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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
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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