How to Stop Making these 3 Money Mistakes: Psychological problems people have with their finances

I am a firm believer that the field of Behavioral Finance can explain a lot about both the good and not so good savings and spending habits of Americans.  This article by Veronica Dagher in the July 24, 2013 edition of Market Watch from the Wall Street Journal, helps to explain these concepts further.  Let me know what you think!


Do you have chronic money problems? Spend too much? Give too much to your kids? Keep putting off writing or updating your will?

Maybe it is all in your head. Really.

Financial advisers and therapists have identified a number of psychologically-based mistakes people make with their money.

“How you feel is how you deal…with money, that is,” says New York psychotherapist Karol Ward, whose six-figure clients help other people make money but find it difficult to hold on to their own.

Here are a few of the most common psychological problems people have with their finances—and what you can do about them:

1. Overspending

Ms. Ward worked with a young woman who wanted a relationship but had “deep pain” from her childhood around trusting others. Most of the woman’s evenings after work were spent wandering through stores shopping for clothes she didn’t need, recalls Ms. Ward.

When she came to see Ms. Ward, she wanted to get out of debt and manage her money. During therapy she uncovered the connection between her fear and loneliness and the overspending.

Overspending usually is related to the management of emotional pain, distorted beliefs about what people feel they deserve and a disconnection between the impulse to buy and the actual results of the purchase, says Ms. Ward.

“Many overspenders don’t need what they buy—they just feel they have to buy it,” she says.

Financial planner Timothy McGrath has seen many clients overspend because they want to live a similar lifestyle to their neighbors or co-workers, while not recognizing that everyone’s financial circumstances are different.

“Clients often don’t realize how purchases outside of their means will impact long-term planning,” says Mr. McGrath in Chicago.

Once clients are aware of their behavior they can work to change it, says Ms. Ward. Before buying, people might ask themselves “What am I really feeling?” or “Why do I want to buy this?” she says.

Marty Martin, a financial psychologist in Chicago, advises clients who feel the need to spend, but are in a heightened emotional state, to wait to make a decision.

2. Enabling

Financial enabling is a common trap for parents who want to help their adult children who are in chronic financial trouble, says Brad Klontz, a Lihue, Hawaii, financial psychologist.

Mr. Klontz worked with a 75-year-old woman who had given her 52-year-old son a total of $150,000 over five years for various business ventures, all of which were ill-conceived and failed. She was having trouble saying “no” when the son asked for another $50,000, even though her own financial security was at risk as her savings were dwindling.

“Money for doing nothing creates more doing nothing,” says Mr. Klontz.

Laura Scharr-Bykowsky has seen many grandparents rack up large amounts of credit-card debt and give away the last of their savings to fund their grandchildren’s tuition or vacations.

They may have a desire to spoil their children or grandchildren, want to get their attention, don’t want to renege on a promise they made when they were in a better financial situation or feel guilty for not seeing them more, says Ms. Scharr-Bykowsky, a financial planner in Columbia, S.C.

If enabling has been going on for years, it can be difficult to stop doing it “cold turkey,” says Mr. Klontz. For enablers, it can be important to recognize that their efforts to help backfired or have been reinforcing dependence.

Mr. Klontz says it is also important to set up a timeline to withdraw financial support, say, in six months, and perhaps explore other ways to help such as paying for a financial plan, a career counselor or a therapist.

Ms. Scharr-Bykowsky counsels clients to reduce support to their kids and stop altogether when they are gainfully employed. Then, she says, the parents can make gifts periodically, but only if their adult child is being financially responsible.

“The most important word they need to use is ‘no’ or else they’ll have an entitlement problem to deal with,” says Ms. Scharr-Bykowsky.

3. Denying

Financial planner Peg Eddy has seen several clients try to deny the reality of their financial situation and think everything “will all work out.”

“Amazingly, some folks think there is a ‘money fairy’ that will bail them out when they reach 65 and they only have Social Security to depend on,” says the San Diego financial planner.

This form of denial combined with lethargy leads to not doing any planning but potentially becoming a burden later on to any children or family they may have.

She’s also seen denial take the form of people’s failures to create or update their estate plans.

That happened to a man she worked with who didn’t want to update his estate plan and died suddenly at age 54. His wife and children were left struggling.

People may not have an estate plan because they find it too upsetting to think about or they don’t know whom to name as their children’s guardians, says Lauren Lindsay, a financial planner in Covington, La.

“The problem is that the state will have a plan if you don’t and it may not follow your wishes,” she says.

Namely, it wouldn’t include any charitable considerations or know if there are any immediate family members who you don’t wish to be involved, she says.

Often the “social taboo” around talking about money keeps family members from discussing inheritance and estate issues openly before anything happens, and while there is still a chance to hear everyone out and include them in the planning, says Mary Gresham, an Atlanta psychologist.

To make this conversation easier, a person might introduce the topic by saying, “I’d like to talk about something that is hard to talk about,” so the other person knows it isn’t just a casual conversation, she says.

Judy Lawrence tells clients to “step up and face the numbers” of their real financial picture. That way, they can create a plan based on their true income, outline a way to gradually pay off debt and save for retirement, says the Albuquerque, N.M., financial counselor.

Ms. Eddy recommends that clients accept their own mortality and plan for what happens in the event of an emergency, disability or death. They can start by having a good estate plan, update beneficiaries on their accounts and if they own a business, continue to work on their exit strategy during their lifetime.

“News flash—none of us are getting out of here alive,” says Ms. Eddy.

To Your Successful Retirement!

Michael Ginsberg, JD, CFP®



Add My New Phone App to Your Smartphone!

I am very excited to announce the availability of my firm’s new phone app.  You can access this phone app by clicking this link through your smartphone.  In order to accomplish this, you need to open this weekly email message through your phone, not just your computer.

This phone app will allow you to:

  • Access your accounts at SEI and your REITs
  • Watch and share educational videos I have produced for clients and their friends
  • Contact me either by phone or email
  • Access my website
  • Read my current weekly blog message
  • Directions to my office

Click this link after opening this email message on your smartphone.  The link is:  http://michaelginsberg.gowebmo.com

Once you click the link it is very simple to add the app to your phone.  Here are the instructions for an iPhone:

App Setup Instructions_Page_1


You can share this app with your friends by forwarding this message or by:

  • Clicking the share button on the phone app
  • Click the email button
  • Enter your friend’s email address
  • Send the message

I look forward to hearing your comments about the app and the videos.  If you have suggestions about other tools and features I should include in the app, please let me know.


To Your Successful Retirement!

Michael Ginsberg, JD, CFP® 


What Makes Clients Happy? A Good Retirement Plan


90% of investors working with financial advisors are happy with their retirement income plans, according to a recent survey of 2,000 individuals

Advisor with Retired Clients

Americans that work with a financial advisor are twice as happy about and confident in their retirement plans as those not working with an advisor, according to a study released Wednesday by Franklin Templeton.

The 2013 Franklin Templeton Retirement Income Strategies and Expectations survey found that 90% of investors working with advisors are pleased with their retirement income plans, and 87% are confident in these plans. Just 44% of investors who are not working with advisors say they are happy with and confident in such plans.

“The findings confirm that the most essential emotions surrounding retirement income planning—happiness with, confidence in, as well understanding one’s plan—are all increased substantially when you work with a financial advisor,” said Michael Doshier, vice president of Retirement Marketing for Franklin Templeton Investments, in a press release.

For the study, some 2,000 adults 18 and older completed an online survey in January.

Investors who work with advisors are much more likely to understand their retirement income plan (86%) versus investors who don’t (48%).

“Retirement income planning can be overwhelming, and professional assistance goes a long way in not only achieving financial goals, but feeling good about the process,” Doshier said.

More than half of investors who completed the survey, 58%, cited experience with retirement planningas the most important factor when selecting an advisor. Plus, the same number, 58%, who had developed a written retirement income plan said they understood how much of their current income would be replaced by Social Security.

In addition, over half (51%) indicated that they would switch financial advisors or begin working with one for the first time if an advisor developed a written retirement income strategy for them. This was particularly true for investors in their key asset-accumulation years, specifically, 65% of those 35-44 and 62% of those ages 25-34.

When asked what they most want most from an advisor, investors said:

  • A retirement income plan to meet their expected expenses, 33%;
  • An understanding of their goals, concerns and fears about retirement, 23%; and
  • A selection of investments to match their retirement income plan and risk tolerance, 19%.

Over the next five years, close to a third (31%) of investors expect to change their retirement strategy, while 22% plan to make changes in their retirement investments. Also, 13% anticipate beginning to work with a financial advisor for the first time.

To Your Successful Retirement!

Michael Ginsberg, JD, CFP® 


Why Has Good Economic News Hurt Financial Markets?

The housing market is stronger than it’s been in years. The U.S. economy grew an estimated 1.8% during the first quarter of 2013–not rip-roaring expansion, but an improvement over the previous quarter’s 0.4%. Employment isn’t where it needs to be, but companies are no longer shedding jobs in record numbers and the Federal Reserve thinks the unemployment rate will fall roughly another half-percent by the end of the year. Weeks and even months have gone by without headlines about a new European debt crisis.

And yet financial assets have been volatile recently. The benchmark 10-year Treasury yield has reached a level not seen since August 2011,* and since rising bond yields are typically accompanied by falling prices, bond markets have been hit across the board lately. The tidal wave of money that has gone into bond mutual funds over the last couple of years has slowed since yields began to rise, and has even begun to flow back out.** The S&P 500 has retreated recently from its string of record highs set in May. Prices for gold and oil also have seen weakness.

Paradoxically, relatively good news has made investors more anxious. Why has improving economic data somehow helped create turmoil in financial markets? The answer has to do in large part with the Federal Reserve and its monetary policy.

Good news, bad news

On June 19, the Federal Open Market Committee (FOMC) said that encouraging economic reports suggest that risks to the current moderate economic expansion have gone down. Assuming recovery continues, the Fed plans to begin reducing the economic support it has provided over the last couple of years. By the end of the year, the Fed could start reversing policies that have injected money into the economy through so-called “quantitative easing.” It will first cut back on the $85 billion a month it has been spending to buy Treasury and mortgage-related bonds. Once the unemployment rate falls to around 6.5%, it will consider raising its target Fed funds interest rate above 0.25% for the first time in more than 4 years.

Low interest rates have helped make it easier for businesses to buy equipment and for consumers to purchase a home or make credit card payments. When the Fed began buying mortgage-related securities in November 2008, those purchases increased demand for bonds generally, providing support for bond prices and keeping interest rates low (since bond prices move in the opposite direction from their yields). Fed bond purchases also have given banks money to lend for home mortgages and business expansion. Those “easy money” policies were intended to help stimulate hiring, the housing market, and economic growth.

Taking away the punch bowl

Former Federal Reserve Chairman William McChesney Martin is often credited with saying that the Federal Reserve’s job is to take away the punch bowl just as the party is getting good. The better the news about the economy, the more investors began to worry that a stronger economy would spell the end of easy money. Even before the Fed announced its blueprint for easing out of quantitative easing, markets were beginning to anticipate the potential implications for various financial assets.

Equities: Recent volatility has been sparked by worries that if the economy slows with less Fed support, corporate earnings could suffer. Also, dividend-paying stocks have been attractive to income-oriented investors seeking alternatives to rock-bottom interest rates; the Fed’s statement raised questions about whether that would still be true if and when bond yields rise high enough to be competitive with dividend yields. Foreign equities also have been hurt by concerns that if tighter U.S. monetary policy reduced American demand for their products, it could accelerate a global slowdown, especially in emerging markets whose economies depend on high prices for commodities such as metal ore.

Bonds: The Fed’s statement prompted fears that if its bond-buying helped bond prices, the reverse could also prove true. If the Fed buys less, or actually begins selling bonds it has already bought, that could lower overall demand for bonds or increase the supply of bonds on the market. And as any consumer knows, lower demand for something or too much supply can lower its market value. Bond prices also have been under pressure as investors worried that higher interest rates eventually might cut the value of bonds that pay today’s low interest rates.

U.S. dollar: The dollar has already gotten stronger, partly because of anticipation of eventual higher interest rates. A stronger dollar could hurt U.S. exports, which would become more expensive for customers who use a weaker currency. That could affect U.S. companies that derive a large portion of their profits overseas.

Commodities/metals: Concerns about the potential for a global slowdown as a result of the factors listed above have brought oil prices down in recent weeks. A stronger dollar, which is often accompanied by weaker global oil demand, tends to hamper oil prices. Gold, already in a slide since last October, also has suffered from a stronger dollar.

The Fed isn’t the only factor contributing to recent volatility, and it hasn’t been the only central bank to use quantitative easing to try to stimulate growth. Investors worry that whenever the United States does raise interest rates, other central banks might be forced to follow to make sure investors don’t take their cash elsewhere. Any monetary tightening overseas could prove problematic. Europe has been mired in a recession for months and continues to have debt issues, while China’s economic growth has shown signs of stalling and its financial system has been under pressure lately. Fears of the global impact of monetary policies are part of the reason equities also reacted poorly to the Bank of Japan’s recent refusal to inject additional economic stimulus.

So what does all this mean for my portfolio?

Markets already on edge for weeks about what the Fed might do reacted strongly to its blueprint for an exit from quantitative easing. However, it’s worth remembering that one of the reasons for any monetary tightening is that the Fed’s outlook for the economy is more encouraging. The Fed also has left itself plenty of room to maintain its support if economic conditions don’t continue to improve in the coming months; in 2010, it halted bond purchases because the economy was growing, only to renew them a couple of months later. Fed Chairman Ben Bernanke has said that when the Fed does begin to reverse course, it will be more like a driver easing off the gas pedal rather than slamming on the brakes.

If you hold individual bonds, remember that even if a bond’s market value declines, the principal will be repaid in full if you hold it to maturity (as long as the issuer doesn’t default). The closer a bond is to its maturity date, the closer its market value is likely to be to the amount of the principal; pay close attention to both a bond’s maturity date and to the price you pay for it. Also, higher yields could provide some relief to those whose incomes from their hard-earned savings have suffered from rock-bottom interest rates.

Market risk based on monetary policy tends to have a broad-based impact, which can make it more challenging to try to protect your portfolio through diversification. And diversification alone can’t guarantee a profit or protect against potential loss. However, it might be worth exploring how various asset classes in your portfolio could be affected by possible future Fed actions, and whether there are ways to hedge your exposure to possible market volatility. If you’ve been keeping a substantial cash position, volatility also may present buying opportunities.

It’s important to maintain perspective in the face of market turbulence. While you should monitor the situation, don’t let every twist and turn derail a carefully constructed investment game plan.

*U.S. Treasury Department Resource Center, Daily Treasury Yield Curve Rates, retrieved from www.treasury.gov on June 21, 2013.

**Investment Company Institute historical flow data as of June 19, 2013.

To Your Successful Retirement!

Michael Ginsberg, JD, CFP®