There are times when instinct serves you well and other times when slow deliberation is the best path. If you are hiking through the mountains and see a large bear in the distance, it is time to trust your instincts and head toward safety. There is no need to hang out and see if the bear is friendly.
However, our finances are not usually served well by automatic reactions. When we react based on fear, desire, or past experiences, we are likely to get ourselves off the best path to our wealth management goals.
Behavioral finance, the way ViaWealth practices it, gives you the opportunity to move past knee-jerk financial tendencies into carefully-planned strategies that help lead you where you want to go.
Money is an inherently emotional subject for many people. Whether you are happy about a tax refund or nervously wondering how much of a hot water tank leak an insurer will cover, financial events evoke feelings.
While emotional responses to financial stimuli can be somewhat involuntary, it is possible to prevent them from overriding your reasoning. As financial advisors, we are intimately familiar with the benefits of doing so.
We have heard too many troubling stories of people who let their emotions drive them to make poor short-term financial decisions that significantly impacted their long-term retirement plans.
If they had only learned to switch gears between fast thinking and slow thinking first—and then tapped the brakes when they felt their adrenaline kick in—they might have avoided financial heartaches.
Behavioral finance is the scientific field of study devoted to this. A psychological and sociological offshoot of behavioral economics, it helps us understand and rise above how people think about and react to money.
Nobel-winning economic behaviorist Daniel Kahneman authored a famous book on the subject called “Thinking, Fast and Slow.” Many in his field consider the work to be groundbreaking.
As a result, we now know that giving in to last-minute financial urges under stress is often habitual, from spending too much on dinner or shopping online for items you don’t really need. The good news is that you can overwrite these bad habits with better, more positive ones. Instead of panicking, we can train ourselves to take a deep breath and call your fiduciary financial advisor in Minneapolis.
It has been said that courage is not so much bravado as doing the right thing, even when scared. Similarly, establishing better financial habits does not mean you will never feel concerned. The difference lies in how you react, despite feeling uneasy.
Once you start recognizing the need to pause for a moment and consider things before you act, things often change for the better in your finances. For example, remember that leaky hot water tank we mentioned earlier?
Imagine that your insurance company notifies you that they will be contributing $10 to cover all of your flooded basement cleanup and repairs. Many people’s gut might say, “There isn’t enough in the bank. Start grabbing out IRA cash, fast!” in response.
However, if you give in to that impulse and pull money from a retirement account, you could incur significant monetary penalties from the IRS. It might feel like you are being decisive at the time, but in all likelihood, you will regret it deeply later.
Rather than making a rash, massive emergency distribution from your IRA, what if you called your ViaWealth advisor and set up a meeting? You could create a plan to gradually withdraw your money as needed, paying contractor by contractor.
Timing your distributions carefully and, if necessary, farming capital gains losses, the two of you might avoid those tax penalties altogether. In all honesty, having your basement mold treated after getting it pumped dry might not be cheap.
Nevertheless, your overall costs would still probably be much lower than if you had incurred IRS penalties by hastily withdrawing a lump sum. This is a win for you and a win for us because we love helping clients develop monetary habits based more on reasoning than reaction.
Mileage varies between readers, so please do not take any of this as a guarantee. With that caveat, there are clearly some decisions that we make with careful deliberation and others that we make based on our past experiences or factors like cultural biases.
Like good financial planning, establishing better monetary habits is a long-term task. The best results seldom happen overnight, but there is something to be said for the epiphany that occurs when you catch yourself in time to keep from repeating a self-sabotaging habit.
At ViaWealth, we love seeing that light come on in peoples’ eyes. As much as we delight in saving you money and helping you strategize investments, witnessing those first moments of someone’s financial and behavioral sentience is priceless. It just never gets old.
That is why we call our time-tested approach to setting financial goals values-based financial planning. You are much more to us than simply a set of numbers; you are a person whose ideals and values we want to get to know.
By doing this, we can tailor-make a financial plan that fits you uniquely. As your fiduciary financial advisor in Minneapolis, we want to ensure that you are supported toward realizing the life you really want.
Investing decisions should always begin from a position that is as thoroughly informed as possible. That is why our independent wealth management philosophy is built around who you are and what you want.
We are happy to speak with you if you are between advisors or would like a portfolio review due to current market conditions. Contact us today.