Human psychology and money don’t mix well. Left unchecked, our psyches can easily sabotage financial decision-making, behavioral experts said during a panel discussion at CNBC’s Financial Advisor Summit.
“We’re all crazy when it comes to money,” said Brad Klontz, managing principal of YMW Advisors in Boulder, Colorado, and a founder of the Financial Psychology Institute.
“The miracle is that anyone is doing it right,” he added.
The human brain is hard-wired to make choices that are long-term money losers, such as buying high and selling low, making a purchase due to the “fear of missing out” or engaging in herd mentality, for example, said Klontz, a certified financial planner and member of the CNBC Financial Advisor Council.
These shortcomings actually do make some sense. Many date to evolutionary processes that played out thousands of years ago species-wide or more recently, on an individual level in early childhood, experts said. Parents, culture and socioeconomic status are powerful forces that shape money beliefs from a young age, they said.
Additionally, feelings of shame, such as thinking we have too much or too little money, are pervasive, experts added.
This tendency traces its roots to comparing oneself to others in the “tribe,” feeding into a sense of needing to “keep up with the Joneses,” Klontz said. Households may therefore place outsized importance on amassing an arbitrary amount of wealth — perhaps $1 million or $5 million — when these figures don’t mean much for overall happiness, he said.
“The number itself needs to be very personal,” Preston Cherry, founder and president of Concurrent Financial Planning in Green Bay, Wisconsin, said of a financial target.
“It’s different for everyone. It’s kind of like a thumbprint, so it’s very unique,” added Cherry, a CFP and member of the CNBC Financial Advisor Council.
Well-being is a leading measure of ‘wealth’
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Financial well-being is about more than one’s investments, experts said. It’s about a person’s goals and how money can help achieve those desires, experts said.
In fact, a new Charles Schwab survey suggests most American adults today think overall well-being, not money, is the leading measure of wealth.
Cherry advised putting a “focus on FOMO over FOMO,” meaning, “focus on moving on” with your vision and plan rather than a “fear of missing out.”
“Keep your blinders on and look straight,” he said. “Don’t compare yourself with others.”
Social media, which is full of misinformation and bad financial advice, has made this a challenge, experts said.
Further, money has become increasingly abstract in a digital world of cashless payments. That may make it tough for children to learn good money habits, since our brains better comprehend concrete examples, Klontz said.
When buying an expensive item, such as a vacation, parents can be good role models for their children by setting up a savings plan and demonstrating how it works. For example, they can set aside a certain amount of their paycheck over six months to achieve the goal, teaching important financial concepts such as delayed gratification and saving for the future, Klontz said.
More broadly, money is still a “somewhat taboo” topic when it comes to both conversations with others —whether a spouse, kids, friends or parents — and when thinking about our own lives, Cherry said.
“The more often we can have healthy conversations [about it] … I think we can have better outcomes with money and what we do with our money,” Cherry said.