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Understanding the Psychology of Financial Planning: Why Important Decisions Can Take the Backseat

Understanding the Psychology of Financial Planning: Why Important Decisions Can Take the Backseat

January 18, 2024

There’s an unshakeable fragility to our human existence, one that’s both bewildering and beautiful. To combat or accept this reality we are driven to the psychological power of hope. It’s an enduring tug of war between positivity and despair, one that grips us at all levels of our physiology. Welcome to the human experience. 

Marinating within that paradox are the choices we make – for the present, short term, and undeterminable future. While our control of life and the world around us is mostly illusory, those choices do have an impact. Financial planning is a prime example.  

We recently reviewed the “simplicity and efficacy” of the Eisenhower Matrix as a decision-making tool - attributed to Dwight D. Eisenhower, not only the 34th President of the United States, but also a Five-Star General during World War II. While a peak historical example, we use this perspective to better understand the emotional blocks present within financial decision making and mindset.  

It’s intriguing how we spend time obsessing over the $5 coffee or $10 per month streaming subscription but avoid at all costs the impact of money management – more specifically, decisions that affect our ability to spend money the rest of our life.  

At an intellectual level many would agree that saving, protecting family, investing appropriately, avoiding financial failure, and growing wealth in a tax efficient manner are important. But the grueling minutiae of everyday life unsurprisingly holds us back.  

To point to the Eisenhower Matrix itself, I believe there to be an emotional inclination toward “this is important, but not urgent.” As a result, we push the planning off and freeze in our indecision. We elude the important and instead bask in the faux comfort of what we already know. We listen to talking heads on television or the internet and remain stuck in the media matrix of information overload. We ask what’s true, how to prioritize, where to start.  

This frozen state can take decades off our future earnings and ability to maintain a lifelong paycheck. 

The irony here is potent. While financial planning may not feel urgent in each of life's moments, avoiding preparation and facing our realities can ultimately be significant and costly.  

Most people have great goals. The issue is ensuring actions are aligning with those goals. We cannot allow this cognitive dissonance to run our operation. Yet knowing where to start and what to even ask is what I believe often holds people back.  

  • How do I save appropriately and build a cash flow management system that works? 
  • How do I protect my family’s wealth and financial environment? 
  • How much insurance and what type is right for my family and me? 
  • How do I invest and diversify appropriately in tax-advantaged vs taxable accounts?  
  • How do I even understand and reckon with risk and volatility? 
  • What will my retirement distribution look like once I retire? 
  • What is the proper liquidity and how can I achieve uncorrelated balance? What is uncorrelated balance?! 

It’s time we start to think of our financial lives as business owners. We cannot make predictions about the future, nor implement a one-size-fits-all framework (i.e. “The 4% Rule”) that doesn’t work in our unique lives.  

Your advisory team should be focused on building successful environments, emphasizing education and holistic optimization, and providing the tools and frameworks for goal-aligned decision making. It takes a village (team) to truly optimize our planning, but it also takes honest reflection on our natural human tendency to not even get started.