Your Money Mindset and Its Effect on Your Financial Planning

Perspectives

What is behavioral finance?

Markets don’t always adhere to economic fundamentals and analyses. They are continually shaped and affected by human behavior, often in ways that defy logic. Behavioral finance deals with the psychology behind investing and money matters, to codify a set of theories that can help explain seemingly unexplainable peaks and valleys. 

On an individual level, behavioral finance addresses why people make financial decisions, beyond pure logic or mathematics. Why do people favor certain stocks? (I want to own Amazon stock because all my friends do.) Why do people play the lottery when they know their chance of winning is lower than their chance of, say, being struck by lightning? (Well, somebody’s gotta win, right?

How does behavioral finance affect your financial plan? 

“A lot of it has to do with what people bring to the table — their money and investing history,” says Kevin Brady CFP®, a Wealth Advisor at MJP.  “If you want to understand your own version of behavioral finance, you have to look at your own experiences with money and investing, the money attitudes you grew up with, and identify areas where this mindset may be clouding rational decisions.” This level of introspection can be a challenge, as many people are not fully aware of their financial biases. A financial planner can help by providing objective direction and advice.  

Part of a financial planner’s role is to observe how clients behave during discussions, and how their behavior affects their decisions. Kevin continues, “This is a collaborative process. We create your financial plan over time, and we get to know you as a person. We ask thought-provoking questions and identify the goals that are most valuable to you, such as paying off your mortgage or sending your kids to college. In many cases, your objectives are not just financial — they’re emotional.  That’s why it’s important for a financial planner to look deeper and identify how your emotions are influencing your financial decisions.”

MJP’s mission: balanced financial plans

The MJP process is designed to take the elements of behavioral finance into account. Being aware of how emotions drive financial matters enables our advisors to help clients balance emotion and logic when they’re making financial decisions. This process takes time, but it results in a more comprehensive understanding of client needs. “We’re not going to solve everything in the first meeting,” Kevin cautions. “We work with our clients long-term to create a well-balanced, cohesive financial plan, then revisit and update the plan based on lifecycle and market changes.” 

“A skilled financial planner will be mindful of a client’s attitudes toward money and investing, and acknowledge their emotions around these issues.” says Kevin. “We focus more on listening than talking, so we can have meaningful conversations that help us build a strong, trusting relationship with our clients.”

These conversations yield insights that help advisors develop a deeper understanding of client goals and how to work with each client to meet those goals. “Sometimes we need to pivot gradually, rather than institute a global shift, so the client can acclimate to new ideas about money and investing. The goal is to create a balance between what a client feels comfortable doing and what constitutes the best strategy for a healthy, successful financial plan.”  

Conclusion

Behavioral finance is powerful, and its effects can’t be ignored. However, you don’t want it to detract from sound financial advice. The key is creating a financial plan that addresses your money and investing history while also putting you on the best path to realizing your financial goals, and the advisors at MJP are here to do just that. As Kevin says, “It’s our job to keep your financial objectives front and center.  We use our professional expertise to introduce ideas and perspective you might not have considered, and help you move from uncertainty to confidence.”

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