Recently, I had the distinct privilege to join Sheinelle Jones on the Today show, discussing some rapid-fire personal finance issues in Simple Money style. Is now a good time to buy stocks? Is it a good time to buy, sell, refinance or renovate a home? We even discussed a version of the Simple Money Portfolio and my top two picks for cash flow apps that can improve your financial situation. Click HERE or on the image below to view the segment.
“That” was the job of owning and running a construction company he started in Ohio in the mid-2000s.
“This” was the sacred experience of fly fishing, and ultimately building a multinational craft rod-making company.
“It’s like going to church.” That’s how Janik describes fly fishing, his passion, which nursed him through the Great Recession as his commercial real estate development and construction company hung on for dear life.
The company survived, and ultimately thrived, but his therapeutic hobby grew into something more. At the moment, “this” has evolved into Clutch Fly Rods, the company Janik founded selling high-end fly rods that is fast becoming a disruptor in its space.
I don’t think professor Richard Thaler is going to return my calls anymore. Sure, he was gracious enough to give me an interview after his most recent book, Misbehaving, a surprisingly readable history of the field of behavioral economics, was published. But now that he’s won a Nobel Prize, something tells me I’m not on the list for the celebration party.
(Although, if that party hasn’t happened yet, professor, I humbly accept your invitation!)
But I’m still celebrating anyway, because Thaler is a hero of mine and I believe that the realm of behavioral economics–and behavioral science more broadly–can and should reframe the way we look at our interaction with money, personally and institutionally, as well as the business of financial advice.
Behavioral Economics In Action
Of course, even if you’re meeting Thaler for the first time, his work likely has already played a role in your life in one or more of the following ways:
- Historically, your 401(k) (or equivalent) retirement savings plan has been “opt-in,” meaning you proactively had to make the choice–among many others–to do what we all know is a good idea (save for the future). But our collective penchant for undervaluing that which we can’t enjoy for many years to come led most of us to default to inaction. Thanks largely to Thaler and Cass Sunstein’s observations in the book Nudge, more and more companies are moving to an “opt-out” election, automatically enrolling new employees in the plan with a modest annual contribution.
- Better yet, many auto-election clauses gradually increase an employee’s savings election annually. Because most receive some form of cost-of-living pay increase in concert with the auto-election bump, more people are saving more money without even feeling it!
- Additional enhancements, like a Qualified Default Investment Alternative (QDIA), help ensure that these “invisible” contributions are automatically invested in an intelligently balanced portfolio or fund instead of the historical default, cash, which ensures a negative real rate return.
- Some credit card awards now automatically deposit your “points” in an investment account while some apps, like acorns.com, “round up” your electronic purchases and throw the loose virtual change in a surprisingly sophisticated piggy bank.
No, you’re not likely to unknowingly pave your way to financial independence, but thanks to the work of professor Thaler and others, many are getting a great head start without making a single decision.
What is most shocking to me, however, is the lack of application–or the downright misapplication–of behavioral economics in the financial services industry.
While on vacation recently in the Abaco Islands, on the outer rim of the Bahamas, I found myself on an important mission: taking the golf cart to the local market to restock our dwindling supply of the necessary ingredients for piña coladas.
I was stopped in my tracks en route by a welcome sign announcing a new resident’s beachside home. It read: “Someday Came.”
The obvious implication is that these folks decided to act on their “Yeah, I’m gonna do that someday” daydreams.
But it raises many questions, right?
Who are these people? What’s their story, financial and otherwise? Did they hammer this sign into the sand after scrimping and saving, finally realizing their retirement dream following a lifetime of toil? Or are they the professionally mobile couple with young kids you see on HGTV’s “Caribbean Life,” who decided they’d just had enough of the rat race?
I’m glad I don’t have the answers, because the big question for the rest of us is worthy of consideration:
How do we define our “someday”? How do you define yours?
I recently asked race car driver Danica Patrick if she thinks there is any validity to the adage that more money simply creates more problems, as the near epidemic documented in professional sports would seem to indicate.
I wanted to know whether she has seen this firsthand, and whether it has been a challenge for her.
“I can see how some would have difficulty managing the money they earn — especially if they do not have an existing mindset geared towards savings,” Patrick said.
“But for me, more money presents more responsibility,” she added.
We were talking because she’s advocating on behalf of Life Happens, a nonprofit dedicated to raising awareness about the importance of life insurance. But to Patrick, it all flows from a mindset about personal responsibility and holistic self-care.
“You have to take care of your body by working out and preparing for the future to make sure that it’s healthy,” she told me.
“Later, you do things to prepare yourself mentally, to make sure that you can handle all situations and have peace of mind and have perspective and know what’s important. So then why wouldn’t you also take that approach with what it takes to operate in the society that we live in–money?”
Good question, Danica. It seems so logical, yet year-after-year, I’ll bet two of the resolutions most often broken are related to maintaining health and finances.
So why do we have so much trouble doing these things that we all seem to agree we should?
Well, for one, we’ve learned through the fields of behavioral economics and finance that knowing what to do isn’t the issue. Knowing what to do is a System 2 process, as Daniel Kahneman teaches us. System 2 is our brain’s intellectual center that processes information.
Doing what we know, however, is a System 1 process. This is our emotional processor, where the will resides. System 1 is notorious for resisting our well-conceived plans, but it can also be a powerful ally, as it’s where resiliency is fueled.
Jonathan Haidt gave us the analogy that System 1 is like an (emotional) Elephant while System 2 is the elephant’s (reflective) Rider. When the two are in conflict, we all know who wins; but when the team is aligned, they are a formidable force.
The Rider is in charge of what to do and how to do it, but the Elephant only cares why.
The big challenge when it comes to getting and staying healthy, physically or financially, is that the vast majority of information out there is System 2 stuff–what and how. Think: “Lose 50 pounds!” or “Make a million dollars!”
But System 1 is the boss, the “decider,” and the source of resolve.
When Patrick decided to become a race car driver, she chose the course her life would take with System 1. Then she used System 2 to chart that course.
When people said she was too small (read: a woman), she appealed to her System 1 to stay the course while plotting with her System 2 how she’d prove them wrong.
When it comes to your health, you know you should get more sleep, watch your diet and exercise, right?
When it comes to your financial life, you know you should spend less than you make, pay your bills and invest for the future, right?
Well, let’s start with an easy one, the one Danica Patrick is advocating for: life insurance.
Why do you need life insurance?
Well, maybe you don’t. If you’re independently wealthy and/or no one relies on you financially, then you don’t need life insurance. (There are a couple reasons why you might still want it, but they’re outliers and probably don’t apply to you.)
If, on the other hand, you’re like most of us–still on the path to financial independence with people in your life who would suffer financially if you left this Earth tomorrow–you probably do need life insurance.
Patrick saw a twenty-something friend in racing lose his life on the track–that was more than enough motivation.
But perhaps you’ve heard some version of this “why” story, and it didn’t inspire the Elephant to apply for a life insurance policy. It’s likely because the very next thing that happened involved the Elephant getting spooked by all of the “whats” and “hows” of life insurance.
There are so many life insurance companies and so many more life insurance salespeople, all so highly motivated to sell you too many types of policies, that the end result is way too much information.The Rider might enjoy the mental gymnastics, but it simply tires the Elephant out.
So if you recognize the need for life insurance but you’re overwhelmed by the information overload, let me offer a simple life insurance plan that will take care of most:
Why? (Since I’ve argued that is the operative question…) Well, it’s likely your salary that needs to be replaced if you’re gone, and a multiple of 15 should create a sufficient pot of money that, conservatively invested, will replicate your income for a good while.
Why term life? Because if you’re healthy, even though 15 times your income is a big life-changing number, the premiums tend to be small enough that they won’t change your lifestyle. That’s not the case with most forms of permanent life insurance.
And why 20-year term? Because for most, their need for life insurance will expire before they do (thankfully!). For most, 20 years in, the kids are out of the house and retirement is close. If you’re just starting a family, you might want to extend some of your coverage to 30-year term, and if you expect to retire in 10 years, get 10-year term.
And if you still need some additional motivation to get that Elephant moving, a final word from Danica Patrick:
“There are only so many things in life that we can control – do everything you can to position yourself for success by being fit. When you’re taking care of yourself, whether it’s your health or what you eat or your finances, it’s about self-worth. Never doubt that you are worth it and invest in yourself and your future both physically and financially.”
We don’t know yet, but it’s quite possible that the answers will be illuminated in retrospect because Equifax waited more than a month to announce the breach.
What can you do at this time to ensure that you are shielded from the worst possible outcomes of this–or the inevitable next–mass identity theft?
First, specifically regarding the Equifax situation, you may consider taking two steps they have recommended (all while keeping in mind that this is coming from the entity that let the identity of as many as 143 million Americans slip through their fingers):
1) You can go directly to the dedicated Equifax website to determine if you were likely hacked, like I did. Hit the “Potential Impact” tab and then the “Check Potential Impact” button:
You’ll be asked to put in your last name and the last six digits of your Social Security number. Then, you’ll get the verdict on whether or not they think your information may have been hacked. When I completed this process for the four members of my household, three of them were (apparently) spared while I got the undesirable response that my “personal information may have been impacted by this incident.” Awesome.
Many, however, have found this online device lacks reliability. In at least once instance, the name of a colleague’s dog and a fabricated Social Security number returned positive results. [Insert contemplative, curious emoji.]
2) Regardless of whether your information was hacked, Equifax then gives you the opportunity to sign up for their TrustedID Premier credit monitoring system–free for a year to all Americans. There initially was some controversy over whether agreeing to receive the freebie would result in waiving your right to be part of a prospective class action lawsuit against Equifax in the future. They’ve since clarified that it will not.
But signing up for their credit monitoring service also seems convoluted, or perhaps my enrollment message appears clearer to you:
If your journey to secure your identity continues beyond what the leaky Equifax has to offer–and it probably should–please consider these additional steps:
3) Monitor your credit. You can pay someone to do this, but I’ve yet to be convinced that it’s worth it, especially because you can get most of the promised benefits for free.
You can obtain a free copy of your credit report from all three credit reporting agencies at annualcreditreport.com. Order all three at once for the most comprehensive review or spread them out throughout the course of the year. But to be fair, reading a credit report can be like drinking from a firehose.
Therefore, you may consider a growing number of free online resources, like CreditKarma.com or Mint.com, that aggregate credit information in a more understandable and practical form. Personally, I’ve used CreditKarma for years and found it to be very helpful as part of the following simple process:
- Regularly glance at the homepage, which displays my current credit score from two of the three credit bureaus. Only if there’s been any significant movement in this score will I then…
- Review any of the warnings that might explain the volatility in my score. If so, I might…
- Review reports in full and take any necessary action.
This process has more than once served to alert me to activity that required follow-up.
4) You may consider taking the additional step of “freezing” your credit. It’s a process that looks different in each state, and I’d only recommended it if you don’t intend to use your credit in the near future. Otherwise, you’ll have to “thaw” your freeze to give prospective creditors the necessary access to your info.
One step, however, that I can’t see any downside to taking is freezing any existing credit reporting for your minor children. (Um, why do they even have credit reports, major credit bureaus?) If you decide to go this route, Clark Howard’s credit freezing guide is helpful.
5) Only use credit cards–not debit cards–for purchases. Despite Dave Ramsey’s objections, this way, it won’t be YOUR money that is stolen if you’re hacked. It’ll be the credit card company’s job to reclaim their funds.
This is advice that I’ve received first-hand from Frank Abagnale, the fraudster turned FBI consultant made famous by Leonardo DiCaprio in the movie Catch Me If You Can.
We can trust him now. I’m pretty sure.
6) Lastly, change your passwords to online financial accounts. If you were one of the 143 million people affected by the Equifax hack, you may wonder if hackers could gain immediate access to your bank and securities accounts. But you still hold some very important cards that they can’t see–namely, your password and any PIN numbers attached to online financial accounts.
It’s probably a good time to update and strengthen those.
But here’s the scariest news that has been highlighted by this new mass hack:
Unfortunately, we now live in a world where it’s not a question of if, but when, we will deal with having all or part of our identity stolen.
Sure, you could try to go “off the grid,” like Psycho Sam, the bush-man. But for most of us, the benefits to be derived by the online economy simply outweigh the risks. That means personal credit monitoring is a habit we must build into our lives.
But what exactly does he mean, and how does he justify this bold statement?
First, let’s separate the work of financial planning into two different elements–let’s call the first quantitative analysis and the second qualitative analysis.
Quantitative analysis is the more tangible, numerical and objective. It’s where planners tell clients what they need to do and, perhaps, how to do it. For example:
- “Your asset allocation should be 65% in stocks and 35% in bonds.”
- “You need $1.5 million of 20-year term life insurance.”
- “Have your will updated and consider utilizing a pooled family trust.”
The qualitative work of financial planning is the intangible, non-numerical pursuit of uncovering a client’s more subjective values and goals, and, hopefully, attaching recommendations like those above to the client’s motivational core–their why.
If quantitative work is of the mind, qualitative is of the heart.
Qualitative planning often has been dubbed “financial life planning”–or simply “life planning.” It is defined in Michael Kay’s book, The Business of Life, as the process of:
That may seem like an odd observation, unless you consider the fact that I had the privilege of spending a couple days recently with life planning luminary George Kinder. Among other benefits, I was able to reacquaint myself with his famous three questions, elegantly designed to progressively point us toward the stuff of life that is the most important–to us.
The final question invites us to explore what benchmark life experiences we would leave unaccomplished if we only had one day left on this Earth. And as you may suspect, even in a room filled with financial planners, achieving a more aggressive portfolio posture was, perhaps, the farthest from anyone’s mind.
Meanwhile, most of the items that people did list represented experiences (not things) that, individually, were outside of their to-date unarticulated–but now evident–comfort zones.
Participants almost universally wished they’d have taken more risks in life–personally, educationally, relationally, experientially, professionally and vocationally.
Similarly, those most meaningful experiences they had enjoyed thus far in life were the ones that pushed the boundaries of their comfort zones, expanding their personal risk tolerance.
But what about financial risk tolerance?
My favorite discovery in the field of behavioral economics confirms what we already knew deep down, even if it contradicts “common sense”–that experiences are more valuable than stuff. I recently put this finding to the test:
Concert of a Lifetime
Those were my wife’s words when I called her from the road, rushing to discuss what I termed “the concert of a lifetime.”
I’d just learned that living legends U2 were touring in support of the 30th anniversary of their most celebrated album, “The Joshua Tree.”
The greatest live band of a generation playing the soundtrack of my youth from start to finish.
Andrea was on board with going to the show–she’s a big fan, too. But what invited her claim of insanity was my insistence that we take the whole family to Seattle to see the show. We live in Charleston. South Carolina.
I fear that I’m going to miss the proverbial wheat because of all the darn chaff overstuffing my inbox. You, too?
Well, apparently we’re in good company. As a student of behavioral economics and finance, my ears always perk up when behavioral economist Dan Ariely has something to say. He struggled so much with managing the daily email harvest that he decided to create two apps, one that helps people send him better emails and another that helps him prioritize the emails he receives.
This inspired some colleagues and me to ask: “What are the ways that we might be contributing to the chaff in the inboxes of our business associates and friends?”
What are the often unspoken rules of good email etiquette? Here’s what we came up with…
The 10 Commandments of Business Email:
1. Thou shalt not gratuitously “cc.”
You’re on it–they know.
Parents have sacrificed their financial futures on the altar of their children’s education. Fueled by easy federal money and self-interested colleges, the result is a student loan crisis that appears already to be eclipsing the catastrophic proportions of mortgage indebtedness leading up to the financial collapse of 2008.
Please allow me to disclaim a few things:
- I’m not anti-education. In fact, I valued my college education so much that I went back to teach at my alma mater, Towson University, for seven years.
- I believe that a college education is a) inherently valuable, b) an enhancer of career prospects and c) fertile ground for unforgettable life experiences beyond the classroom.
- I’m a parent. I’ve encouraged my two sons, 13 and 11, to strive for a college education, and I’ve also offered to share in the financial burden.
- I’m not a prognosticator. Therefore, I’m not predicting an imminent crisis akin to the Great Recession, led by student loan defaults. Crystal balls don’t work, and anyone who claims to have one is selling something.
I’m also not a conspiracy theorist, but the facts, according to a new Wall Street Journal article, are indisputable: