In this month’s edition of “Money Matters,” Scott discusses time, control, and social comparison, and why your mindset about these three factors can be crucial to your financial success.

Money Matters: Your Financial Mindset is Important Transcript

0:00:00.0 Mark: Scott Oeth is a certified financial planner and adjunct professor. He's taught hundreds of financial professionals, retirement planning and wealth management strategies. Scott joins us now by phone. Welcome, Scott.

0:00:12.8 Scott Oeth: Thanks, Mark.

0:00:14.1 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.

0:00:26.5 SO: That's fantastic, I'm happy to hear it.

0:00:28.3 Mark: How do you think about money matters? Let's talk about that today.

0:00:32.9 SO: Yeah, so I've been in financial services for 25 years now, and I've noticed over the years... 'Cause 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. And also how they present themselves, how they feel, their contentment with their financial situation varies widely. So I've known for a long time, it's not just the numbers, it's the decisions, the choices people make, their discipline. And in 2002, Nobel Prize was awarded for a field called behavioral economics, which is the intersection of psychology and financial decision-making, and 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. But yeah, I was just at a conference recently, a virtual conference, and Sarah Newcomb, who has a PhD in Behavioral Economics and works for Morningstar, a big investment research company, she 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.

0:01:55.2 Mark: Well, 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?"

0:02:07.5 SO: Yes, yes. This is an important one. So on a surface level, we've talked about this all the time, compound interest and start early with your savings, let your money work for you, try to avoid having long-term, high-interest rate debt working against you. So good financial planning is kind of the intersection of making financial decisions on a timeline. But what Dr. Newcomb was presenting was research showing that 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... That is affecting your future self. And so she did research, saying, "What is actually the impact, looking across the timeline?" And people who only think about today versus just a few years down the road, well, if you're thinking a few years ahead, those folks when they screened a large body in surveys, they had about four times as much savings and assets. And those people who are thinking 10 to 20 years ahead, they had 10 times as much. And folks who viewed their entire lifetime and mapped it out and visualized themselves in the future and think about what they're gonna be in the future, where they wanna be, they had 20 times as much in savings on average.

0:03:20.7 Mark: So I imagine 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?

0:03:35.6 SO: Yeah, and you know, it's the dollar, maybe it's 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, visualize the future, talk about it with friends, ones who are gonna be positive, reinforce where you wanna get to, maybe your spouse, advisor. Dream, write it down. I was very happy to hear you mention you talked about this at home because I think some of these things as I say them, a lot of us are kind of old dogs and it's tough to learn some of the new tricks. But kids, there's some remarkable tools in terms of thinking about positive mindsets and how it can help them for the future.

0:04:12.5 Mark: Wow, and even those of us in our 60s and semi-retired need to continue to think about that timeline.

0:04:19.5 SO: I hear that all the time. People say, "Well, I'm retired. I don't have much time." But, boy, if you're in your 60s, you very well might have three, four decades ahead of you.

0:04:28.4 Mark: That's right.

0:04:29.0 SO: Yeah. It's a long time.

0:04:30.4 Mark: Now, I love this point, what 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.

0:04:42.0 SO: Yeah, this is amazing, and 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." And certainly certain people have a much easier starting point than others, but here again, they looked across all income levels and wealth levels, and they found that... They asked a simple question to start the research here, and it was, "A, I create my own financial destiny, or B, I have very little power over my financial situation." And that simple starting point determines a lot in terms of how people... Where they ended up and how they felt about their finances. And people who believed that they had some control or control over their financial destiny were having mostly positive experiences with money and those who did not and answered the second question, it's all you gotta control, well, their thoughts, their well-being and their actual... The numbers on paper were much worse.

0:05:44.5 Mark: Well, I imagine then your perception of your level of control, you can change that perception in a way. You can work on that.

0:05:51.1 SO: Yeah, I think you can work on it, and I think I could see this as a bit of a chicken-or-egg situation. Do you have control or is your situation actually out of control because maybe you don't have much income or assets, maybe 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, and then you can start working for small wins, build up a bigger plan, and gaining those victories will build your strength in terms of feeling like you have control over your situation.

0:06:23.3 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?

0:06:32.3 SO: Yes, it turns out it does. Believe it or not, Grandma and Grandpa were right when they say, "Don't worry about keeping up with the Joneses." And so we've known this for a long time, and there's a lot of... I love a lot of the long-term sort of folky wisdom that turns out to be then supported academically. But I think the way I would typically interpret that is, don't try and keep up with the Joneses because it could really damage you financially in terms of you spending too much money. And here again, Dr. Newcomb, she has a really good article you can read online, it's called "Is Instagram Making You Poor?" And it's published in Psychology Today, some of this research for Morningstar. But the idea is, she took a look at who people compare themselves to. And she says, some people say "don't compare yourselves to others." But that's too simple. It's the human... It's innate. Everyone wants to compare themselves, but most people look up, they look to people who have more, and they make that comparison. But here's an interesting quote, she says, "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."

0:07:55.8 SO: So it's natural to make comparisons, I guess we all do it, it's what the research shows. But be self-aware, be thoughtful, maybe take some time for gratitude, look at those who are less fortunate. I think volunteering is excellent, we do that with our firm, which they do with their family, to expose and see in real life those who might not have as much and realize that almost all of us living here in the United States are living a very rich lifestyle compared to many parts of the world.

0:08:25.5 Mark: All right, 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'll be talking finances with Scott on the first Wednesday of the month on North Shore Morning, and this is also posted as well on the WTIP website for people that wanna return to it and learn a little bit more. Anything else you wanna add, Scott, if we wanna find out more about the information that you gave us today?

0:09:00.8 SO: Well, yeah. Certainly, there's a lot if you look up behavioral economics, you'll find a lot. I've written on this... Dr. Sarah Newcomb, who I mentioned, I'm leaning heavily on her work because these are some newer pieces, she's got some great stuff out there. And I think, the key is, a lot of these are hardwired into it, these types of things, but at least know thyself, be self-aware, be conscious of the things that can trip you up, it really helps, and then make a plan, have goals, work on your action steps, and seek out positive reinforcement. Friends who think alike, a spouse, advisor, read good books on the subject, there's a lot of great bloggers out there, sometimes 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 that inspiring reinforcement to think positively about your finances, to think long-term and to think that you're in control.

0:09:56.9 Mark: Alright, well, we have been talking about money this morning, Money Matters with Scott Oeth. Thank you so much, Scott.

0:10:04.8 SO: Thanks, Mark. This was great.