psychology-of-money

How do emotions, habits, and beliefs impact financial success? Explore the topic of
Behavioral Finance to understand what may be holding you back on the path to financial
security.

All of us come with a history of how our own parents related to the use of money. Were
there examples of charitible giving? Do you remember any lessons in the importance of
investing? Knowledge and awareness of your financial habits are the first key to unlocking
the power of change and improvement.

Are you hiding from your finances?
Get involved to improve your financial health.
By Laura Scharr-Bykowsky, Certified Financial Planner™ Posted February, 2010

Men are notorious for procrastinating when it comes to their health, but when financial health
is the issue, women tend to be the ones who avoid taking action.

In the course of my financial planning practice I hear these types of comments from my
female clients.
"I take care of the children and house-- it's my husband's job to take care of the finances."
"My mother told me what you don't know about the money, won't hurt you."
"I never spent much time trying to understand anything about finance and investing, so I
don't want to start now."

These comments are disheartening considering that close to 90% of women will need to be
responsible for taking care of their own finances at some point. It's essential that women
educate and inform themselves about financial matters so they can become more
empowered, confident and secure about their financial future.

Stocks, lies and tickertapes
Women develop an understanding of their relationship with finances from an early age.
Strong messages from a parent can result in misperceptions that carry over to adult life.

As a child of a traditional stay-at-home mom, I constantly received the message that a
woman's financial success and happiness was solely derived from a man who could provide
for the family. My parents' ongoing struggle with finances instilled an irrational fear in me--a
fear of losing and spending money, or of losing my spouse who is the main breadwinner.

I experienced what is known in behavioral finance as "loss aversion." Essentially, the
experience or thought of losing money is far more painful than the experience of monetary
gains. It's a powerful force that can lead to being overly conservative, or hanging onto losing
investments too long in the hope they will eventually come back.

Ultimately, I confronted that fear and went on to get my Masters in business and Certified
Financial Planner™ designation. With more knowledge, I became more comfortable and
confident with my finances, and now enjoy helping other women do the same.

The experience of loss can also cause women to hold onto investments for emotional
reasons. One of my clients couldn't bring herself to sell a poor investment because it was a
favorite of her late husband's. She viewed her committment to her late husband's investment
plan as a committment to him and his memory.

Another tendency for some women is to suffer from "recency bias." Their recent experience
with the financial crisis of 2008-09 is weighted more heavily, resulting in a more conservative
stance toward risk. They become disengaged with their investments because they assume
that terrible market conditions will persist. These women tended to pull their money out of
the market at the trough of the plunge and place it in cash. Consequently, they missed the
spectacular run up following the March 2009 lows.

Men are from Mars
Studies confirm that women in general are more conservative investors. On average, they
tend to hold more "safe investments" like CDs, savings accounts, annuities and life
insurance.

Men, on the other hand, tend to suffer from "overconfidence bias." A study done by Barber
and Odean in 2001 showed that men trade up to 45% more frequently than women.
Interestingly, decreased trading frequency is one reason why women, when they do invest,
tend to outperform men. On a net basis their returns are better than the men's due to lower
transaction costs.

How can women improve overall financial health?
Luckily, it is never too late to become more dedicated to your financial well-being. Here are
some tips.

1) Get informed about your financial life. All too often I deal with women who have
suffered a loss due to divorce, death or disability of a spouse. They are left in a frightening
position of uncertainty and fear if they were not involved in the financial decision-making.

2) Get help if you need it. Seek out a Certified Financial Planner™ practitioner to help
assess your goals and form a plan. You can get guidance on investments, insurance, estate
planning, taxes and financial education.

3) Discuss your finances with your husband or partner on an ongoing basis. Share the
decision-making for large purchases and spend time together doing periodic reviews of
investment statements and budget.

4) Prepare for the unexpected. Ensure that you and your family are protected with proper
insurance and estate planning documents should you experience a catastrophe.

5) Invest with a long-term mentality. Remember that financial markets can be very
volatile on a short-term basis. Understand your tolerance for risk by taking a risk-tolerance
survey online or with help from your financial planner.

6) Monitor your progress towards your goals. If you're working with a planner, have a
financial check-up at least once a year. Don't set it and forget it. Life is ever-changing and
your financial plan should also be dynamic.