“Behavioral finance is going to be a big area of financial planning going forward. This is not just looking at the dollars and cents, but more of the psychological impact of certain decisions.”
The way we think does affect how we approach our financial planning. Matt Stead, Eric Sachetta, and Mike Callahan, Sachetta Callahan financial advisors, discuss The Psychology of Money: Timeless Lessons on Wealth, Greed, and Happiness by Morgan Housel, hailed as, “One of the best and more original finance books in years, “ by the Wall Street Journal.
Every decision that we make has a behavioral component to it, the underlying reason why people do what they do. When it comes to financial planning, the trick is to balance the psychological side and the financial side. A person’s financial views and habits can be heavily influenced by their background. Some feel that their earning potential determines their financial outcome, versus what they actually do with the money they have. In the end, focusing on compounding your wealth over a long period of time leads to greater success, instead of picking the right stocks.
Your habits do determine your outcome, and it’s easy to lose the way forward when faced with the constant barrage of savings and investments ‘shoulds’. Vanguard estimates that a financial advisor adds around just over 3% a year to your rate of return over time, the biggest area where value is added by behavioral coaching. In this way, financial advisors can become coaches, helping people to understand their psychology surrounding money.
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