March 29, 2024

Bucks Blog: Questioning the Motives Behind Your Financial Decisions

Carl Richards

Carl Richards is a financial planner in Park City, Utah, and is the director of investor education at the BAM Alliance. His book, “The Behavior Gap,” was published last year. His sketches are archived on the Bucks blog.

When making any financial decision, one of the most important questions we need to ask ourselves is why we are motivated to behave in a certain way. But it’s a question we tend to avoid.

Asking ourselves why we make certain money decisions can be scary because we often don’t know the answer. And admitting that we don’t know the answer can make us feel unmoored. We start to realize that we might be operating without a rudder, tossed about by whatever financial storm crosses our path.

And when we stop to question our behavior, we may not like the answer — or look for someone or something to blame. But if we’re going to improve our financial decision-making, we need to give ourselves permission to think about our motivations without judgment. To start, consider these questions:

  • Why do I invest a certain way?
  • Why do I spend what I spend?
  • Why do I save as much (or as little) as I do?

As part of that process, I suggest:

1. Letting go of the past.

Past mistakes are only useful if they help us avoid repeating the same mistake in the future. Don’t waste a valuable lesson because you’re too embarrassed to talk about it.

2. No shame, no blame.

The moment we start questioning our true motivations, we’re likely to discover that some of what we do doesn’t line up with what we say we believe. If I say that time with my children is the most important thing in my life, but I work long hours to manage a big car payment, then I’ll be forced to deal with that conflict. These conversations often involve someone else, like a spouse or children, so it’s important to give one another the space to talk about money without fear of judgment.

For instance, when my wife and I first discussed moving to Park City, Utah, we looked at a building lot. It cost more than we felt comfortable spending, so we didn’t buy it. When we finally moved a few years later, we learned that the lot was for sale again. But this time around, it was five times more expensive!

It would have been easy for each of us to blame the other for missing that opportunity. Instead, we decided to treat the experience as a lesson. The lot was still more expensive than we could have afforded at the time, a fact we could have easily forgotten if we got caught up in the blame game.

This approach would have helped another couple I know. Over the years, they made a lot of money in real estate. But the couple later lost a large amount of money in the stock market because of poor timing, not poor judgment.  One partner just won’t let it go. Every time the subject of money comes up, the one partner can’t help but remind the other that they would have far more money if it weren’t for that mistake. This attitude must weigh on their relationship.

3. Focus on your plan, not society’s plan.

Questioning your motivations will also lead you to discover things about your decisions simply because you’ve never thought about them before. It’s common for adults to warn children about the dangers of peer pressure, yet adults often forget they are subject to the same pressures. So give yourself a minute or two to focus on what’s really driving your money decisions and not what society expects of you.

This type of introspection isn’t easy. I suspect it’s one of the key reasons we do dumb things with money; we’re afraid to know why we do what we do, so we don’t take the time to question our behavior. Knowing might mean needing to change something we’ve grown comfortable with.

We also live in a world that puts a premium on the notion of immediate gratification.  But here’s the thing: Asking ourselves why we make a certain money decision is integral to our financial success, even if it takes a bit of time and effort to reach an answer. We just need to be brave enough to ask ourselves these hard questions.

Article source: http://bucks.blogs.nytimes.com/2013/02/20/questioning-the-motives-behind-your-financial-decisions/?partner=rss&emc=rss

Fed Minutes Show Interest in Extending Bond-Buying

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Op-Ed: China’s Great Shame

Why won’t the Chinese government allow the true tale to be told of the Great Famine?

Article source: http://www.nytimes.com/2012/11/15/business/economy/fed-minutes-show-interest-in-extending-bond-buying.html?partner=rss&emc=rss

Bucks Blog: Why Awareness Beats Anxiety

Carl Richards

Gathering information — being in the know — is not the same thing as being mindful, being aware, being present for what’s actually going on behind the news and the chatter and the stuff that just doesn’t matter.

Often when we think about money, it’s in terms of either past mistakes or worries about the future. Both of those types of thoughts take us away from focusing on the present.

Many people have a tendency to beat themselves up when they make a financial mistake. But most of us should spend less time worrying about things we could or should have done differently.

Patricia Wall/The New York Times

Instead, we can use our experiences to help ourselves and others avoid similar mistakes without getting involved in feelings of blame or feelings of shame. We can look at our mistakes, make note of the lesson and move on.

Spending too much time worrying about the future can also undermine our enjoyment of the present. This is a tricky issue for me because my work often involves encouraging people to have more meaningful conversations about the role that money plays in their lives — and normally such talks revolve around plans for the future.

One solution is to draw a line separating the time that you spend focused on planning for the future and the time you spend living for today.

Planning for the future is very important, but it needs to be done in isolation to avoid overshadowing the joy of today.

Think about setting aside time each month to evaluate your recent financial behavior. Try to identify any mistakes you may have made, and note the lessons that you need to learn. Think about your goals and what you should do now to move closer to reaching them.

Once you’ve done that, get on with living your life.

Money decisions are emotional decisions — and making good money decisions requires emotional clarity. So try to pay attention to your emotions around money. This can be as simple as considering how you feel when you get your monthly investment statement or when a medical bill arrives in the mail. Acknowledging those feelings and being aware of their potential impact on your decisions can be important, often in ways that aren’t clear right away.

I’ve found myself asking some really fundamental questions during the last several years. Whom I can trust? What’s really important to me? What do I really value? How much is enough? How should I really be spending my time?

I’ve watched as close friends have lost their businesses, their homes and even friendships over money. I’ve seen friends struggle to find jobs at a time when they had planned on being well into retirement. Other friends have had to move parents into care facilities that fall short of their family’s hopes but are all that they can afford. I’ve seen my own children’s disappointment when I had to tell them that we couldn’t afford something they really wanted.

When we go through these experiences we can feel sorry for ourselves and get angry. Or we can try to understand past mistakes, practice self-awareness and act from our deepest instincts.

Which approach will bring us closer to reaching our most important goals?

Excerpted from “The Behavior Gap: Simple Ways to Stop Doing Dumb Things With Money,” published by Portfolio/Penguin. Copyright © Carl Richards, 2012. Reprinted with permission.

Article source: http://feeds.nytimes.com/click.phdo?i=6d8c2afa6dfcd62e7bbe517c90ab6a3f

Economic View: Needed: Plain Talk About the Dollar

Listening to that statement, I flashed back to one of my first experiences as an adviser to Barack Obama. In November 2008, I was sharing a cab in Chicago with Larry Summers, the former Treasury secretary and a fellow economic adviser to the president-elect. To help prepare me for the interviews and the hearings to come, Larry graciously asked me questions and critiqued my answers.

When he asked about the exchange rate for the dollar, I began: “The exchange rate is a price much like any other price, and is determined by market forces.”

“Wrong!” Larry boomed. “The exchange rate is the purview of the Treasury. The United States is in favor of a strong dollar.”

For the record, my initial answer was much more reasonable. Our exchange rate is just a price — the price of the dollar in terms of other currencies. It is not controlled by anyone. And a high price for the dollar, which is what we mean by a strong dollar, is not always desirable.

Some countries, like China, essentially fix the price of their currency. But since the early 1970s, the United States has let the dollar’s value move in response to changes in the supply and demand of dollars in the foreign exchange market. The Treasury no more determines the price of the dollar than the Department of Energy determines the price of gasoline. Both departments have a small reserve that they can use to combat market instability, but neither has the resources or the mandate to hold the relevant price away from its market equilibrium value for very long.

In practice, all that “the exchange rate is the purview of the Treasury” means is that no official other the Treasury secretary is supposed to talk about it (and even he isn’t supposed to say very much). That strikes me as a shame. Perhaps if government officials could talk about the exchange rate forthrightly, there would be more understanding of the issues and more rational policy discussions.

Such discussions would start with some basic economics. The desire to trade with other countries or invest in them is what gives rise to the market for foreign exchange. You need euros to travel in Spain or to buy a German government bond, so you need a way to exchange currencies.

The supply of dollars to the foreign exchange market comes from Americans who want to buy goods, services or assets from abroad. The demand for dollars comes from foreigners who want to buy from the United States.

Anything that increases the demand for dollars or reduces the supply drives up the dollar’s price. Anything that lowers the demand for dollars or raises the supply causes the dollar to weaken.

Consider two examples. Suppose American entrepreneurs create many products that foreigners want to buy, and start many companies they want to invest in. That will increase the demand for dollars and so cause the dollar’s price to rise. Such innovation will also make Americans want to buy more goods and assets in the United States — and fewer abroad. The supply of dollars to the foreign exchange market will fall, further strengthening the dollar. This example describes very well the conditions of the late 1990s — when the dollar was indeed strong.

Now suppose the United States runs a large budget deficit that causes domestic interest rates to rise. Higher American interest rates make both foreigners and Americans want to buy more American bonds and fewer foreign bonds. Thus the demand for dollars increases and the supply decreases. The price of the dollar will again rise.

This example describes conditions in the early 1980s, when President Ronald Reagan’s tax cuts and military buildup led to large deficits. Those deficits, along with the anti-inflationary policies of the Fed, where Paul A. Volcker was then the chairman, led to high American interest rates. The dollar was very strong in this period.

Christina D. Romer is an economics professor at the University of California, Berkeley, and was the chairwoman of President Obama’s Council of Economic Advisers.

Article source: http://feeds.nytimes.com/click.phdo?i=7d2943143825167c76b44ad1d3afd526