The No. 1 obstacle to achieving financial success isn’t what’s happening in the stock market or how much money we make, it’s ourselves. In a recent interview in the Journal of Financial Planning, author Mitch Anthony provided two conclusions from behavioral finance. The first is we make bad decisions with our money (which is also why it’s an uncomfortable topic for most people). The second conclusion is even worse because we’re not even aware of these bad decisions.
Another author who has explored this topic in great detail from a practical perspective is financial planner Bert Whitehead, author of “Why Smart People Do Stupid Things with Money.” According to Whitehead, financial dysfunction is defined as “financial choices and strategies that people believe are effective but that actually impede their financial progress.”
This dysfunction is the result of four main factors:
1. Lack of awareness of your financial personality.
2. Relying on factors outside your control.
3. Inability to benchmark progress.
4. Using tools and strategies designed for other people’s needs.
Just as we all have different personality types when it comes to relating to other people or getting work done, we also approach money from different directions too. We see this commonly among spouses who have different financial personalities which left unaddressed can lead to conflict.
Relying on factors outside your control is most evident when it comes to making financial decisions based on world events or fear of uncontrollable fluctuations in the financial markets. This particular factor is perhaps the most pervasive as it’s often promoted by news sources whose interests do not align with the audience receiving the message. Think of cable’s Jim Cramer who may be entertaining to watch but not necessarily a good source of financial advice for most of us.
A common question I hear from people is how do they compare with others at their age in terms of retirement preparedness? While comparing yourself to others is bound to lead to anxiety or envy, benchmarking yourself against your own goals is critical. Rather than comparing your performance to the stock market, how about asking yourself whether you are on track to reach your goals?
The final factor recognizes that a lot of financial products today were developed for large institutions or the ultra-wealthy which is not most of us. In addition, many of the products created for the middle market are imbedded with high costs that benefit the seller more than the buyer.
So what are you to do with this information? First, recognize how each of these factors plays a role in your life. Second, educate yourself and determine how you can move from financial dysfunction to financial independence.
