Make This Year Better by Asking the Right Question

This post is by guest writer Carl Richards. Carl is a financial planner, contributor for The New York Times and Morning Star, and author of Behavior Gap: Simple Ways to Stop Doing Dumb Things With Money.

With 2012 still fresh and new, it's a great time to make a plan to have a better year financially than we did in 2011. But figuring out how to make smart decisions about money can be a frustrating experience. In large part it comes from the sense that it should be easy. After all, it should be a simple math equation, something that fits in a spreadsheet, right?

I think a significant part of our frustration with money comes from the fact that making smart decisions is not as simple as finding the right spreadsheet. Emotion and how we feel about money plays at least as large a role as the calculator.

Given the role that emotion plays in our financial decisions, I've found it far more interesting, and frankly more helpful, to focus on asking the right questions, instead of obsessing over one-size-fits-all answers. By learning to ask better, or at least different, questions we can have some hope of having a better experience.

This approach reminds me of the old Stephen Covey lesson about spending our entire lives climbing a ladder only to find out it was leaning against the wrong wall. As we start to ask ourselves different questions about money we can make sure that we're climbing a ladder leaning against the right wall.

To get started, I suggest asking yourself and/or your partner some of my favorite money questions.

1. What's important about money to you?
I've asked this question in hundreds of interviews over the years, so I'm no longer surprised when the initial answer is silence. We're not used to thinking about the importance that we place on money and why. This question is not about goals, like saving for education or retirement; it's about values, like security, freedom, flexibility, and peace.

The goal of this question is to define your financial values and help you get to the “why” of money. Don't stop with the first answer or even the second. Most often I hear people say things like security. But keep pushing. What's important about security to you? Think of the answers as a progression of values and your goal is to keep digging until you can say, “There is nothing about money more important to me than XXX.”

One time I had this discussion with a very successful professional couple. The wife was in the prime of her career as a successful emergency room physician. Like many people before her, the first answer to this question related to security. But as we continued to push, the answer became, “I'd like to have more time.” When I asked why time mattered, she got very quiet, and then said, “I finally want to have time to have a child.”

The most important thing about money to this emergency room doctor was getting to the point where she would have the security and the flexibility to have a child. Of course your answer will vary from this doctor, your friends, and your neighbors, but that's why this is so important. Once you become really clear about what's important about money to you, then you have the emotional context to talk about goals. To return to the ladder example, it's about defining the wall you want to lean your ladder against.

2. Where do you want to be financially in three years?
The context for answering this question should be based on what you learned in the first question. Whenever possible, the answers should be specific and measurable. Think in terms of defining and setting goals.

For instance, if one of the most important things about money to me is providing opportunities for my children, I might set a goal to start saving for education. But of course that's not specific enough. The next step requires that you define exactly how much you want or can afford to save. I found it to be most helpful to make these goals specific in terms of time frame and dollar amount.

They need be no more complicated than, “I will save $100 a month on the 15th of each month into my child's 529 account.” Picking the specific numbers and even the timing may take some work to figure out for your particular situation, but plenty of online savings calculators exist to help you figure out the best number for you.

It's important to notice that so far we haven't talked all about rates of returns or specific investment products. So far this is just about the plan, not the product; it's about a process of planning. The other thing that's important during this step is to let go of the need for precision.

While we want the goals to be specific and measurable, you also have to realize that often these are guesses. You don't really know how much you'll need to save to meet an educational goal, for instance, because too many assumptions go into it. So what we need to do is avoid getting hung up on the need for precision at the expense of getting started. Realize these are guesses, make the best guess you can, and get to work.

3. What good habits will help me reach my goal?
When it comes to money, behavior plays a massive role in our success. The big problem is most of us behave poorly if left to our own devices. The solution is pretty well documented at this point: we have to find ways to automate good behavior.

If you determine that you should be saving $100 a month towards education, don't make that decision every month, make it automatic. It's as simple as signing up for an automatic withdrawal out of your checking account and into your child's 529. If we make this into a decision that requires action on our part every single month, we will fail. If it's going to require you take out your checkbook, write a check, address an envelope, put a stamp on it, and put it the mailbox you can tell it's not going to happen. There will always be other things that we would rather spend $100 on. So take advantage of automation.

Another example of good behavior that we can automate is rebalancing our investment portfolios. This is a pretty simple concept. I believe it's one of the most important things we can do to avoid the big behavioral mistake of buying high and selling low that we're also prone to commit.

Here's the deal: let's say you determine that the 529 education account should be put 60%into stocks and 40% into bonds. So you setup the account and invest in broad-based index funds to ensure diversification. Now comes the avoiding temptation part.

Perhaps you set up the account in mid-2007 right before the massive declines of 2008 and early 2009. After watching the market go down 20, 30, or 40%, you'd probably feel like selling what you had invested in stocks. But clearly that decision doesn't match with our goal of rebalancing. The key to investing success is pretty simple: buy low, hold on to it, and sell it for a higher price later. But instead we're tempted to buy high (when we feel good about things) and sell low (when we feel bad). It's why the behavior gap exists.

Going back to the earlier example, emotionally we wouldn't want buy more stocks to get our portfolio back up to a 60/40 value split. Instead, we'd be tempted to liquidate our stock holdings. By adopting rebalancing as part of our investing strategy, we avoid this temptation because it automates behavior.

So if we started in 2007 with 60% of our money in stocks, and the market declined, we would now have something less than 60%, let's say 50%. However, if you've automated the rebalancing process, you'd be taking money (10%) from the bond side of the portfolio that did relatively well (high) and move it into the stock side of the portfolio (low) to restore the 60/40 split.

Avoiding the greed trap
There are a lot of benefits that can come from rebalancing, but none is more important than effectively automating the good behavior — avoiding the big behavioral mistake of getting scared out of our portfolio after a market decline. It also works to prevent us from getting greedy after a market is having huge run.

Warren Buffett said the key to investing success is being greedy when others are fearful and fearful when others are greedy. But unless you see Buffett in your mirror, it's almost impossible to do unless you automate that type of behavior through disciplined rebalancing. There are plenty of services out there that will actually rebalance for you.

Each of these questions demonstrates my primary goal in writing The Behavior Gap. It wasn't to provide another step-by-step personal finance book, but to help people think through the questions we need to ask ourselves. By providing a framework, there's the opportunity to have more meaningful discussions about money.

Plenty of great resources cover the specifics of how to implement financial decisions, including J.D.'s book, and the ongoing discussion on this site. My hope is that we also can take a little time to have some more meaningful, honest conversations about money with the people we love to make sure that the ladders we are climbing are leaning against the right walls.

More about...Planning, Psychology

Become A Money Boss And Join 15,000 Others

Subscribe to the GRS Insider (FREE) and we’ll give you a copy of the Money Boss Manifesto (also FREE)

Yes! Sign up and get your free gift
Become A Money Boss And Join 15,000 Others
guest
30 Comments
Oldest
Newest Most Voted
Inline Feedbacks
View all comments
Brian @ Progressive Transformation
Brian @ Progressive Transformation
8 years ago

I have trouble finding the right questions, especially about money. Sometimes I take the approach t ask Socratic Questions, which are open ended. Examples are “What is the nature of…”, “why did I do that…” Why is this happening?” Etc.

Socratic questioning works for all parts of our life, and are essential to how we build strength in our lives. Ahh, if only i can do it more efficiently when it comes to money.

thank you for this post.

jack foley
jack foley
8 years ago

I think the time thing is so important. So much people earn a lot of money but have no life.

time freedom is what it’s all about..

Trinket
Trinket
8 years ago
Reply to  jack foley

I agree – having the so-called time-freedom is very important! But for me the reality has been, that for you to be able to have some time-freedom, you need money. So that’s the reason I’m saving at the moment.

Emily Hunter
Emily Hunter
8 years ago

It’s weird that I got into an argument with business people yesterday over this — they claimed that money was what we were after. I told them that it was the resources that it could purchase. Then I was told that there’s only a semantic difference between the two.

I asked him whether he’d tried drinking a bowl of soup made of $1 bills. I think I officially got the ‘does not play well with others’ tag as a result. 🙂

Sonja
Sonja
8 years ago
Reply to  Emily Hunter

I don’t think you deserve the tag, but I do have to agree with the business people you talked to. It is a matter of semantics. Money = trade mechanism to get stuff = being able to get needed resources.

Perhaps you were talking about a different money thought, rather than the abstract concept of money (ie abstraction of ability to get resources) you might’ve been talking about money the paper and coin stuff. (Hence the soup metaphor).

Emily Hunter
Emily Hunter
8 years ago
Reply to  Sonja

You’re right about that. I was talking about it as being something that’s inherently useless until we address the ‘why’ of the matter. I was taking it in more of the literal sense of the word. Money is, by far, the easiest proxy that we have to get stuff. It replaced the barter system because folks decided that they’d rather have a representation of 400 coconuts rather than having the coconuts on hand. These business folks seemed to be after money for money’s sake, rather than thinking about its purposes. As a side note, I was invited back to the… Read more »

imelda
imelda
8 years ago
Reply to  Emily Hunter

What comes to my mind with that question is this: theoretically, if you value money as money without thinking about why, then there is no limit to the amount you want to amass.

Whereas, if you’re thinking of the resources it could buy, theoretically you have specific things in mind, and therefore a defined limit where you’ll be happy.

Miser+Mom
Miser+Mom
8 years ago

Love this! When I discovered I could set up automatic transfers from my checking to savings account, that changed my savings habits for the better. Ditto for giving to charity automatically through payroll deduction — that’s another thing I’ll say out loud is important to me, but not follow up on if I have to think about it over and over.

Kevin M
Kevin M
8 years ago

I love Carl’s writing and sketches. I think the last one is really awesome. Thanks for the guest post…and thanks for the print I received last night, can’t wait to hang it in my office.

John | Married (with Debt)
John | Married (with Debt)
8 years ago

What do I want from money? I want to enjoy life now, and later. Is that too much to ask?

For me, it’s not that I want the resources that money buys, as a commenter above said (though she is correct).

What I really want is not to feel trapped by a job, that I am enslaved by my resources. I’d rather work until the day I can retire, and not a day longer.

Tyler Karaszewski
Tyler Karaszewski
8 years ago

“1. What’s important about money to you?
This question is not about goals … it’s about values.”

“I finally want to have time to have a child.”

Are you sure that question’s not about goals? “have a child” seems like it’s a goal.

bareheadedwoman
bareheadedwoman
8 years ago

but a goal with no value is worthless as well as unattainable.

i do have a problem with “automating good behavior” as much as I see it solving many short term problems. if your goal is to modify your behavior (i.e. how you think about money) then ultimately you are simply opting not to think, not altering your thinking.

Catherine
Catherine
8 years ago

Funny, yesterday I posted this comment on my Facebook page: “Having goals matters, but understanding the why gets you across the finish line.” Having an emotional connection to your goal makes it possible to makecthe changes needed to succeed. It is the secret ingredient that makes the impossible possible.

MoneyforCollegePro
MoneyforCollegePro
8 years ago

I do best by making specific goals for the next year. The example of depositing $100 on the 15th of the month into a 529 college savings plan is a great example. This works well for me.

Sean at Economically Humble
Sean at Economically Humble
8 years ago

This was a great post. I do agree with the need of specificity, especially for students such as myself. Having an emergency fund is never as good as having a 6 months emergency plan (or saving for college, as you used).

So far January has been pretty good, as fa as budgeting goes. Almost everything is automated so I can focus on what is important…. my partner.

AverageJoe
AverageJoe
8 years ago

My office was sadly the first place many couples had a serious discussion about money. I could see that they left our meetings closer than they’d felt before they came in. Everyone seems to talk about investments, but talking about the “why do I want this” in the first place is a better spot to begin the discussion.

Rob+Bennett
Rob+Bennett
8 years ago

I think this is a highly intelligent/insightful article.

This is the future of investing analysis, in my assessment.

Rob

chacha1
chacha1
8 years ago

I appreciate the simplicity of the graphics. My favorite Behavior Gap graphic that I’ve seen so far was two circles with a small overlap. One circle was “what is important” and the other was “what I can control.” The overlap was labeld: where to focus.

This kind of psychology works for me. It’s like cognitive behavioral therapy for money.

Long
Long
8 years ago

The analysis about the question of the importance of money is significant. Most people will deliver an answer that relates to something tangible and most financial planners will readily accept that answer. It’s often goals/values that can drive financial planning past wealth building.

The example of the doctor wanting to have a child is a great example of this because it can bring up other discussions. Things like wills, trusts, education savings, funds to cover maternity leave, etc. become important topics to cover.

Krantcents
Krantcents
8 years ago

I think this is always true! Asking the right question gets the right answer. Money and food always seem to be on everyone’s mind. Funny, how most people have trouble with both, weight issues or money issues.

bareheadedwoman
bareheadedwoman
8 years ago
Reply to  Krantcents

ain’t western civilization grand?

Amy
Amy
8 years ago

Love this post! I went through the questions this afternoon and it helped me realize I have some big goals (finish paying off the house, up the emergency fund to a certain level, oh and still have money for get aways and books and entertainment and hobbies) that will take patience (sigh) and lots of careful management of my money to achieve (double sigh). My impatient and impulsive sides are not pleased. But now I have what I beleive I want written down and already have some of the impediments (like me, my own worst enemy)identified that I will face… Read more »

doug_eike
doug_eike
8 years ago

Finding financial balance is indeed difficult. When my portfolio is in cash, the market goes up. When I’m fully invested, it goes down. Getting into step with the market’s upswings and downturns is a tricky business. Thanks for the tips!

Andrew
Andrew
8 years ago

The first question, especially, is very insightful. The real goal a person has can serve as a better motivator for changes in financial behavior than the financial goal itself, which after all, is just a means to an end for (I hope) everyone.

imelda
imelda
8 years ago

Terrific, thought-provoking article. Thank you for this!

LennStar
LennStar
8 years ago

Because I usally do it if the question of questions arises:

Asking (and learning to ask) the right questions is one of the most important skills – propably *the* most important – that a human being can have. What do I want? What does the other person want? (especially if the other one wants to sell you something ;)) Why are politicians are saying X?
And so on.

Steven | The Emotion Machine
Steven | The Emotion Machine
8 years ago

Very helpful outline of some very valuable questions. I believe reflecting on our financial goals is a huge part to achieving them – this post provides a good framework to do that. Much appreciated!

Kenny
Kenny
8 years ago

The money answer varies so much as we go through life, that normally, there is no one good answer or graphics for a person. It will change from 20’s to 30’s to 40’s to 50’s and most definitely in the 60’s. The point is not money, but the purpose of life, since money is only an enabler (having too much debt makes it still an enabler, but a very slow enabler). Hence, making money to accumulate and get it to a wealth stage is very critical between 25 and 50, so that you can get the purposes accomplished, and enjoy… Read more »

bareheadedwoman
bareheadedwoman
8 years ago
Reply to  Kenny

chutes n’ ladders

Trinket
Trinket
8 years ago

I think the question one needs to ask is, whether money can really buy the thing you want most? Putting it simple – is the money (= the work) worth it? I recently have discovered that the amount of time I put into work and the amount of money I receive and the stuff I want to get back with the money I earn, do not correlate. So I wish to make a difference in my life. The difference won’t come easy. I have to save, save, save for a very long time to be actually able to do this,… Read more »

shares