Who isn't having financial concerns these days? I don't know of anyone who isn't tightening their belt and looking for ways to cut their expenses. But you've heard the expression "penny-wise and pound-foolish?" You know what that means and I urge you not to make any major financial decisions without giving it considerable thought and time and checking with a couple of people that are financially savvy. I always prefer to think of how I can make more rather than spend less on the basics of living. I wanted to share some highlights of an excellent financial article with you! Feel free to talk about financial concerns in your therapy session too!
First: Look at the Big Picture. Denial isn't healthy. So first of all, be honest with yourself and take stock of your financial life.
While there is math involved in this process, it need not be a sophisticated analysis: a back-of-the envelope approach is generally sufficient.
What is the amount of your net worth, your investment assets, earned income and annual expenses? Do you anticipate significant financial events in the future-selling a business, an inheritance or paying off significant debts?
Assume that future returns over longer time periods will be equal to long term averages of capital markets–say 10% for stocks and 5% for bonds–or 7.5% for a 50/50 portfolio. Now do you have enough to meet your financial goals? Can you live on 5% to 8% of your working assets?
This exercise can help by distinguishing a real financial problem from psychic poverty– i.e. feeling poor, even if you're not. It should also help by highlighting the magnitude of any projected shortfalls.
Problem-focused Coping: Consider Alternatives. Knowledge is power and we're most stressed when we don't have alternatives. So if you identify a true financial problem looming, look at your financial life and consider your options.
Increase Income. Look at whether you have alternatives for generating additional earned income. Delay retirement. Consider a career change. Think about part time work. Review payout options in your retirement plan and/or Social Security.
Cut your Expenses. It's a good exercise to tighten our belts occasionally. Review your spending habits and cut out those extras.
Bigger Changes. Are there more significant alternatives to consider? Sell a vacation home. Move to that smaller house. Think about a reverse mortgage on your primary residence.
Review your investments. As our primary business, this is a constant process for us with our clients. We believe that the asset allocation is an investor's most important decision. Once set, it should be changed as your situation changes, but not in response to market conditions.
It's important to set the right mix of assets to match your goals and risk tolerance. Is your equity exposure correct? Do you have sufficient diversification–both in your equity and fixed income segments?
Be sensitive to timing: you don't want to decide to be more conservative and sell your equities in a down market. So move gradually if you decide you want to shift your assets.
Emotion-focused Coping: Now Move On. This is the tough part. Once you've done your homework and addressed the things you can change, refocus your energy in other directions. Develop a sense of healthy optimism in the future, rather than dwelling on potential problems or market fluctuations. The fancy psychological terms are: acceptance and positive re-interpretation–but our mothers knew best when they told us to find the silver lining.
In a recent study, Psychologists Ginzburg, Solomon and Bleich found that patients who repressed traumatic events in their lives generally fared better in coping than those who exhibited "a specific combination of anxiety and defensiveness". So the power of positive thinking does seem to work.
Our most successfully coping clients seem to be those who don't deny financial reality, but who also don't agonize over investment losses or possible future money problems. Developing a sense of trust in one's own personal resourcefulness–and in the future, seems to be a behavioral quality which can be cultivated.
After doing what you can to address your financial plan, divert your energy to family, to hobbies, to other interests. Don't dwell on investment fluctuations you know you can't control but wait for better economic times to come
While there is math involved in this process, it need not be a sophisticated analysis: a back-of-the envelope approach is generally sufficient.
What is the amount of your net worth, your investment assets, earned income and annual expenses? Do you anticipate significant financial events in the future-selling a business, an inheritance or paying off significant debts?
Assume that future returns over longer time periods will be equal to long term averages of capital markets–say 10% for stocks and 5% for bonds–or 7.5% for a 50/50 portfolio. Now do you have enough to meet your financial goals? Can you live on 5% to 8% of your working assets?
This exercise can help by distinguishing a real financial problem from psychic poverty– i.e. feeling poor, even if you're not. It should also help by highlighting the magnitude of any projected shortfalls.
Problem-focused Coping: Consider Alternatives. Knowledge is power and we're most stressed when we don't have alternatives. So if you identify a true financial problem looming, look at your financial life and consider your options.
Increase Income. Look at whether you have alternatives for generating additional earned income. Delay retirement. Consider a career change. Think about part time work. Review payout options in your retirement plan and/or Social Security.
Cut your Expenses. It's a good exercise to tighten our belts occasionally. Review your spending habits and cut out those extras.
Bigger Changes. Are there more significant alternatives to consider? Sell a vacation home. Move to that smaller house. Think about a reverse mortgage on your primary residence.
Review your investments. As our primary business, this is a constant process for us with our clients. We believe that the asset allocation is an investor's most important decision. Once set, it should be changed as your situation changes, but not in response to market conditions.
It's important to set the right mix of assets to match your goals and risk tolerance. Is your equity exposure correct? Do you have sufficient diversification–both in your equity and fixed income segments?
Be sensitive to timing: you don't want to decide to be more conservative and sell your equities in a down market. So move gradually if you decide you want to shift your assets.
Emotion-focused Coping: Now Move On. This is the tough part. Once you've done your homework and addressed the things you can change, refocus your energy in other directions. Develop a sense of healthy optimism in the future, rather than dwelling on potential problems or market fluctuations. The fancy psychological terms are: acceptance and positive re-interpretation–but our mothers knew best when they told us to find the silver lining.
In a recent study, Psychologists Ginzburg, Solomon and Bleich found that patients who repressed traumatic events in their lives generally fared better in coping than those who exhibited "a specific combination of anxiety and defensiveness". So the power of positive thinking does seem to work.
Our most successfully coping clients seem to be those who don't deny financial reality, but who also don't agonize over investment losses or possible future money problems. Developing a sense of trust in one's own personal resourcefulness–and in the future, seems to be a behavioral quality which can be cultivated.
After doing what you can to address your financial plan, divert your energy to family, to hobbies, to other interests. Don't dwell on investment fluctuations you know you can't control but wait for better economic times to come
By Jim Martin, President, Arbor Investment Advisors
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