwab suggests that most American adults today think that overall well-being, not money, is the most important measure of wealth.
Cherry advised putting “focus on FOMO over FOMO,” meaning “focus on moving forward” with your vision and plan rather than “fear of missing out.”
“Keep your blinders on and look straight,” he said. “Don’t compare yourself to others.”
Social media, which is full of misinformation and bad financial advice, has made this a challenge, experts say.
Furthermore, money has become increasingly abstract in a digital world of cashless payments. That can make it hard for kids to learn good money habits because our brains better understand concrete examples, Klontz said.
When buying an expensive item such as a vacation, parents can be a good role model for their children by creating a savings plan and demonstrating how it works. For example, they can set aside a certain amount of their paycheck for six months to meet the goal, learning important financial concepts such as delayed gratification and saving for the future, Klontz said.
More generally, money is still a “somewhat taboo” topic when it comes to both conversations with others – be it a spouse, children, friends or parents – and thinking about our own lives, Cherry said.
“The more often we can have healthy conversations (about it) … I think we can get better results with money and what we do with our money,” Cherry said.
