When you think of your financial advisor or financial plan, how do you feel? Gratified? Anxious? Indifferent?
How much would you say your advisor has contributed to your sense of emotional and financial well being?
Most of us probably don’t ask ourselves those questions and yet, according to a 2016 Morningstar study, When More Is Less: Rethinking Financial Health, our sense of well being is an important element to consider when thinking about wealth management and financial planning.
A simple way to look at financial well being is that it’s the ability to:
- Fully meet your current and ongoing financial obligations
- Feel secure about your financial future
- Make choices that allow you to enjoy life
Seen that way, it’s clear how feeling secure financially can contribute to our overall emotional well being as well.
At the same time, not having a sense of overall emotional well being can have a negative, sabotaging effect on our financial well being, via decisions driven by anxiety, fear, insecurity, or some common behavioral biases.
Which comes first, emotional or financial well being?
The short answer is that either can.
While health, family, and friends are the most important things in life, we all know that feeling anxious financially can affect our important relationships. And we know that having a sense of financial well being can give us peace of mind that lets us more fully enjoy the life and relationships we have.
We also know that emotional well being – feeling emotionally secure and supported – can ground us so that we make better, more measured financial decisions. And that emotional distress can lead us to make reckless, impulsive, or biased decisions that can negatively affect achieving a secure and prosperous future.
What kinds of behaviors can derail financial well being?
Behavioral Science researchers have identified many simple yet critical attitudes and biases that can keep us from acting in our own best interest. Unconscious biases that can wreck havoc with financial well being include:
- The tendency for investors to react more strongly to negative news than to positive news
- Placing more weight – positive or negative – on current news than on the big picture
- A “herd mentality” that leads investors to follow the crowd, buying securities at their peak prices as a result
What’s the first step in achieving financial well being?
A good first step towards achieving financial well being is becoming aware of the role that our emotions and biases may be playing in our financial decisions, choices, and habits. Think about your financial choices and some of the last few big financial decisions you made: were there emotions involved, however subtly, that may have influence your choices? A good Financial Advisor, particularly one well versed in Behavioral Finance, can be enormously helpful. “By identifying specific patterns of thought that may sabotage a client’s overall financial health,’” writes Sarah Newcomb, Ph.D., a behavioral scientist for Morningstar, “an advisor can help guide clients into making better financial decisions and increase their satisfaction and peace of mind.”
An added benefit of identifying some of the emotions or biases that may be driving financial decisions: some of my clients have told me that discovering a bias that has affected their financial decisions has lead them to understand other ways that same bias has been affecting their life as well!
Nothing beats a sense of well being, and feeling more secure financially definitely contributes to a greater overall sense of well being and peace of mind. And emotional wellbeing – along with a good financial advisor – can keep you from sabotaging your own progress, and put you back in control and on your way to achieving your financial goals.
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