There is nothing easier than explaining to people how to be successful with money.
Spend below your means, prepare for financial emergencies, invest regularly with a long-term perspective – that pretty much sums it up. Now for a much tougher assignment – figuring out why people don't listen to advice such as this.
Why do people fail with money? Mike Morrow, a financial planner in Thunder Bay, recently offered some thoughts that were so interesting I asked other financial planners and advisers to weigh in with comments of their own. Some highlights are presented here in the hope that they'll help people understand why they're struggling with money issues.
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Mr. Morrow got in touch with me several weeks back after reading a piece I linked to in my daily blog about how owning old cars and ugly houses can help you retire rich. "I have been saying for years that living in too big a house and driving too big a car are the No. 1 reasons why people fail [with money]," he said in an e-mail. (He also said "Go Habs," but only because he knows I'm a Leafs fan.)
I asked Mr. Morrow to elaborate on his thoughts and he replied with a longer list of reasons why people fail with money. To get more planners and advisers into the conversation, I invited comments on LinkedIn. The results are shown at the bottom of this column.
A lot of the answers that came in cited a lack of a financial plan as a reason for failure. Fine, point taken. Planning can certainly help. But given that planners plan for a living, this is hardly the most unbiased insight. More interesting were the very specific thoughts on the reasons why people have money problems. Some of these ideas came up repeatedly and it seems worthwhile to highlight them as themes and develop them a bit. Here goes:
1. Finding satisfaction in spending and consuming rather than saving
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We live in a world of non-stop, real-time exposure to all the cool things that people can buy and do. It's hard for saving to compete, especially when the payoff is so small as a result of low interest rates. In fact, many people have compared the cost of borrowing with the return on saving and changed their financial belief system to one based on immediate consumption rather than delayed gratification.
Suggestion for 2016: Think about setting some achievable savings or investing goals and the satisfaction you'll get from nailing them.
2. Not starting early enough
There are signs that today's young adults understand this point well. To plan our future coverage of millennial issues, we recently asked people in their 20s and 30s to fill out a supershort questionnaire about their financial worries. The challenge of saving for retirement has come up surprisingly often in the answers. Brilliant. If there's one surefire way to de-stress the retirement saving process, it's starting early.
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A late start steals your flexibility. You have to take on a bigger savings burden, retire later or plan for a retirement of financial frugality.
3. A flawed savings strategy
Several planners see people failing with money because they don't have the financial resources, savings or insurance to cover them in case of emergencies such as a job loss or illness. In a recent column, I strongly urged people to build an emergency fund in 2016. That's one way to avert financial failure.
Planners also see a problem with people not having a regular savings program. This is easily fixable – just arrange to have a preset amount transferred to a savings or investment account every time you get paid. Save regularly, not just when it's convenient.
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4. Risky investments
Low interest rates have played hell with our thinking about investing risk. Frustrated over low bond yields, many investors wandered into the likes of preferred shares and junk bonds. All had a tough time in 2015, reminding us that higher yield means higher risk.
5. Overall passivity
You can see this theme over and over in the failings cited by planners. They say people are too intimidated to ask questions about money, and that they follow a rule of spending first and trusting there will be money left to save. Also, planners see people hoping things will take care of themselves. They never do, which is why I wrote this column.
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Why People Fail With Money
Six financial planners and portfolio managers list their top reasons why people struggle with their finances.
Mike Morrow, financial planner
- Big house, big car, 'essentials' like four cellphones per household
- Going into debt early in life, spending the rest of your life trying to catch up
- Divorce
- Starting too late to save and invest
- Suboptimal education and skill set
Shawn Todd, financial planner
- No financial plan
- Not starting early enough
- Impulsively changing course on your finances
- Poor investment strategy from age 20 to 40
- Not reviewing your plan periodically
Graham Isenegger, portfolio manager
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- Reaching for yield and risking capital
- Retiring too early with not enough resources
- Starting too late or taking too much risk early on
- Not paying yourself first
- Getting too emotional
David Lester, financial author
- Not setting up a sufficient automatic savings plan and then leaving it to run
- Not having or updating a financial plan
- Having large debt payments in later life or retirement
- Not having sufficient insurance or savings for sudden death or life surprises
- Enjoying vacations and toys more than being financially sound
Matthew McGrath, portfolio manager
- Not minimizing or avoiding unnecessary fees across your banking, investing, and borrowing
- Not having a plan defining how much you need to save to reach your financial goals
- Investments over/under diversified, not monitored or rebalanced; use of high-cost mutual funds
- Being too intimidated to ask questions about money
- Hoping things will take care of themselves
John Klass, retired adviser
- Judging affordability by what friends seem to be able to afford
- Spending first and trusting there will be money left to save
- Relying on get-rich-quick investment strategies
- Following the herd on fear-greed market swings
- Not having savings or insurance in case of emergency