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Self-Evaluating Your Financial Behavior, Part I
If you were to sit down with a financial planner, you might expect to state your goals and come away with directions for allocating your money. You might expect to be sold a life insurance policy or have your money transferred to accounts that are under the control of the advisor.
A CFP® follows specific steps to align the client with a sound financial plan. These steps involve establishing a relationship, gathering data, analyzing the current financial status, developing a recommendation, implementing the suggestions, and monitoring the plan.
A comprehensive evaluation of your financial status should integrate your underlying money motives and help you understand how you are managing yourself and your money. This is critical knowledge because you are the only person that will take the necessary actions.
Dr. Brad Klontz is my hero on this topic. Dr. Klontz combines behavioral finance and financial psychology into standard financial planning procedures. He’s the Dr. Phil of finances. If you need help getting real with your finances, Dr. Klontz has your remedy. In case you haven’t made the connection between your behavior and your financial status, read below where I’ll translate Dr. Klontz’s recommendations for conducting client meetings into self-evaluative introspection and actions. If you understand your motives and harness that energy, you will be better empowered to make smarter financial decisions.
Some mind mastery is required to alter your existing money habits but ultimately, you are the only person that truly cares about you. Therefore, I encourage you to self-evaluate. Be honest with yourself. I promise it will be more rewarding than relying on someone else’s directives.
I separated this into two parts to avoid overload. This is a synopsis of the first three steps. I’ll include the self-evaluative action for each.
1) Introduction and Listening
Financial Planner Action: Establish a relationship and listen to the client’s needs, wants, issues, and anxieties. Priorities are discussed to determine best first steps.
Self-evaluation: Before a goal can materialize, you need to identify it. If it helps to get to the core of your desires, use a journal. Write down your life plans and financial goals. It’s amazing how the brain thinks differently when writing. If you haven’t tried it, it’s my top recommendation. Writing triggers greater curiosity and introspection and it doesn’t have to be fancy. I use an approach called a “mind dump” where I write continuously, jotting down whatever jumps to mind whether it’s small fragments or full sentences. Don’t hold back or hesitate, go for it. Ideas will fly out of your head and may surprise you.
2) Gather Data
Financial Planner Action: Gather sufficient financial data. The client needs to produce savings and checking account statements, mortgage documents, credit card bills, and other pertinent paperwork.
This step also involves defining the personal and financial goals, needs, and priorities. A conversation to stir motivation may be introduced at this stage.
Self-evaluation: Dig out all your important paper and organize using folders. If you have everything in electronic format, organize your electronic data so it’s easy to retrieve. Then make a backup on a flash drive or DVD.
Give yourself some open-ended questions to think about, such as, “What savings priorities should I focus on for the next 12 months?”, “What short-term living status do I want to work toward in the next 2 years?”, “What do I want my ideal retirement to look like?” or “How do I want my assets dispersed when I pass away?”
Allow yourself to reflect on your thoughts and feelings. Give yourself some time for your ideas to distill into a final vision.
Be positive and reward yourself for any benchmarks that you’ve already reached. Even if you’ve created a budget but haven’t followed through, give yourself credit for setting up the budget. Feeling positive about your accomplishments and future goals will bolster your motivation.
3) Determine the Current Financial Status
Financial Planner Action: Analyze the current financial status of the client and determine if their goals are in alignment with their reality. The professional will consider personal aspects specific to the client such as age, income needs, family dynamics, time horizon, life expectancy, etc. A collective evaluation of the client’s financial landscape helps to develop a holistic recommendation.
The financial planner will determine the client’s overall financial health. This includes measuring financial satisfaction. Financial satisfaction is defined by feelings of contentment with money associated with an adequate savings plan, a responsible spending plan, low levels of financial stress, low levels of debt, and a lack of financial conflicts.
During the discussions, any signs of financial anxiety or financial stress would be noted and addressed. Another way of measuring financial health is by using questionnaires developed by Dr. Klontz and other psychology professionals*.
Self-evaluation: Assess your current financial position. You can’t set a plan until you have everything laid out in front of you. Take a stab at calculating your net worth. Make a list of all your assets and debt. Determine which asset accounts you’d like to build up and which debt accounts you’d like to pay down.
Here’s a tough one. Take inventory of your financial beliefs. This may be harder than you realize and you may resist admitting these behaviors to yourself. If you start to feel uncomfortable, take a break and come back.
See if you fall within the following money attitudes:
- Money avoiders think that money is bad and evil; they avoid responsibility toward money and shun money discussions. Money avoiders may think they don’t deserve money or that it’s hard to be rich and be a good person.
- Money worshipers think that money is the answer to all their troubles. They hold the belief that more money will make them a happier person and that they can never have enough.
- Individuals that live out money status behaviors think that they need to keep up with the Jones’ and believe that money makes them important. Money status believers think that poor people don’t deserve to have money and that poor people are lazy.
- Individuals that demonstrate money vigilance are the watchdogs of their finances. These are the people that save, limit or avoid debt, and maintain a healthy level of concern over their money matters. This behavior can lead to unhealthy anxiety if taken to the extreme.
Identify your areas of financial anxiety. If you feel insecure about your knowledge of cash management, start a plan to educate yourself through reading, courses, or adult education sessions. If you feel insecure about being disciplined, set up an automatic deduction plan.
Remember to acknowledge your stress areas, but don’t dwell on them. Recognize that you have money anxieties and then move on without judging or criticizing yourself. You’re looking to achieve a healthy balanced attitude towards money that meets the definition of financial satisfaction above.
That’s enough to absorb for now. Take your time with each step. It’s critical to not rush the process.
Feel free to post questions. I’ll continue with steps 4 through 6 in next week’s post.
*Klontz-Britt Financial Health Scale K-BFHS (Britt, Klontz, Tibbetts, and Leitz)
* Financial Anxiety Scale (FAS) (Archuleta, Dale and Spann 2013)