Many of us carry lessons and attitudes toward money that we learned as children. Ideally, these lessons help us, but they can also be stress-inducing and contrary to or outright sabotaging our financial goals.

I recently saw Sarah Newcomb, PhD, a behavioral economist give an excellent presentation on the psychology of money at the National Association of Personal Financial Advisors (“NAPFA”) Spring Conference. (NAPFA is a professional organization for us “fee-only” financial advisors who do not sell products, are commission-free, and are only paid directly by our clients for advice and service.)

In her talk, Dr. Newcomb identified three key thought patterns that were major determinants of not only financial success, but also a person’s satisfaction and peace of mind regarding their financial position:

Maintaining a long-term vision
Believing that you control your financial future
Looking down, not just up, when making social comparisons

Interestingly, these factors were found to be significant across income and wealth levels.

Regarding social comparisons, Dr. Newcomb offers this compelling statement from her research:

“In every income group, people who reported making frequent, upward comparisons also reported having more debt, lower savings, higher stress levels, and lower satisfaction with their own situation than people who compared themselves with those less fortunate. When asked about the emotions they experienced in their own financial lives, people who compared upward were experiencing significantly more negative feelings than those who did not.”

Your Mind & Money

WTIP's "Money Matters" with Scott Oeth. June 03, 2020

What money-related attitudes and lessons do you carry from your formative years?

Does your mindset help you or hold you back?

What lessons you would like to pass on to the next generation?

I discussed these concepts on my “Money Matters” radio segment, which you can listen to by clicking the image/link to the right (or read the transcript below):

Money Matters: Behavioral Economics Transcript

Mark: We’re talking to Scott Oeth, a certified financial planner. He’s taught hundreds of financial professionals retirement planning and wealth management strategies. Scott joins us now by phone. Welcome, Scott!

Scott: Thanks, Mark!

Mark: Well, I have to tell you, the ideas that you sent up to stimulate discussion this morning, stimulated discussion last night in our household, so this is great!

Scott: That’s fantastic! I’m happy to hear it!

Mark: How you think about money matters. Let's talk about that today.

Scott: Yeah, so I’ve been in financial services for 25 years now, and I've noticed over the years because I’m in a unique position, I get to see underneath the hood, so to speak, of the inner workings of people’s finances, and it’s become so apparent to me from seeing many people who are in very similar situations, similar income, similar education, that they end up in vastly different spots down the road. Also, how they present themselves, how they feel, their contentment with their financial situation varies widely. So, I’ve known for a long time that it’s not just the numbers, it’s decisions, the choices people make, their discipline. In 2002, the Nobel Prize was awarded in the field called behavioral economics, which is sort of the intersection of psychology and financial decision making. I found that to be tremendously interesting and useful, and I’ve talked with clients about it, I’ve read about it, I’ve written about it. I was just at a conference recently (virtual conference), and Sarah Newcomb, who has a PhD in behavioral economics and works for Morningstar, a big investment research company, introduced us to a few newer pieces of research that I thought were really interesting because they’re applicable all the way across the income and wealth spectrum, and they’re very actionable items.

Mark: Now, the first subject was about the time horizon, and, as I understand it, it’s about how does a person's financial planning timeline impact their wealth.

Scott: Yes, this is an important one. So, on a surface level, we’ve talked about this all the time with compound interest and start early with your saving and let your money work for you, try to avoid having long-term, high interest rate debt working against you. So, good financial planning is the intersection of making financial decisions on a timeline, but what Dr. Newcomb was presenting was research showing how you perceive yourself. If you have a dollar in your wallet, you’re not just making a decision for yourself today, you’re also affecting your future self. She did research looking across a timeline, and people who only think about today versus just a few years down the road. The people who looked a few years ahead had about four times as much in savings and assets. The people who looked 10-20 years ahead had 10 times as much, and folks who viewed their entire lifetime, having mapped it out and visualized where they were going to be or wanted to be had 20 times as much in savings on average (compared to the person who only thinks about today).

Mark: So, I mentioned that even if someone is at a point where they're just struggling and just getting started with thinking about money, the idea is even if you only have that dollar, think about the future. What can you do with that dollar?

Scott: Yeah, and maybe it’s the dollar, maybe it’s the education, maybe it’s the career choices, it’s the spending and saving, it’s who you associate with. There’s a lot that goes into it, but I think the point is to visualize the future, talk about it with friends--ones who are going to reinforce where you want to get to--maybe your spouse or an advisor, dream, write it down. I was very happy to hear that you talked about this at home because I think a lot of us are old dogs, and it’s tough to learn new tricks. For kids, there are some remarkable tools to help think about positive mindset and how it can help them for the future.

Mark: Even those of us in our sixties and semi-retired need to continue to think about that timeline.

Scott: I hear that all the time. People will say, I’m retired, I don't have much time, but if you’re in your sixties, you very well may have three or four decades ahead of you.

Mark: That’s right. Now, I love this one: researchers have found that one's perceived level of control affects their finances. Whether you feel like you have any control over your money at all really affects it.

Scott: Yeah, this is amazing. I think the natural inclination might be to say, well, I don't make much money, and I had a tougher start, so I don't have much control. Certainly, some people have a much easier starting point than others, but researchers looked across all income levels and wealth levels. They asked the question: A., I create my own financial destiny or B. I have very little power over my financial situation. That simple starting point determined a lot in terms of where people ended up and how they felt about their finances. People who believed they had some control over their financial destiny had mostly positive experiences with money, and those who felt out of control of their financial destiny had much worse thoughts, well-being, and actual financial numbers on paper.

Mark: I imagine that your perception of your level of control, you can change that perception in a way. You can work on that.

Scott: Yeah, I think you can work on it. I think I could see this as a chicken and egg situation where the question arises of do you have control or is your situation actually out of control because you don't have much income or assets, and you have a lot of debt? But without a doubt, the starting point is deciding that you want to run your financial life and not let it run you. Then, you can start working for small wins and build up a bigger plan. Gaining those victories will build your strength in terms of feeling like you have control of your situation.

Mark: Alright, now, number three, this is the one we had some discussion about. Social comparisons and does it matter who we compare ourselves to?

Scott: Yes! It turns out it does! Believe it or not, grandma and grandpa were right when they said, “Don’t worry about keeping up with the Joneses.” We’ve known this for a long time. I love a lot of the long-term folksy wisdom that turns out to be supported academically. I would interpret that as don’t try to keep up with the Joneses because it could damage you financially in terms of spending too much money. Here again, Dr. Newcomb has a really good article you could read online called, “Is Instagram Making You Poor?” It's published in Psychology Today, citing this research from Morningstar. She took a look at who people compare themselves to. Some people say don’t compare yourselves to others, but that’s too simple. It’s innate. Everyone wants to compare themselves. Most people look up, they look for people who have more and make that comparison. But she says that in every income group, people who reported making frequent upward comparisons also reported having more debt, lower savings, higher stress levels, and lower satisfaction with their situation than people who compared themselves with those who are less fortunate. So, it’s natural to make comparisons, I guess we all do it, but be self-aware, be thoughtful, take some time for gratitude, look at those who are less fortunate. I think volunteering is excellent. We do that with our firm, we do that with our family to expose and see in real life those who might not have as much and realize that almost all of us living in the United States are living a very rich lifestyle compared to many parts of the world.

Mark: Alright, well, this has been great, Scott! So, today we've talked about the time horizon, how your timeline impacts your wealth and your perceived level of control, and social comparisons, which I find really fascinating. So, we've been talking with Scott Oeth. We will be talking finances with Scott on the first Wednesday of the month on North Shore Morning. This will also be posted as well on the WTIP website for people that want to return to it and learn a little bit more. Anything else you want to add, Scott, if you want to find out more about the information that you gave us today?

Scott: Well, certainly there's a lot if you look up behavioral economics, you’ll find a lot. I written on this. Dr. Sarah Newcomb, who I mentioned, I’m leaning heavily heavily on her work because these are some newer pieces, and she’s got some great stuff out there. I think the key is to know thyself. Be self-aware, be conscious of the things that can trip you up. It really helps. Then, make a plan, have goals, work on your action steps. Seek out positive reinforcement: friends who think alike, your spouse, an advisor, read good books on the subject, there’s a lot of great bloggers out there. I don’t always agree with the specific nuts and bolts of the strategy, but the thing a lot of them are really good at is inspiring reinforcement to think positively about your finances, to think long-term and to think that you have control.

Mark: Alright, well, we have been talking about money this morning. Money Matters with Scott Oeth. Thank you so much, Scott!

Scott: Thanks, Mark, this was great!