Bert Whitehead, M.B.A., J.D. © 2013
Money and Behavioral Issues
Money matters are complex. Investment options, taxes, interest rates, and financial transactions in general can be overwhelming for people who are not in the financial industry. Fewer than half the people in this country understand the math necessary to handle their own finances, even at a minimal level (including reconciliation of a checkbook). Compound the bewildering technical aspects of money with fear: nearly everyone reading this has been 'ripped off' monetarily at some point in their lives. Eventually, most of us understand that we should be very careful about trusting anyone else, even family members, with our money.
Even with these issues, the most difficult money problems are without a doubt the behavioral aspects. On the one hand, some people are compulsive shoppers who spend every dime they can and then run up their credit cards when the checking account is empty. This can be so extreme that it can constitute an powerful and devastating addiction. Often these people are not even aware of these issues because of denial, which is a common phenomenon among addicts.
On the other hand, there are others who hoard money, sometimes compulsively. This obsession drives every decision. They may spend many hours counting their money, talking to others about money, and lecturing family members about spending too much money. They never have enough savings to make them feel secure, and they don't generally even know how much they would need to feel financially adequate.
Recent studies have demonstrated that using a trusted and knowledgeable financial advisor who doesn't charge commissions enables people to make better decisions and improves their financial situation substantially over time. That's why I myself rely on other financial advisors in my own financial affairs: as a professional, I know it is impossible to be objective about my own money. It is a huge weight off my shoulders to turn it over and rely on the wisdom of others. Doctors don't take out their own appendices, lawyers shouldn't represent themselves, and believe me financial advisors and do-it-yourselfers are their own worst problem.
Money mindfulness entails living within your means. You are living within your means if you are able to save 10% of all your income and pay off your credit cards each month (not with a home equity loan!). When people live beyond their means, their debt becomes the monkey on their backs. Basically, they are trying to be someone they are not. It is very emotionally exhausting to continually fight this disconnect. If you have debt, you must put away the credit cards until you bring your spending down and get them paid off.
Bond ladders with US Treasuries --- which assure investors that they have sufficient cash flow for fifteen years on retirement, without having to worry about any other investments --- provide the security needed for Money Mindfulness. Clients without bond ladders made it through the recession of 2008 financially, but I witnessed their anxiety as their investments stocks, junk bonds and real estate plummeted. Clients with bond ladders faced those traumatic times with aplomb, and gratitude.
Money Mindfulness is a concept that stresses awareness without obsession, circumspection without distrust, and a cultured disposition to use money effectively to enhance one's own life and the lives of those around them. There are several aspects I have noticed in people who have matured to this level. These include emotional, intellectual, and spiritual assets which provide a base to earn, use, and enjoy money comfortably.
Emotional, Intellectual, and Spiritual Aspects
Emotional mindfulness is nurtured by our relationships with others, obviously starting with our parents. Childhood deprivation often develops a 'getting and spending' vortex impelling some to never feel like they quite have enough. In some cases this may manifest as hoarding or kleptomania in later life, but seldom results in such extremes. More generally it shows up in dithering over decisions involving money. For example, at a restaurant some people evaluate their choices by first reviewing menu prices to find the least expensive, or at least not the most expensive choice. Frankly, if you have to make your culinary choices based on the menu prices, you should go to a different restaurant.
Intellectual mindfulness must be learned. These lessons are difficult, especially for those who are not naturally mathematically inclined. It can be difficult to intuitively understand when an interest rate is too high or too low. This drives many people into financial destruction because they don't understand how much interest they are actually paying when they buy on credit. Likewise, as Warren Buffet noted: "Investors lose more money chasing high rates of return than they do at the point of a gun.”
The single most important concept to understand is the power of compounding, both when investing and when borrowing. Even tiny differences in investment returns mushroom over time. $100 saved every week in an index fund will net $32,000 more return over 20 years compared to paying 1.25% for a managed fund. Conversely, borrowing $300 for a week until payday for $10 interest amounts to an annual interest rate of over 40%. Learning this fundamental truth is essential to Money Mindfulness.
Finally, I believe there is a spiritual element in mindfulness. This is a basic understanding of myself in relation to the rest of the world. The winner in life is not the one with the most toys at death. The winners in life are those who can detach themselves from the facets of life that are reflections of fear, and who know how much is enough. Money Mindfulness is an ancient Buddhist concept which teaches that the path to happiness is more a result of wanting what we have than getting what we want.
Thanks to Laura Webber for editing this for me.