Emotions rule our decision making- what we want to eat, what we want to wear, what we want to buy, how we spend our money, etc. While not always negative, making financial decisions based on your emotions can be problematic. Who hasn’t made an impulse purchase based on a gut reaction that they have later regretted?
Let’s face it- we are all guilty of letting our emotions get the best of us, myself included, which, unfortunately, can sabotage one’s financial plan.
Below, I’ve outlined the most problematic emotions I’ve seen throughout my years as a financial planner and how you can prevent them from ruining your goals.
In regards to financial planning, optimism can result in some serious under budgeting. I often see clients rationalize spending by saying “well I spent that extra $500 this month because we needed to repair our roof,” or “we spent more money traveling this year because of a family wedding.”
While it’s easy to convince yourself an expense is a one- time occurrence, when accumulated over time, these expenses can wreak havoc on your monthly budget and savings. As Financial Planners, our job is to hope for the best and plan for the worst. Therefore, when we work with clients on their financial plan we encourage them to calculate how much they really spend each month, have an emergency fund for those unplanned expenses like car trouble or home maintenance, and include a miscellaneous fund in their budget to cover the monthly “extras.”
2. Self-Control Bias
As humans, we have a hard time putting away money. Even with the best laid plans, we often lack self-control, choosing instant gratification over saving for the future. Admittedly, it can be difficult to stay disciplined when you are staring at the object you want to buy at this very moment in time.
To negate this emotion, reframe how you think about saving by visualizing how your actions today will impact your tomorrow. Through the use of technology, we can model how much you are likely to accumulate by the time you retire, and demonstrate how an increase or decrease in contributions will impact this amount. For instance, if we illustrate that by saving an extra $50/month you will have an extra $6,000/year upon retirement, would you choose to spend the $600 this year, or the $6,000 later? If enough emphasis is given to the future impact, most will choose the $6,000 later.
3. Wanting to Make That Last Check Bounce
I often hear clients say that they plan on spending every last penny of the money they’ve accumulated before they die. In theory, this sounds like an ideal plan, but do you really want your last 5-10 years to be stressful and filled with worry that your money will run out too soon? What if you live longer than you expect?
Our goal is for your money to never run out. With software and the right tools, we can project at what age your assets will be depleted based on your estimated annual expenses and income. This allows us to work with you to create a plan so you won’t feel anxiety about running out of resources prematurely.
I often hear clients joke that “my kids will be taking care of me when I’m older,” or “I won’t be taking care of my parents,” yet neither party discusses what will actually happen in the event long term care is needed.
At some point you need to ask yourself what you want to happen if you can’t take care of yourself. As we wrote about last week, while it can be difficult to think about the health challenges of getting older, it’s important to have a conversation with your family when you still have options to make sure your wishes and needs are met. Your financial planner can work with you to make the conversation as comfortable as possible. We can help you research different options such as long term care insurance and proper estate planning, and show you how the cost of long term care will affect your assets so you can make an informed decision with your family.
Financial planning is filled with emotions; it can be overwhelming, intimidating and scary. At Legacy, we strive to make the process as smooth as possible so you can relieve anxiety and let us worry about the details of risk management. We want clients to find the ideal balance of enjoying life today, while preparing for their future. Schedule a complimentary consultation to see how we can help you.