© 2015 Dow Jones & Company. All rights reserved. If you think you’re making the best possible decisions with your money, think again. We all like to regard ourselves as rational spenders and investors, optimizing the use of our hard-earned money. But in fact, say psychologists and financial advisers, most people are generally in the grip of emotional traps and cognitive biases that impede the optimum use of their money, and sometimes guarantee they’ll do the worst possible thing with it. The classic example: Panicselling of stocks after the market has taken a plunge—the very moment you should be buying. Psychologically driven money missteps can be costly, and the first step toward avoiding them is recognizing that they exist in the first place. Below, four money mistakes you may be making: THE WEEKLY GUIDE TO MANAGING YOUR MONEY Money Problems? Maybe It’s All in Your Head. Veronica Dagher learns the solutions to many financial difficulties can be found in a psychologist’s office. Self-Sabotaging Beliefs The problem: These are half truths that were learned in childhood but that operate unconsciously in your adult life, says Maggie Baker, a psychologist in Wynnewood, Pa. Some examples: “I grew up poor, I will die poor” or “My net worth determines my self-worth.” A problem with half-truths is that they can induce a type of passivity known as “learned helplessness” that prevents people from acting in their own best interests, even as they pro- 18000 Friday: 17672.60 17800 17600 17400 17200 Half-hour intervals January Source: FactSet The Wall Street Journal 1 merce company is cutting 2,400 jobs, adding three board members and exploring the sale or spinoff of its eBay Enterprise unit, which helps companies with their Web-sales efforts. 2 Corbis Skin in the Game: Janus Capital Group said star manager Bill Gross invested “more than $700 million” of his own money in his $1.2 billion Janus Global Unconstrained Bond fund, confirming Journal reports about the source of the fund’s capital. 3 Groundwork: EBay is cleaning house before its planned breakup this year. The Internet-com- 4 Fowl Rules: The Agriculture Department is proposing testing standards for chicken and turkey aimed at reducing rates of salmonella and other bacterial contamination. 5 Ouch: Standard & Poor’s is expected to pay about $1.4 billion to settle probes of how it graded bonds before and after the financial crisis. 6 A Fine Plan: A judge signaled that he may let BP pay fines for the 2010 oil spill in installments instead of a lump sum. The Numbers Percent change for the week 1.2% GOLD 7.2% 4.5% OIL NATURAL GAS mote self-sabotaging behavior, Ms. Baker says. She cites a client couple who didn’t have steady jobs and saved very little. The wife, however, wanted to keep spending more than the couple could afford, even though they now had a newborn child. She also didn’t want to work. Through counseling, the wife came to realize that she had unconsciously adopted her mother’s assumption that “the universe will provide.” The fix: Counseling can help you understand your subconscious beliefs, and can be a critical first step toward a healthier relationship with money. “Blind hope isn’t a financial plan,” Ms. Baker says. “Under- stand that repeating the same behavior and expecting different results is insanity.” Overspending The problem: One of Karol Ward’s clients was always stressed about not earning enough, says the New York psychotherapist. The client said it was because she worked as a freelancer and that her income was unpredictable. However, when Ms. Ward helped her analyze her expenses, she realized she was spending way too much on clothes for her two children. The client’s rationale: She was obsessed with bargains and couldn’t pass up a sale. In reality, she was seeking a tempo- rary stress release by shopping. Another of Ms. Ward’s clients was living paycheck to paycheck, spending out of a need to save face and avoid being judged. “He was horrified at the thought of saying ‘no’ to a night of drinks after work,” she says. The fix: The first step to stop overspending is realizing you’re doing it, Ms. Ward says. When you’re rested and calm, track your expenses and compare them with your income. If you are overspending, set some financial goals and create a spending plan that will require you to live within your means. (Experts say this tracking exercise will also help you conquer “avoidance”—fear of opening your bills or confront- Email: [email protected] JONATHAN CLEMENTS Talk About Stimulus Faster: Google is preparing to sell wireless service directly to consumers after striking deals with Sprint and T-Mobile, a move likely to prod lower wireless prices and improved speeds, say people familiar with the matter. The problem: A client of Ms. Baker lost a lot of money in the 2008 market crash. “He tormented himself with the regret that he had listened to his financial adviser,” she says. He then decided he would manage his own investments, even though he had a full-time job and had limited knowledge of the stock market. But he made investment decisions based on “good news” about the stocks he liked, ignoring information that might challenge his assumptions—a phenomenon known as “confirmation bias.” For a while the strategy worked, but he eventually ended up losing more than before. “He felt so driven to make money that he overvalued his own opinions,” Ms. Baker says. The fix: Don’t get “hijacked” by the excitement of investing, Ms. Baker says. If you feel that is happening, stop and make sure you’re doing enough research about the investment and fully understand its risks. Seek the input of an investment professional or trusted friend who can give you another perspective. Put some time between your investment idea and decision, she says. Jeff Mangiat and anxiety between parents and their kids, and instill a sense of fiscal responsibility and motivation for moving forward,” Mr. Ulin says. NEED TO KNOW The news last week that the European Central Bank (the Eurozone’s version of the Federal Reserve) would go into the euro-bond buying business sent the Dow Jones Industrial Average soaring. It rose 1.5% on Thursday’s news. Things settled down a bit on Friday, but the Dow finished the week up 0.92%. After a shaky start, it’s down 0.84% for the year. ing your 401(k) statement.) Setting goals can help you stay focused on a long-term goal, such as saving another $10,000 for retirement. A financial adviser or therapist can help you find ways other than shopping to relieve your stress, Ms. Ward says. A therapist can also help you identify your emotional triggers, says Brad Klontz, a financial psychologist in Lihue, Hawaii. For example, if you’re aware that you like to overspend after a bad day at work, avoid the mall at night. “We’re most at risk for bad financial decisions when we are hungry, angry, lonely or tired,” says Mr. Klontz. Overconfidence Enabling The problem: Financial planner Jon Ulin has several boomer clients who have helped pay for their college-graduate children’s living expenses and loans while allowing them to move back home. The Boca Raton, Fla., planner also recalls a retired client whose boomer-aged daughter, along with son-in-law, two grandchildren and a dog, moved back home with him (now going on two years). While well-intentioned, the client is putting his own retirement at risk by bailing out his family. The fix: Parents can mitigate the risks of financially enabling adult children by setting boundaries in advance of providing support, he says. If you’re already supporting adult children, break the pattern by having a family meeting and putting down specific requirements in writing. Stipulate exactly how much support you’ll provide, and for how long. And consider requiring the child to repay you over a period of time. “This will decrease the stress WSJ.com/Sunday 1.81% 10-YR TREASURY YIELD Lawrence Rout, Senior Editor [email protected] David Crook, Editor [email protected] Christopher Gay, News Editor [email protected] Mark Tyner, Art Director [email protected] Lorri Wagner Business Partnerships (609) 520-4235 [email protected] Paul Carlucci Jr. Director of Sales (212) 597-5636 [email protected] CORPORATE HEADQUARTERS 1211 Avenue of the Americas New York, NY 10036 FOR A SPECIAL JOURNAL SUBSCRIPTION OFFER, CALL 1-888-295-2747 ALL OF THIS WEEK’S EDITION IS AVAILABLE ON OUR FREE WEBSITE: WSJ.com/Sunday Don’t Spend Old Age Pinching Pennies Half of us need to make serious financial changes— or we won’t be able to maintain our standard of living once retired. According to the National Retirement Risk Index created by Boston College’s Center for Retirement Research, 52% of households will see their standards of living fall if they opt to retire at age 65, up from 30% in 1989. The drop-off has been driven by a host of factors, including rising life expectancies, falling bond yields, the disappearance of traditional pension plans and the rise in the full retirement age for Social Security benefits. Sound bad? It gets worse. In estimating how many of us face a penny-pinching retirement, the index assumes folks retire at age 65, yet most retire earlier. It also assumes that seniors take out reverse mortgages and buy income annuities. Many folks resist these strategies, even though they can increase retirement income. Faced with such grim statistics, the standard response is to exhort Americans to save more. That’s obviously a good idea, though it works best for folks who are further from retirement. What if you’re close to retirement age? In addition to saving like crazy, consider four strategies. 1 Work longer. This suggestion often triggers an exasperated response from readers who are forced out of their jobs or who find work becomes too physically demanding. “We’re big advocates of trying to work longer,” says Alicia Munnell, director of the Center for Retirement Research and co-author of “Falling Short,” a new book devoted to the retirement crisis. “It’s a prescription that works for the bulk of the population. But it’s not possible for everybody.” If you can continue working, it could tilt the odds in 2 Buy lifetime income. To squeeze maximum income out of your savings, often the best strategy is to buy a lifetime-income annuity. Sure, there’s a risk you’ll die early in retirement. But in return for taking that risk, you can enjoy attractive monthly income. Intrigued? The best annuity available is Social Security— and you can get a monthly check that’s some 76% larger by delaying benefits from age 62 to 70. The price of this “annuity”: You would need to draw more heavily on your savings during Today, 52% of households will see their standards of living fall if they opt to retire at age 65—up from 30% in 1989. favor of a financially comfortable retirement. Let’s say you can find parttime work that pays just enough to cover the bills. That could still give your retirement a huge financial boost by allowing you to leave your nest egg untouched for longer, while also delaying Social Security. On top of that, working at least part-time may give a sense of purpose to your early retirement years. Remember, your retirement might last 20 or 30 years. That’s a long time to sit around “relaxing.” your initial retirement years. Social Security is “such stupendous income,” Prof. Munnell argues. “It’s inflation-adjusted and you get it for as long as you live. If you can get as much of that as possible, you’ll be in solid shape.” 3 Tap home equity. Prof. Munnell’s research center calculates that the median wealth of households approaching retirement age is just under $600,000. Much of this is accounted for by two “assets”: the value assigned to the income streams from Social Security and traditional pension plans. What’s the next biggest asset? That would be home equity, which you might tap by trading down to a smaller home. That would free up money that can be spent, while likely also reducing your living costs. But maybe your home is already modest or you prefer not to move. The alternative is to take out a reverse mortgage. I’m not crazy about reverse mortgages—but I’m also not crazy about folks spending their retirement pinching pennies. “People don’t want to tap home equity,” says Prof. Munnell, who notes that she is an investor in a reverse-mortgage lender. “They see it as a reserve and they’d like to leave it as an inheritance. But what was possible in the past may not be possible today. I hate to think people might scrimp unnecessarily.” 4 Cut spending. The lower your fixed living costs, the more financial breathing room you’ll have— and the more you can spend on discretionary expenses like travel and eating out. Key fixed costs include rent or mortgage, other debt payments, property taxes and car costs. Two obvious moves: Try to get all debts paid off by retirement and consider moving somewhere with a lower cost of living. Email: [email protected] More Young Adults Stay Put in the Biggest Cities BY NEIL SHAH Amira Nader graduated from Columbia University in 2010 with a master’s degree in acting and nearly $190,000 in debt. She now works for a public radio station in New York City and waits tables on the side. Ms. Nader, 31 years old, who moved to New York nine years ago from Florida, dreams of owning a home in New Orleans. But like tens of thousands of other young Americans, she is finding it hard to move away. “I’m scared,” she said. “There aren’t jobs like this in New Orleans.” For decades, young people flocked to the U.S.’s biggest metro areas—New York, Los Angeles and Chicago—to build careers before taking their talent elsewhere. That pattern now appears to be fading as more young workers stay put. On average, fewer than 23,000 young adults left New York annually between 2010 and 2013. Only about 12,000 left Los Angeles—a drop of nearly 80% from before the recession, according to an analysis of census data by the Brookings Institution and The Wall Street Journal. Chicago’s departures dropped about 60%. Young adults who moved to the cities for school, internships or early jobs—or simply because it seemed cool—may now be stuck, said Brookings demographer William Frey. A confluence of factors is behind the decline. Many young workers who began careers during the recession are struggling to find their footing. Some are delaying marriage and children. Increased financial insecurity also may play a role, especially for young people shouldering big student debts. Median earnings for full-time U.S. workers aged 18 to 34 have fallen nearly 10% since 2000, after adjusting for inflation, to below 1980s levels. Amira Nader, New York City
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