“Knowing who you are with regard to money is a critical component of becoming more successful in life.”- Angie Politarhos.
Attributed variously to Plato, Socrates, or Aeschylus, the saying, “Know thyself,” has popped up in self-help books for hundreds of years.
When applied to a person’s finances, “Know thyself” has an intrinsic self-help appeal. I mean, after all, you can’t understand the decisions you make, particularly money decisions, without knowing yourself first. In fact, some money coaches spend large swaths of time leading their clients in exercises designed to help them learn who they are when it comes to money. But, is knowing yourself the best way to start making better money decisions? Can we truly trust our ideas about what kind of people we think we are?
Fighting the “End of History” Illusion
As humans, we make many of our financial decisions, not because they make sense logically, but because we believe they’re consistent with who we have decided we are. You invest in the stock market because you think you are “a stock market kind of person.” You pay off your debts quickly because you are the “kind of person who hates debt.” This mental set-up, however, is deeply flawed. It doesn’t deal with the unpredictable, chaotic times in a person’s life, such as when they marry, divorce, or have children. Life events almost always cause you to change, often drastically. You might go to bed as a bold risk-taker and wake up fearful and unable to accept any degree of risk at all. A stressful life event might push you from being cautious with your money to spend as if there’s no tomorrow.
The point is, change comes, whether changes occur suddenly or gradually slip under the radar. It would be best if you tailor your financial plan accordingly. If you don’t, conflicts will occur because your self-image remains the same even though everything in your life has changed. Unfortunately, human beings are good at believing that our identities are set in stone once we reach a certain point in our lives. Most of us tend to feel that who we are right now is who we will always be, that our preferences, ideals, and goals will be the same in another ten, twenty, or thirty years.
Psychologists call this the “End of History Illusion.” It’s a phenomenon that happens to people of all ages that causes them to believe that they have reached the pinnacle and have become the person they’ll be for the rest of their lives. The “End of History Illusion” does, however, have consequences, especially in the area of finances, where people will often overpay for future opportunities based on their current preferences. It’s easy to make serious money mistakes based on your set-in-stone self-image rather than incorporating life changes into your financial plan. If you want to avoid these mistakes, you must create and continuously adjust your financial identity, incorporating your changing values, likes, and dislikes.
Steps to creating a financial identity
- Keep a money journal. At the risk of sounding “woo,” I suggest you keep a money journal at every stage of your life. It doesn’t have to be too involved. Just record your daily money activities, expenditures, savings, etc. Note your attitudes and feelings at the time of the transactions. Doing this will allow you to see the subtle changes in your money mindset and adjust accordingly.
- Seek wise financial counsel. It’s always a great idea to get a new set of eyes to review your financial plan. The reason for this is apparent. Not only are you changing as a person, but so is your advisor. It would help if you were sure that they correctly accounted for those changes and made the necessary adjustments to your portfolio. Adding a new advisor, especially as you near retirement, will ensure that you aren’t making money decisions entirely out of habit but that your choices reflect who you are right now.
- Keep on top of credit. Even if you are married, you should control your credit history. Don’t set it and forget it. Make periodic reviews a part of your debt reduction and elimination strategy. Strive to maintain a healthy, consistent credit score and use credit sensibly and strategically. Credit is a prime area where you must factor in life changes, however small.
In summary: Your financial identity will never be completely fixed or static. Don’t allow yourself to believe that you are incapable of changing, no matter what your age. Be sure that every money decision you make reflects your attitudes and beliefs right now. Don’t be afraid to tweak your financial plan or challenge your advisor’s advice when it doesn’t mesh with your current financial identity. Discovering who you are regarding your wealth and money attitudes will go a long way in helping you avoid making serious mistakes with your finances.
“Know thyself… but know that “thyself” is subject to change.”