A Smarter Way to Think About Financial Decisions
It’s as simple as reframing how you think about your money.
By Tim Herrera
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For years I had a 401(k) from my first job that sat neglected, quietly collecting meager interest as I willfully ignored it. I wasn’t necessarily scared or intimidated by deciding what to do with it — roll it over, change the investment allocation, leave it be — I just never wanted to address it. So I didn’t.
Now, years later, I’m kicking myself thinking about how much money I left on the table by ignoring it for so long.
Sound familiar?
“There’s something about financial decisions that goes beyond knowledge,” Aner Sela, an associate professor of marketing at the University of Florida whose work focuses on how people make choices, told me. “They have a unique flavor, and there’s something about that flavor we don’t like. They feel very cold, very abstract and analytical, and it’s something that you just don’t want to do.”
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As it turns out, there may be a reason some of us avoid making those decisions, according to a study by Professor Sela and Jane Jeongin Park in The Journal of Consumer Research. It comes down to how we perceive ourselves.
Many tend to think that financial decisions require a similarly cold, abstract, analytical mind-set, Professor Sela said. So if we perceive ourselves as the type of people who rely on emotion in our decision-making processes, we’re more inclined to avoid making financial decisions because we think they don’t “feel like me,” he said.
In fact, we’ll avoid making decisions about money even if we think we have the knowledge and ability to do so.
“I have a Ph.D. in business and an M.B.A. in finance, on top of a degree in architecture, so I think I can understand financial products pretty well,” Professor Sela said. “But still, every time I get a letter from my bank, my instinct is to shove it in some drawer.”
The key to getting around those roadblocks is to reframe the way we think about money decisions.
For example, let’s say you’re like me and struggling to decide what to do with an old 401(k). Rather than look at that decision as one involving stock and bond allocation and portfolio diversity, think of it in terms of the lifestyle you want for your future. Do you want to have a future in which you can eventually retire, maybe travel and have the ability to eat out a few times a week? The decision that will get you there is figuring out what to do with that 401(k).
“It’s just a different framing of the same data,” Professor Sela said. “If you just call it by a different name that brings to mind different things, it certainly makes a difference.”
Indeed, Professor Sela found that people were more comfortable making a financial decision after reframing it in lifestyle terms — for example, a choice about annuities versus a choice about life experiences — even if the decision was the same in both scenarios.
So the next time you’re struggling to do something about your credit report or at a loss for how to go about building your nest egg, think of it as a decision about the type of life you want to have. Future you will thank you.
How do you tackle tough financial decisions? Tell me on Twitter at @timherrera or email at tim@nytimes.com.
Have a great week!
— Tim
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Tip of the Week
This week I’ve invited Rachel Sugar, a writer in Brooklyn, to give us what I think is one of the most brilliant pieces of relationship advice I’ve ever heard.
I dislike being rushed. I leave for the airport early, and I like to be at the movies with time to spare.
It’s not because I am a punctual person by nature — I am not — but rather because I am both slow and easily stressed. Part of adulthood is knowing oneself, and what I have learned so far is that, under pressure, I am happiest moving at the pace of an arthritic retriever.
My boyfriend is the opposite. He loves rushing. The more rushed, the better, he says. He walks at a respectable marathon pace. He loves the thrill of impossibly tight train connections, because it makes him “feel like Jason Bourne.”
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For years, this was a source of tension. Then we discovered the answer: leave at different times. “I’m going to get a head start!” I’ll say, and leave for the restaurant, while my boyfriend is still showering. And then I go, at my pace — a pace ideal for noticing new storefronts, or attractive dogs — and he shows up at his pace, and no one is angry or stressed or secretly resentful.
When we tell friends about our system, they are often baffled: You leave at … different times? To go to … the same place? Yes. That is exactly what we do. And you can, too! It is even (sort of) romantic, in a way. As the old saying goes: If you love something, set it free and then meet it at the movies.
Some fights are necessary; what time to leave is not one of them.
Tim Herrera is the founding editor of Smarter Living, where he edits and reports stories about living a better, more fulfilling life. He was previously a reporter and editor at The Washington Post. @timherrera • Facebook
