Bad Moves & Good Advice

When it comes to money, our minds can play games with us.

• We’ll drive across town to save $10 on a $25 alarm clock, but we won’t drive across town to save $10 on a computer. Why is that? The value of $10 doesn’t change, but our perception of it does.
• How many times have you gotten gift money and then spent it – almost wasted it – on something that you otherwise would not have bought? Why is that? It’s as though we value it less because we got it effortlessly. Why do we never think to save such “found” money?
• We will spend more money when we can charge a purchase than if we had to pay cash for it.

These inconsistent, irrational actions (and many more) are being uncovered by a new branch of psychology, Behavioral Economics.

If money is going to serve our long-term interests – funding college educations and retirements – we clearly need some help to think more rationally. For many people, their financial future is a real worry. Yet they don’t seem to be able to change financial course. Perhaps it’s time to get some help.

An antidote for financial worries

A recent Northwestern Mutual study surveyed 1,279 people to gauge what they knew about their personal finances and what they were doing to fashion their financial future. In general, the study found that those people who work with financial professionals –

• Set goals and contribute to them, saving twice the amount of people without advisors.
• Anticipate retiring at a younger age.
• Are less concerned about supporting themselves in retirement or about the future of Social Security.
• Increase their use of financial tools, like 529 plans, mutual funds, IRAs, stocks, bonds, and life insurance.
• Are better educated about financial matters, rivaling the knowledge of people 15-20 years their senior who don’t consult an advisor.

One more thought: the more educated we become, the better we can teach our children. Our children are inheriting our financial behaviors. We have to be sure they are good ones.

Those who do not know how to prepare for the future and who don’t seek professional advice worry about the future. A Northwestern Mutual survey found that 61% say that worrying about retirement is what keeps them up at night.