What are the best ways to understand how I’m doing?

Transcript:

Hey, humans! I’m Michael Liersch. This is the About Money podcast, presented by Wells Fargo. I’m a behavioral scientist with a PhD in cognitive psychology who loves openly discussing money to help humans better understand their money behaviors. By understanding our money behaviors, we all have the opportunity to make better money decisions.

In this season, we’re going to talk about how we can all sync up our life and our money. We call it LifeSync^®. You might be asking yourself, why does LifeSync matter? Well, when we align what we want to accomplish in life with our money, it can clarify whether money is truly working hard for us to get us to where we want to go. But that requires us to be intentional about what we want in our life, the jobs we want money to do for us, and compare it with how our money’s organized both now and in the future. To that end, we’re going to keep each episode under 10 minutes so that you can take immediate action to LifeSync. So let’s get into it.

In this episode, we’re going to answer the question: What are the best ways to understand how I’m doing? So in all the research we do in behavioral finance, you know, for individuals and families, this is what they want to know, which is, am I going to be OK? So I just really want to go through two very tactical steps that you can take to evaluate how you’re doing. And I want you to know, even if you find out things aren’t going super well, that’s great news because you figured it out, and then you can take actions to make things better. And if you find out things are awesome, that you’re doing great, even better than you thought, that’s good news too because what you can do is say, well, what are the factors that contributed to that and how do I keep that going and stay on track? Because just as easily as it is to be off track, you know, in this moment, even if you’re on track, you can get off track pretty quickly too, so you want to be intentional, always, and stay on track. You never want to get complacent when it comes to your money.

So my two thoughts for you — in terms of getting tactical to evaluate this — is first, I want you to align the number one job you want to accomplish with your money with how your money is organized. And so you might say, well, Michael, I’m not really sure I quite get what you mean. So it’s best, I think, in this case, to work an example. So let’s pretend that your number one job is to enjoy a comfortable and worry-free life, so it’s for your lifestyle. What you’re going to need to do is first determine how much money that takes, and then how long you’re going to need that money on a monthly or an annual basis. So I want you to literally think of start and stop dates. So maybe the starting date is today. Maybe you need $100,000 every year for the rest of your life. You need to think of — you know, so me, Michael Liersch, I’m 45 years old. You know, I need to assume maybe — I’m pretty healthy — I’ll live to 95. So what that means is I have a good 50 years, let’s say, to have that $100,000 coming in to support a enjoyable and comfortable life.

You want to get really specific on that, and then you want to say well, what’s essential versus what’s more discretionary? You know, the essential stuff is what really creates that comfortable and worry-free life, you know, a roof over your head, perhaps transportation to and from, you know, things that you’d like to do, a job, whatever that is, you know, the food that will make you feel happy and your family happy, you know, supporting education. Whatever that is, you’ve got to be really focused on what’s essential versus what’s more discretionary. So perhaps an extravagant vacation or, you know, some big purchases that you want to make, you can do without and maybe you’re counting that in there, so just get very deliberate and really focus on what’s truly essential and then add the discretionary stuff as on top of that essential stuff.

And within that framework, then I want you to compare that, think of it is as, need. And in, you know, my dorky world, we call it your cash flow needs on an annual basis, you know, for your spend, is we want to match that with how much money you have now and how much money you’re going to have coming in the future, your sources of income. So that could be distributions from trusts, investments. It could be a job, a business, whatever that is. So you want to take what you’re going to need, both what’s essential and then remember, you can add in the discretionary stuff, but separate it out a bit, and then match that with what you have now and what you’re going to have coming in in the future, and I want you to ask yourself, is there a match or is there a mismatch? Meaning, when you just look at this on a piece of paper, do you say to yourself, “Oof. I’m not quite sure how this is going to work out.” Or when you look at it, are you thinking, “Hooray! It’s all going to work perfectly”? And what’s fun about that is you get to test your intuition, and this is where the second idea comes in.

Now you kind of have a lot of the information you need to use tools and technology to validate your intuition. And so for many of you, if you have a professional advisor or, you know, there are tools and technologies online, you can go and enter this information on how much you need, what the start and stop dates are, and you can actually look at how much money that would amount to in terms of what you need in today’s dollars to make that happen and whether you’re on track or not to get that done. And so I really would encourage you to do that in that technical way with a tool or technology because many times people’s intuitions aren’t actually in line with the reality. And you may say, Michael, I don’t know if I’m following along. So I was a professor back in the day, and I did some research with a collaborator of mine, and what we found out is that people’s intuitions about how money operates over time, generally speaking, don’t necessarily map to the reality. The fact of the matter is, when you actually put it in a tool or a technology, you might get a completely or fundamentally different answer than your intuition suggests.

So one of these examples is, a lot of people underestimate how much investing — and particularly, you might have heard of the magic of compounding — how much investing, especially when you have a lot of time in the markets, can grow your money over time. And in this study that I’m talking about, we actually asked people, you know, imagine you put away $400 a month, over 40 years, how much would you have? People vastly underestimated how much they would have at the end of that time period. And so, I really encourage you, use those tools and technology because you, especially if you’re saving and investing in a regular investment program, or you’re not, and you have that opportunity to pay yourself forward, or you’re already retired, you have the opportunity to maybe spend a little less, or maybe things are going well, and you have the opportunity to spend a little more, get those facts so you can make the best decisions for yourself. Save more, spend more, risk more, risk less, and give more, give less, and then it starts helping you when you get those facts to adapt, especially as things change in your life.

Maybe, you know, your needs change. Maybe there is a, you know, let’s say a new, you know, need you have where you need to support someone unexpectedly, perhaps a special needs family member or a child and so, you know, you need to change your essential spending, or perhaps, you know, the markets change and the markets go down or up, you know, over a period of time. You know, maybe you get a promotion or you lose a job. You know, there’s just so many things that you may need to adjust so that you can constantly evaluate how you’re doing. So really getting into those tools and technologies, revisiting that information on a regular basis is going to give you the opportunity, not just now to understand where you’re at, but to adapt in that way in the future.

That’s it for this episode of the About Money podcast. Please email us with the topics that you would like us to address at AboutMoney@wellsfargo.com. And if you really like the episode, share it with family, friends, and anyone who listens to podcasts. About Money is produced by Wells Fargo. You can learn more about ways to work with us at wellsfargo.com/aboutmoney. I’m Michael Liersch, asking you to talk about money today.

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