The source of financial stress

Two years ago I wrote about relieving financial stress for Stress Down Day.

Fellow financial educator Carl Richards of Behavior Gap just released a new diagram that summarises one key source well:Circle-Stress

One value of financial planning is in removing the uncertainty and replacing it with clarity of direction and the confidence to act.

So if you’re tired of constantly thinking about and even stressing about money related issue then I recommend you invest in professional financial planning advice.

P.S. Carl writes some insightful articles about how our behaviour impacts our financial situation. I recommend you consider subscribing to his newsletter.

The Three Fatal Financial Behaviours

Have you ever thought you are not getting as far ahead financially as you think you should, but are not sure why? Then maybe one or more of these three behaviours may be the cause.

Have you ever thought you are not getting as far ahead financially as you think you should, but are not sure why? Then maybe one or more of these three behaviours may be the cause.

financialYour current financial situation is the cumulative effect of all the financial and lifestyle choices you have made to date. Over time your possible lifestyle outcomes diverge greatly and not necessarily towards the outcome you most want (represented by the star on the diagram to the right).

The purpose of comprehensively planning your financial situation is to maximise the probability that you will meet or exceed your desired lifestyle.

Implicit in this is to minimise the impact of negative outcomes from your choices and from external events.

Why we don’t meet our financial goals

I believe there are three main categories of reasons we don’t meet our financial (and therefore lifestyle) goals:

  • Knowledge – we don’t find out the right things for us to do right now
  • Behaviour – we don’t do the things we already know we should be doing
  • Time – we take action too late (delay)

In this article let’s look at three financial behaviours that can prove fatal to the achievement of your goals and what you can do to overcome them.

There are other destructive behaviours. I have chosen these three because they eat away at your foundation and are counter-productive to your other efforts. Long term readers may notice they link to the three Cs of Money Mastery.

The Three Fatal Behaviours

”three

1. No idea what you spend

The common impact of this behaviour is that you end up spending way too much money on insignificant things and don’t have enough for really important things. The longer term impact is that you will not be diverting enough savings to longer term wealth creation meaning you may never be able to retire on your terms.

A symptom of this behaviour is thinking “wow, where did all my money go?” Another symptom is having an ad-hoc important event creep up on you, like a wedding or milestone birthday and you not being able to afford to fully participate. A variant of that symptom is that whenever that happens you whack it on your credit card and spend months trying to repay it.

What to do

You know what to do to solve this one just like I know what to do to get fitter. If you exhibit this behaviour hire a personal trainer for your money to support you in getting financially fit.

Call me about cash flow coaching and read my last article for additional suggestions.

2. Haphazard investment decisions

We make haphazard investment decisions when we don’t really know what is the best option for us but we can’t be bothered spending the time and energy on the research. So we tend to do what others are doing and take emotional comfort in being part of the crowd. (For most people this will be sub-conscious.)

The impacts of this behaviour are many and include:

  • Mediocre returns – you may make money but probably nowhere near enough for the ‘risk’ you took, and also not as much as the rest of the market. So you miss your lifestyle target (the star).
  • Stress – you are not confident about the investment so you are stressed about what could or is going wrong. You saved time doing the research but traded it for emotional stress – what’s the point?

What to do

The solution here includes:

  • starting early (like right now) so time is on your side
  • starting simple with only what you currently understand
  • Taking incremental steps forward in your knowledge so you can increment forward in complexity of investments
  • Hiring a mentor to educate you and thereby increase your confidence and capability. (A good financial planner will not only advise but also educate you.)

3. Blind optimism

This behaviour is all about the impact of negative outcomes from your choices and from external events.

buried head in the sandOptimism – you think it’ll never happen to you. You underestimate both the likelihood and the consequences of something going askew.

Blind – You don’t even bother to investigate, consider and evaluate what could go wrong and its impact.

What to do

“Sometimes maybe curiosity can kill the cat-astrophe before it actually happens. Ask questions, seek answers, find possibilities.” Wise words from one of my mentors, Glenn Capelli.

Next erect your safety nets so if you fall off the tight rope of life you bounce rather than splat.

Do It

You probably know this stuff already – I write about it all the time. But if you are not doing the positive things you are robbing yourself of riches. One day the party is going to end and you will wake up with a rude hangover (that could last decades).

Party responsibly and you can enjoy both today and tomorrow.

Just like health, if you need support and accountability to implement new financial behaviours hire a personal trainer and even buddy up.

To have enough money to live the life you’d love stop researching new trends (K), start doing the foundation actions (B) and do it now (T).

Yours in prosperity

Matt Hern CFP
Financial Educator and Adviser

Take The Financial Pressure Down

Today is Stress Down Day, to raise funds for Lifeline. As part of their promotion of Stress Down Day Lifeline conducted a Newspoll to discover what was stressing Australians.

The Newspoll found that two thirds of Australians are stressed about money, second only to being stressed about work. Does that include you?

Financially Stressed CoupleThe Lifeline poll reminded me of research published last year by Relationships Australia, which found that financial stress was the second largest contributor to relationship breakdown, affecting 35 percent of relationships.

This may be a stretch, but if we can work together to reduce our financial stress we may be able to lower the divorce rate and bring more joy into everyone’s lives.

Causes of financial stress

I started writing a list of what has caused financial stress among people I’ve met. Most of the causes fell into two broad categories:

  1. Not enough money (to do, buy or retain)
  2. Doing it for the money

In this article I’ll share some tips for reducing your stress caused by “not enough money”. Later, I’ll write about “doing it for the money”, but if you’re keen to learn how to earn money doing what you love then please call me now.

Stress about not enough money

Our stress seems to rise when we don’t have enough money for something that is really important to us. For example:

  • To join our close friends on a big interstate or overseas holiday (maybe to celebrate a milestone birthday)
  • To buy a bigger house when our family has well and truly outgrown the current shoebox
  • To keep our car and house when we lose our job and fall behind in the mortgage repayments

Our stress doesn’t appear to rise when we decide we can’t afford the $2 chocolate bar or $15 movie ticket. I believe that is because those things aren’t really that important to most of us.

Financially related decisions can also stress us, and I believe they fall into this broad category. Our stress level is affected by the materiality of the loss or by the consequence of a wrong decision. If we get the decision wrong it may mean we won’t be able to upgrade our shoebox house when we want to, so then we stress about the decision.

Save for the Significant. Minimise the Insignificant

To reduce your financial stress plan to have enough money for those things that are most important to you. This is a personal thing and is based on your values.

Once you have plans to be able to afford the most important things in your life you can spend the rest of your money on whatever you want, guilt free.

You need to move your thinking from “next pay” to “next year” and then onto “next decade”.

I believe it is through spending too much on daily insignificant things that we end up not having enough for the significant things. This is often because the significant experiences and achievements are lumpy and irregular, so they can sneak up on us.

Bring far away important things into focus

”binoculars”Here’s an exercise that you can do.

Get a blank piece of paper and place it in landscape orientation. Across the middle from left to right draw a thick line. The left represents now; the right represents your passing, say at age 100.

Divide this line representing the remainder of your life into bite size chunks. The length of each chunk is not fixed, just make it meaningful to you. You may like symmetry and therefore make each chunk an even five years. Or each chunk could be of different length representing different life stages you have in mind.

Next fill the rest of the page with all of those achievements and experiences that are really important for you in each of those meaningful chunks of life. For example:

  • Career transitions you’d like to make
  • Places you’d like to see in the world
  • Experiences you’d like to have with your family
  • Time out of the workforce to study, reflect or travel
  • Contributions you’d like to make to your community and world

For inspiration on what is really important reflect on your personal values.

Now implement plans

Implement a clear plan to manage your money so that you achieve and experience what is really important to you. Then you can happily spend the remainder on whatever insignificant pleasures you want, guilt free.

This is how you can achieve what I call financial fulfilment. And this exercise is part of the process that I call Fulfilment Financial Planning. To learn more call me on 1300 669 101. I take clients from all around Australia and would love to hear from you.

Six rules can help you avoid Sod’s Law

In The Australian today, Peter Switzer writes a good article that extracts fundamental lessons for us all from the recent loss of $100 million by Sydney lawyer, Chris Murphy. Read the full article here.

When seeking investment information it is easy to be attracted to the neon lights and fanciful claims of certain investments. But it is essential to look past the glamour and understand the core of what is going on.

Is it a wolf in sheep’s clothing? Or a beautiful swan within an ugly duckling?

If in doubt, return to the fundamentals and stick to what you understand. Complexity does NOT equal value. Simple is often the best. 

Delusion lets smokers breathe easy

MOST Australian smokers are in denial about their habit.

A survey by the Cancer Council Victoria reveals that 60 per cent of smokers cling to “self-exempting beliefs” that smoking-related diseases such as heart and lung cancer are caused by air pollution or genetics.

Tamara Davis, The Weekend Australian, December 29, 2007

Self-exempting beliefs don’t just apply to smokers and are not limited to our health habits. The article headline could easily be changed to “Delusion lets us spend easy”

A non-smoker probably reads the above quote with disbelief. With all of the advertising over the recent decades how could anyone still think that smoking and lung cancer are not linked?

So, as we enter 2008 ask yourself if you have any self-exempting beliefs that are negatively impacting on your wealth.

For example:

I’m young so don’t need to start saving and investing for my retirement.

I invest in residential property so can ignore my superannuation.

I’m fighting fit, drive and live carefully so don’t need insurance because it’ll never happen to me.

Apparently you are not responsible enough to be investing by yourself

“…weak and unsophisticated investors should not be permitted to make high-risk investments unless they are totally aware of the risks”.

According to an article in The Weekend Australian the above is the opinion of Tony Lewis of Lewis Securities in response to recent loses experienced by investors in income based products. Lewis goes on to suggest that “applications for new investments (or rollovers of maturities) by public lending institutions should be certified by an Australian Financial Services Licence holder or their representative.”

[Reference: “Certification needed to protect fools who rush into financial products”, by Tim Blue; The Weekend Australian; July 28-29, 2007. Read the full article here.]

Yes, it appears that many people have been lured into high risk investments by virtue of the associated marketing and advertising information. But if that is all they base their investment decisions on it is foolish, as the article’s headline suggests.

Is a broadly applied, paternalistic approach really the solution to foolish behaviour of some individuals?

Two consenting adults
In my view, someone completing an application form based on their own research (no adviser involvement) is entering into a situation that is akin to intercourse between two consenting adults. Yes, it is likely that at least one of the parties has presented themselves to be more attractive than reality. But if they proceed with fervour and no protection and then suffer negative consequences then a wonderful learning opportunity results. If the lesson is not learnt the universe is bound to create several more learning opportunities for the individuals involved.

“Fools and their money are soon parted”, so the saying goes.

We expect adults to take personal responsibility for their sexual actions yet when it comes to their money somehow adults are no longer adequately responsible. I would have thought it was the other way around – as far as I am aware no hormones are involved in investment.

How would you feel?
If you are reading this article it is likely that you are an active investor who likes to do your own research, probably without the aid of a financial adviser. Further, you may not yet meet the legal definition of a sophisticated investor. So, how would you feel if you were told that you could not complete an application form without official sign-off by an authorised adviser?

By leaving a comment below, please let me know how you would feel in the above situation. (You can be anonymous)

Also please let me know your view on how these situations should be managed? Am I too harsh in expecting personal responsibility; should we legislate to protect people against themselves?