Everything we do involves some element of risk. For the main, we don’t give too much consideration to most of these risks because we are so accustomed to good outcomes. Some risks are external; that is they occur as a result of something beyond our direct control. Still other risks are internal, they happen as a result of specific actions that we take and these are at least partially within our control.
Interestingly, the majority of our focus is often on the external risks, even though we can’t directly influence their outcome. Within the area of financial decision-making, this is particularly true. We worry nonstop about the direction of the stock market, interest rates and political races. All of this worry is for naught since we can’t impact short term markets, interest rates or elections (except for voting, of course). What if instead, we shifted our gaze towards the internal risks that we can control?
4 Risks You Can Manage
While there are numerous internal risks, let’s look at four main risks that we see in many client situations.
1. Spending Too Much– There is an economics maxim known as Parkinson’s Law that says spending rises to meet income. That is, if one year we spend “X” and the next year our income increases by 10%, our spending tends to follow a similar path. This new level of spending may be surprising at first, but quickly becomes ingrained as our “new normal”.
2. Saving Too Little- This is of course, directly related to # 1. If we spend too much, we don’t have enough left to save. Most individuals are poorly prepared for retirement precisely because they have not saved a sufficient amount for a long enough period of time.
3. Kids and Money- To say there is an epidemic of problems with kids and money (including adult kids) is an understatement. Many, if not most adults in their 50’s or beyond have at least one child that has significant and ongoing money problems.
4. Behavior- We talk a lot about behavior because it is so critical to wealth wellness. We coach clients to continue focusing on their long term financial planning goals instead of short term noise and random world events. The growing field of neuroeconomics has helped increase our understanding of brain wiring and pitfalls.
Managing these four internal risks can set you on the course towards financial well being. Ready for a real conversation?