“So most financial advice then doesn’t take into account the total of you — past, present and future…what are your best interests?”
Our Make Your Mark series, powered by the NFL, showcases the global impact of the Tillman Scholars who are writing the story of a better future. In these videos, they share their works of humble leadership and service across both public and private sectors.
2013 Tillman Scholar Michael Kothakota knows a thing or two about best practices with personal finance. After earning his M.S. in predictive analytics from Northwestern University and his Ph.D from Kansas State, Michael made it his mission to help individuals find solutions for their personal financial planning.
In his talk, “Making Personal Finance Work for You,” Michael explains that there is no one-size-fits-all approach to financial planning. He has found that more often than not, “financial advisors have a habit of dividing things into wants and needs, or if they want to be fancy, discretionary and non-discretionary,” but not sorting those wants and needs based on an individualized approach that takes an individual’s history, and wishes for the future, into account.
Michael runs WolfBridge Wealth, a research-based financial planning firm, and focuses on bringing individualized financial planning to people by focusing on total self.
Watch Michael’s Make Your Mark talk below.
Financial advice isn’t one size fits all. American finances don’t match the ideal state. We have difficulty prioritizing spending and savings, and that’s usually because we don’t know what our own priorities are, so there’s this disconnect between our needs and our wants, and our ability to manage finances. And that gap isn’t easily bridged without sufficient effort, and even then we don’t fully grasp what will work best for ourselves
So, one of the reasons some researchers think we have so much trouble managing our finances is because of this concept of mental scarcity, and that’s the inability to manage your finances because you have too much other stuff going on and it makes it difficult to think. There’s also an instinct people feel about money and how to decide what it’s used for. And the decisions made tend to be sub-optimal because people don’t understand their full financial life.
So let’s look at two people the same age — Em and Alex. They’re both 30 years old, they have different careers – Em is an engineer earning about eighty thousand dollars a year and Alex’s social worker earning forty thousand dollars a year. They have the same credit score, same amount of debt, and if you’re interested, they’re both single. They also just both inherited five thousand dollars, and so they’re thinking, “What should I do with that money? Should I pay down debt? Should I invest it? Put it in a savings account? Save for a down payment on a house?” These are big questions, and for many people, they look to experts for answers. So they might call into the Suze Orman Show, they might sign up for Dave Ramsey’s newsletter, or they might tune in to Mad Money to get stock advice.
And some people may go to see a financial advisor, a term that effectively has no meaning because anybody can call themselves one. Suze Orman will advise you to do anything that might improve your FICO score without knowing whether you actually need to improve it. She might tell both Em and Alex that they need to pay down their debt in order to free up available credit to boost that FICO score. Dave Ramsey’s probably going to give you some of the same advice and tell you to pay down your debt, and that debt is bad, so his advice will mirror Suze’s, but for different reasons. Jim Cramer is going to pace around the room, he’s going to punch the air and he’s going to shout at you to buy, buy, buy some stock, and both Alex and Em will be buying the next stock to crash if they follow his advice.
So there’s a problem with getting advice from either financial celebrities or even regular financial advisors, and that’s bias. So they’re supposed to get to know you, and figure out what you want and how to help you get there. Some are really good at matching your financial situation to stated goals that you have, but their biases still play a role in the advice they give. You know what it doesn’t do? It doesn’t take into account your personal money story. I’ll tell you a quick story about what that might mean and how to paint the picture.
When I was a kid, we didn’t have a lot of money. My dad was in the Army and my mom worked at Sears in the paint department. My brother and I used to love to go to the movies but, like now, popcorn was very expensive. So my mom used to hide a bag of popcorn in her purse — one of these giant purses — so I was always worried that we’d get caught and thrown out. And I’d get this anxiety about it. So now, I make sure that if i’m going to go to the movies, I have enough money to pay for popcorn and maybe a drink at the theater. I receive a certain pleasure from it. It’s not an outsized expense, but that expense is discretionary, and popcorn is expensive.
So most financial advice then doesn’t take into account the total of you — past, present and future. A financial planner will say, “Well, this expense isn’t needed or excessive, so because even though you know this expense is the result of something from your past, you must eliminate it because it doesn’t fit in with traditional financial dogma about spending and savings, and that advisor will say, ‘This is not in your best interest.”
But what are your best interests? Financial advisors have a habit of dividing things into wants and needs, or if they want to be fancy, discretionary and non-discretionary. They de-prioritize the wants and fail to consider the impact that this will have on your quality of life. We need and we want, but they are tied together. So we need to optimize how we think about financial matters, not letting my biases or anybody else’s biases keep you from doing what’s best for you.
Now, the math is complex, so we won’t go into it here, but consider a situation where you’re playing a game. We’ll call it the game of financial planning. Now, you’re the only player and each of your decisions affects multiple aspects of your financial plan and these plans are affected in different time frames five years — 10 years, 20 years, 50 years from now. Each decision is based upon an ever-changing set of values, needs and desires that evolve with these timeframes. This sounds complex, but life is complex, and any advice or decision made about your life is likely to involve these myriad of decisions.
So let’s figure out the best place to put this money for you, not the best place to put the money for what I think you need, or what Dave Ramsey thinks you need, or what Suze Orman thinks you need and definitely not what Jim Cramer thinks you need. If we can incorporate the total self, past present and future into our personal finances, it’ll go a long way in making life better for everybody.