My name is Tim, and welcome to the Financial LIFE Planning weekly!

Why We Do Dumb Things With Money

published3 months ago
6 min read

Don't let the headline fool you--I'm not getting on the financial guru bandwagon of bludgeoning people with self-righteous guilt and shame into someone else's idea of what is Right or Wrong in matters of personal finance.

But we all have issues with money--we all do dumb things with money--because, in our humanity, we are all subject to blind spots...self-deception...willful ignorance. So this week, we'll try to open our eyes to some of those blind spots and marvel at the machinations of the market.

In this FLiP weekly you'll find:

  • Financial LIFE Planning:
    • Why We Do Dumb Things With Money
  • Quote O' The Week:
    • The 3 Most Dangerous Words In Personal Finance
  • Weekly Market Update:
    • Fed Strikes Fear

Financial LIFE Planning

Why We Do Dumb Things With Money

“How could I be so stupid?” Maybe you’re looking at a bulging credit card bill after an over-spending spree. Or maybe you’re looking at a budget that simply won’t balance—for the 77th consecutive month—wondering how you made it this far in life without being able to master the simple math of addition and subtraction.

Why is it that we, as informed, educated and even brilliant people, can be so dense when it comes to basic matters of personal finance?

Check out the book, The Checklist Manifesto, by Atul Gawande, or better yet, the article that pretty much sums it up, “The Checklist,” in the December 2007 edition of The New Yorker. On his way to making a compelling case for the use of checklists to ensure accuracy in even the most multifaceted procedures—like emergency room surgery or skyscraper construction—he gives us some insight into why we’re capable of doing dumb things in seemingly simpler processes. In his words:

"Two professors who study the science of complexity—Brenda Zimmerman of York University and Sholom Glouberman of the University of Toronto—have proposed a distinction among three different kinds of problems in the world: the simple, the complicated, and the complex."

Zimmerman and Glouberman give us a tangible example of each type of problem. Simple is to baking a cake from a mix as complicated is to sending a rocket to the moon. The latter requires “…multiple people, often multiple teams, and specialized expertise.” But once you’ve marshaled the necessary manpower and know-how to send a rocket to the moon, the exercise can be successfully repeated.

This is not the case in complex problems, however. The example they give for a complex problem is raising a child. “Expertise is valuable but most certainly not sufficient. Indeed, the next child may require an entirely different approach from the previous one.” As a parent of two, this news was both heartening and frightening. But it also helped me realize something groundbreaking, at least to me:

While many matters of personal finance seem so simple on their face, they’re actually quite complex…because WE’RE complex.

Even as a single person with no dependents or pets, our innate proclivity for self-deception is remarkable. But within the context of a couple or family, it’s easy to see how the “simple” discipline of cash flow management, for example, can become quite complex.

Further complicating the problem is that most areas of personal finance require perpetual decision making, in which each individual decision to save, spend, buy, sell, re-allocate, contribute, distribute, insure, reduce coverage, file, expense, deduct, bequeath, endow, receive, or disinherit is its own fertile ground for success or failure that could compound positively or negatively to impact the whole!

So let’s all enjoy a collective “WHEW!” as we momentarily enjoy the fact that making mistakes with money doesn’t mean we’re a complete nincompoop. Of course, this is an explanation, not an excuse. We’re still responsible.

Here are three ways we can all keep our financial decision making as smart as we are:

1) Be cognizant of things financial. Be present and deliberate when dealing with your money. Keep these topics at front of mind by reading a good financial blog or two (ha, ha). And consider reading my friend, Carl Richards’, book, The Behavior Gap: Simple Ways to Stop Doing Dumb Things with Money. (It’s the only financial book I know of that is strewn with pictures!)

2) Develop good habits. We often need to force ourselves to be cognizant because personal finance either bores us or is loaded with self-deception. The development of good habits, beginning first-and-foremost with a functional cash flow system, will help us develop the behavior we’d prefer.

3) Be accountable to someone or something. Some are willing and able to develop their own system to maintain accountability, but for many, a healthy relationship with a professional financial planner is the key. In my Forbes post, “Hey Financial Planners, Do Your Job!” I gave advisors a gentle nudge, encouraging them (us) to make financial planning a simpler, more client friendly process that eliminates complexity instead of creating it.

What are some other ways you’ve been able to keep from making dumb financial decisions in your life? (Seriously, I want to know--we're *all* still learning. Please hit the [REPLY] button and let me know!)

Quote O' the Week


Speaking of self-deception...

The most dangerous three words in personal finance:

Weekly Market Update

  • - 4.04% .SPX (500 U.S. large companies)
  • - 3.14% IWD (U.S. large value companies)
  • - 2.91% IWM (U.S. small companies)
  • - 3.27% IWN (U.S. small value companies)
  • - 2.16% EFV (International value companies)
  • - 2.97% SCZ (International small companies)
  • - 0.46% VGIT (U.S. intermediate-term Treasury bonds)

The Fed Strikes Fear

Contributed by John Marske, CFP®, a Notre Dame grad and generally good guy.

The previous week, various Fed officials tried to alert the markets they had no plans to follow the current rate hike cycle with a subsequent lowering of rates. This past week the markets started to listen, while patiently waiting for Fed Chairman Powell’s speech on Friday, in Jackson Hole, Wyoming.

We started the week the same way we ended the previous week--down. U.S. equities slid as investors returned to a focus on yields and the Fed. The U.S. 10-year yield pushed back above 3%, after closing at 2.6% in early August.

There was no significant economic news, other than increasing fears the emerging energy crisis in Europe would spark a global recession. In essence, Monday was just a continuation of the downward slide that started the previous Friday. The Dow index finished more than 600 points lower, with the S&P 500 and NASDAQ falling 2.1% and 2.5%, respectively.

Considering 95% of large cap stocks declined Monday, and the S&P 500 came into the day down 3 of last 4 days and Nasdaq down 4 of last 5-trading days, Tuesday’s market was relatively dull. The S&P 500 did end 0.2% lower, and the NASDAQ was basically flat, falling a fraction of a point.

The market remained lethargic on Wednesday, but this time ended higher. U.S. stocks rose for the first time in 4-days, posting modest gains, with the S&P 500 ending 0.3% higher and the NASDAQ up 0.4%. Small caps have continued surprisingly strong, ending up 0.8% on Wednesday.

U.S. stock futures got a boost Wednesday evening (S&P hit highs above 4,187 before paring gains) after China announced a 19-point plan in new stimulus money to boost their economy. Global markets rallied on the news, including several commodity sectors, but markets pared gains following mixed U.S. economic data on Thursday.

Preliminary second quarter GDP data showed a slight improvement, but still a negative reading, while inflation data (PCE) was in-line to slightly above estimates. Nonetheless, the rally continued on Thursday. Plug Power (PLUG) was one of the big winners on Thursday (up 11%) after signed a hydrogen supply deal with Amazon (AMZN) to provide liquid green hydrogen starting in 2025 to help the e-commerce giant hit its goal of net-zero carbon by 2040.

The past week was really set-up as a waiting game for Fed Chairman Powell’s speech in Jackson Hole on Friday. Mr. Powell laid out a history lesson of what he learned from the inflationary period of the 1970’s and vowed to not make the same mistakes. To make his position clear, he said the U.S. economy will need tight monetary policy "for some time" before inflation is under control, a fact that means slower growth, a weaker job market and "some pain" for households and businesses.

This time the market seemed to get the message. After a brief attempted rally, the market plummeted. All the major indicies ended the day down over 3%. The next Fed meeting is a month away. There’s a lot more data to digest.

But that's enough data digestion for one week. Enjoy the rest of your weekend!


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Oh, and BTW, The information in this article is for educational purposes only and should not be construed as specific investment, accounting, legal, or tax advice. That should really come from your financial advisor. I'm thrilled to work for Triad Financial Advisors, but what I write is my opinion, and not necessarily theirs.