The Psychology of Sound Money Management
By Ray Jaramis
A couple of months ago I wrote a blog article about how the financial services industry is evolving. When there is change strong businesses innovate, one component of that innovation at Treysta is a more intelligent approach to the further education of its advisory team. I am now nearing the end of my first year of a Psychology degree and I thought you might like to read a little about how my Psychology studies are supporting our approach to the next generation of advice, Financial Life Management.
In my studies we learn about how our attitudes and biases define the way we evaluate situations and problems and subsequently heavily influence our decision making process. It is our attitude, our underlying biases that drives a primarily emotional response when we reach a crossroads.
You probably know this feeling pretty well – It is the inner voice telling you that you’re about to make a mistake, when something isn’t quite right. The emotional side of your brain is blocking out the logic.
Bringing our biases to account and into our conscious decision making process is a constant battle we work through to arrive at a balance between rational thought and emotion.
Regrettably a discipline being missed by mainstream financial services education providers, my studies provide me with the tools to walk my clients through the human problem, that we are emotional beings.
Put our rational and emotional brains in a boxing ring and our emotional brain will win every time.
There’s a brilliant book on the theory actually, check out this article for a flavour of it when you next have a moment.
I think we can all relate to a time that emotion overrode our logic and we found ourselves being caught up in the moment.
The emotional side of our brain defines what it is to be human and in many instances the balance of our brains serves us well. However, emotion rarely equates to sound money management and it can be a dangerous driver of poor outcomes. I can’t help but be reminded of The Marshmallow Experiment which so beautifully illustrates how quickly logic can be put in the passenger seat.
So how does a Financial Life Manager integrate behavioural biases with sound money management?
Here’s a recent client story.
A young couple in their early 40’s without children arrange a time to meet with me. The brief I received was that they would like to take control of their spending in order to save up a deposit for the purchase of a family home.
The traditional financial services response would be to take their ‘order’ model a scenario and produce a lengthy advice document full of spreadsheets to determine affordability.
Don’t get me wrong, the numbers are important and at the appropriate stage we should establish affordability however,
My point is that numbers are only a part of the conversation.
A walk down the behavioural approach to money management leads to a much more relevant and honest conversation between the couple with support from their Financial Life Manager.
Without talking through the motivations behind the objectives, we would not have uncovered that one half of the couple was actually petrified by the commitment to a large debt (mortgage) – and really didn’t like the idea of being restricted from what ‘financial freedom’ meant to him, his ability to spend guilt free.
Facilitating a conversation around the psychological relationship with money was a process we all went through together in an effort to redefine what the financial commitment of property ownership truly means to them relative to the lifestyle benefits and trade-offs.
So what was the financial solution to a psychological crossroad?
It was agreed that would have a dry run before the purchase was made.
We restructured their bank accounts so that it created the illusion of a mortgage payment coming out of the account each week. This exercise enabled us to get a good sense of what ‘felt affordable’.
The process also served to ensure the couple were completely aligned in terms of the decision making process and this is essential to their future well-being and for the long term success of their relationship. This is the driver for the difference between traditional financial advice and Financial Life Management. The financial return on the above is incalculable but we are confident it will be a far larger determinant of future financial success than returns on investments will ever be.
The Treysta business is delivering next generation advice in order to create richer lives for our clients. If you think a richer, more fulfilled life is about more than just money speak to a Treysta adviser and find out how to truly live the life of your dreams.