Money is an emotional subject. Whether you are a saver, a spender, a conservative investor, or a resolute risk-taker, you feel something about your money. You may have felt nervous when the stock market dropped. Or you may have felt your self-worth is defined by your money. These are natural responses to something that has so much power over our lives.
Your attitudes towards money, or “money scripts”, were likely shaped by your experiences with money early in life, your parents’ attitudes and behaviors, and your cultural context. In the words of Brené Brown, what is the story you’re telling yourself about money? Understanding your attitudes is the first step towards developing healthy financial habits.
Recognizing Your Relationship with Money
Emotions around money often emerge when we speak with our clients about investing. With the stock market constantly shifting, news stations reporting on it constantly, and many people investing the bulk of their retirement savings, the stock market is an ever-present force in many of our lives.
Consider what you would feel if your investments declined in value. Would you be anxious or excited? Would you consider buying or selling? Your answers to these questions will indicate your risk tolerance as it pertains to your investments. We ask our clients to complete a 25-question survey resulting in a “risk score” which provides a quantitative measurement of risk tolerance in addition to your initial thoughts and feelings.
Now think about creating a budget. Does the thought that you might need to cut back generate feelings of stress? Or perhaps you are looking forward to finding more ways to save money? These two questions can help you understand your spending/saving style. Some people find a feeling of security in having a high savings balance and others find security in using their money to buy possessions and experiences.
Finally, let’s consider what you would do if you were given a large sum of money, no strings attached. You will not need to pay taxes on this money. Would you buy something large like a house or a boat? Would you donate it to charity or set it aside for your heirs? Would you start a business or sock it away into savings? These questions will indicate your primary financial goals.
Now that you know your attitudes in these three important areas, we can move to the next step: What do you do about it?
Developing strong financial habits
Now that you know your risk tolerance, your spending/saving style, and your financial goals, you can use this knowledge to refine your financial approach.
With risk tolerance top of mind, you are one step closer to developing an investment plan and sticking with it. Meeting with an AMM advisor or CERTIFIED FINANCIAL PLANNER® practitioner can help you zero in on your tolerance for risk and your financial ability to take risk. You may have a high risk tolerance but need to use your savings in the near future. This indicates that your capacity to take risk may be lower than your tolerance to take risk, meaning that you may be better off investing more conservatively.
On the other hand, you may have a low risk tolerance but a long time period in which to let your investments grow. Investing a little more aggressively than feels comfortable may be necessary to meet your financial goals. Working with a professional will provide you with the guidance to develop your investment strategy.
Whichever type of investor you are, there are a few common pitfalls anyone can fall into.
- Buying high and selling low. When stocks are at an all-time high, it can feel like they will make money forever. When they start to drop, it can feel like they will soon be worthless. The markets move in cycles and it is impossible to predict which way things will move tomorrow or a year from now. Deciding on an asset allocation, based on your risk tolerance and capacity, and sticking with it is a better strategy than reacting to what has just happened in the market.
- Timing the market. One of AMM’s 5 Core Investment Principals, “No one can predict the future,” is a consistently relevant reminder. There are countless articles and stories telling you that we are about to hit the market peak or that one stock is about to make millions. If the authors of these articles actually could predict these events, it wouldn’t make sense for them to broadcast that information for everyone to read. Humans are pattern-seeking creatures and it is natural for us to try to predict the next movement of the market.
Saving and Spending
You may be a saver, a spender, or somewhere in between. If you find yourself spending more than you should, you may need to trick yourself into saving for retirement, an emergency fund, or a future goal. If you find yourself unable to spend on anything but the bare necessities, and you have saved plenty of money to achieve your future financial goals, you may be unnecessarily sacrificing some present joy. Money is, after all, just a tool to be used to achieve your goals.
Ways to trick yourself into saving:
- Set up a direct deposit from your paycheck into your savings account. Better yet, open a savings account at a completely different bank than your checking account to make the money harder to reach. Even if you can only set aside $5/month, that will do more than saving $0/month.
- Create a budget or use a spending tracker app like Mint or Nerdwallet. You may save better by entering each transaction into an app like Pennies. That can make every expense feel more real which makes you examine your spending more closely.
- Make it a habit to review your automatic bill payments at least once a year. Are you getting your money’s worth out of that streaming subscription? Can you find a cheaper phone plan? Put the amount you would have spent into your savings instead.
Achieving Financial Goals
You have identified some important financial goals for yourself, which can be challenging. Give yourself a pat on the back! Now it’s time to design a plan to achieve those goals.
First, decide what this goal is likely to cost you and remember to factor in inflation. Second, when would you like to achieve this goal? Is it a short-term goal, 1-6 years out, or a longer-term goal? Divide your savings goal by the months remaining to find your monthly savings target. If this target is unrealistic, you may need to extend your time period or lower the amount you want to spend.
For a more complex goal like saving for retirement, consulting a professional may be best. There are many factors which play into a retirement savings goal and it is not always a matter of simple arithmetic.
For any financial goal, more education is always a good idea. If your goal is to buy a home, look at recent sales in your ideal neighborhood and learn the basics of financing a purchase. There may be other costs to your goal which you only discover through research.
If it feels overwhelming to tackle your attitudes towards money, call an advisor at American Money Management, LLC, and we can coach you through the process. With a professional guiding you, it may be easier than you think!