Fine–Cut My Pay!

“Experience is simply the name we give our mistakes.” –Oscar Wilde

Can you imagine circumstances that might cause someone to say “Go ahead, cut my pay?” My guess is that most readers imagine an angry resignation beneath the utterance of such a phrase—because the person saying it has no choice but to accept a lower wage.

Now, can you imagine a person who is actually happy about saying it?

These people do exist, and some are clients of ours. They’re grateful to be in a position to trade a pay cut for something they value more—perhaps time with family, or control over their working conditions, or more meaningful work. The question is: how did they earn this leverage?

One of the rewards for a lifetime of disciplined saving and prudent investing is the ability to choose when and how you retire. The reverse is also true, and sadly, much more commonplace. Plenty of people continue to work longer than they want to, doing things they’d rather not do—because they have to.

Let’s examine the possible causes for these very different retirement-age outcomes.

Lifetime financial security is built upon many things, including investment expertise, discipline, and patience. Among the significant drivers of long-term financial success (or failure) are certain types of choices:

• one-off decisions around important life events (for example, purchasing a home)

• a series of decisions over time (such as saving and spending choices)

• reactions to actual or anticipated market conditions (“cashing out” of the market or staying invested)

What Causes Financial Mistakes

It would be great if financial mistakes were caused only by bad information or flawed reasoning. If that were so, they could be eliminated with education and logic. The reality is that there is a powerful emotional component to both good and bad financial behaviors, even if we’re not aware of it. Some examples of the ways that emotions manifest in financial decision making:

• A young professional saves consistently from a young age because her parents’ frugality is ingrained in her.

• A middle-aged woman balks at planning for retirement because because she’s committed to supporting her adult children, and convinces herself that she’ll never want to stop working.

• A young couple spends way too much on a home.

• Another couple will not even consider selling their investment shore property, even as the real estate bubble becomes obvious.

• An investor liquidates his portfolio in reaction to a contentious political season.

• An entrepreneur has an estate plan in place as soon as his first child is born because he lost his own father at an early age.

Ideas that we’re raised on, the emotional attachments we have to things and places, our fears and our dreams, all can get in the way of our decision making. It happens to all of us. Sometimes our emotions support positive habits or behaviors. But more often, they can be the main ingredient in poor financial decisions, some of which could derail a retirement goal.

The solution starts with being open to the fact that you can blindside yourself. That your reasoning can get stuck in one channel, that your analysis can be polarized. When your financial advisor nudges you toward that realization, keep in mind that he or she has witnessed the behaviors and decisions that have worked or not worked for many clients. When emotions are strongest, run the numbers and review whether the math works against you or in your favor. Ask questions and truly find out whether your thinking is sound—from a financial standpoint.

Remember, it’s perfectly fine to have strong feelings around your money, a difficult market, or the next tumultuous news event, as long as you don’t allow them to cloud your financial decisions.

By Joan Hill / Communications Coordinator

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