Imagine being hungry. It is difficult to think as clearly, we get irritable, and certain foods seem like a really good idea. It does not take a study to tell us that hunger makes us think about food! Nonetheless, a few researchers decided to study this. They took people who were hungry and those who weren’t and had them hunt for words. Participants had to find the word “cookie” first, and then a non-food word (“tent”). The goal was to measure how long it took for them to find the word “tent”.
Unsurprisingly, hungry people took a lot longer. It took so long, in fact, that it translated into an average reduction in IQ by 10 points versus the non-hungry word searchers. Being hungry makes a big difference.
You might be saying to yourself, this is a blog about money and finance, right?
Yes, it is.
Researchers decided to measure something similar with money. In the podcast “People I Mostly Admire,” two University of Chicago professors talked about how our money affects our ability to work and focus in far reaching ways.
Low income students taking a math test tested worse when the exact same math problems used monetary words instead of everyday items ($30 versus 30 pebbles, for example).
Another study found that farmers tested lower on cognitive tests when money was tight before a harvest--a 13 point IQ difference. Does that seem familiar? The consensus is that we have a limited bandwidth. When the back of our mind is occupied and worried by money concerns, our minds literally don’t work as well.
Our advice reflects this reality. Sometimes the most logical answer to a money problem is not the best answer. Clients hire us not just to help them make great money choices, but also to help them feel better about their financial situation and de-stress their relationship with their finances.
Here is a common example: an affluent client was sitting on a mountain of invested money. Meanwhile, she was hardly spending anything--certainly not as much as she could. Yet she was still worried about having enough money and hired us to help her accomplish this. Diving into the details, she shared that growing up, her family struggled to make ends meet. To her, money represented security, but she was losing sleep over her money when she realistically had enough to last her through any situation. After understanding what she needed to feel “secure”, we deviated from what made the most mathematical sense: we took five times the normal amount to have in a bank account and added it to her bank account.
She had spent for decades with hardly any money in her bank account, instead investing every spare dollar in investment accounts to keep her from mentally feeling like she could spend it. Years later, she logically knew she could spend more, but kept defaulting to her bank account rather than her entire financial situation as a gauge of her financial security. By infusing her checking account with cash, she felt safe. It was not the best way to maximize her growth--but in the end, she hired us to help her be financially secure, and there is a difference between the two.
Similarly, we have had clients and client’s children with credit card debt. They would find credit cards paying 0% interest rates and juggle the debt to save interest on large amounts. After a while, however, they struggled to keep track of the cards and were constantly dedicating their brain power towards this balancing act. Eventually, something slips, and they fall into extremely high interest rate payments that erode their ability to save and feel financially secure.
We step in with these clients and create solutions that save money, but they are not always the mathematically superior solution. It is arguably as important that someone is able to take our advice and do it as it is to be given great advice. Some people need to see small wins to keep them going and change their mentality around the problem. We might find a financing option that does charge interest, but lasts a long time to avoid the headache of juggling cards. If there are multiple credit cards and they are struggling, we might advise tackling the smallest balance first rather than the balance with the largest interest rate. Sometimes we even resort to rolling the debt into their home financing to put it out of their mind, create a clean slate, and allow new, better habits to fill the void.
A final example: some clients are uncomfortable with taking risk, even if it is actually a level of risk that is appropriate for them. We could take the obvious step of lowering the risk in their accounts, and we sometimes do, but there are other levers we can pull as well that create a better outcome. Some of the most risk averse clients, once we ask them, admit that their behavior is contributing to their stress more than the actual risk in any account. For example, they check their investment account balances more than once a day, or they sit glued to the news channel for hours. These habits heighten their sensitivity to temporary downturns and focus them on short term issues rather than the long-term timeline they are investing for. Retiring does not make you a short-term investor.
By changing these habits rather than their investments, they became happier, less stressed, and better able to avoid the bigger risks: things like selling in a downturn or allowing inflation to eat away at accounts that are invested too conservatively. It also can help you become more productive at work, which may improve your ability to earn more income later! Yet another study of workers paid early showed that their work productivity actually improved, counter to the idea that being paid in advance would discourage people from continuing to work hard.
Allow your mind to focus on the better things in life. It is exceedingly difficult to measure the value of feeling financially secure, but we see people’s quality of life rise when they recognize they are taken care of. Live long and prosper.