Leveraging Your Financial Intelligence Read online

  FIGURE 4.1 MISERY: IMPACT OF FINANCIAL STRESS

  Unfortunately, financial stress not only makes us feel miserable emotionally, it also can make us feel miserable physically. When authors Doug Lennick and Ryan Goulart asked psychiatrist Helen Riess, of Harvard Medical School, if financial stress affected physical health, she emphatically responded, “The answer to that question is yes.” Riess went on to say, “Stress is not just a mental state. It's also a physical state. All kinds of physical issues, including heart disease, diabetes, and obesity can result.” Riess also pointed out, “Our brains are wired to perceive danger. And the dangers we perceive today are usually related to health, relationship, or financial issues.” Chapter 1 noted numerous scientific studies that support Riess's conclusions. Other professionals confirm that misery can be part of the intersection of money, health, and happiness. Chiropractor Moses Smith, owner of the highly successful wellness clinic, Moe Body Works, in Minneapolis, knows as well as anyone how important it is to maintain positive health practices. But even Dr. Moe, with all her health expertise, periodically ends up on the misery track. “When I get stressed financially,” Dr. Moe says, “I stop exercising, and emotionally I start to struggle.”

  Diana Iannarone is an author, former Fortune 100 executive, and founder in 2005 of Redthorn Solutions, a life reinvention coaching practice which specializes in helping people break the bonds of unhealthy or exploitative relationships and situations. Diana is widely lauded for helping countless people reach their full personal and professional potential by examining the beliefs that block their passage to a fulfilled life.

  As a financial executive and a single mother throughout her early career, Diana has been financially disciplined all through her adult life. Despite her considerable skills, Diana still experiences times when financial stress affects her health and happiness. In a 2016 conversation with author Doug Lennick, Diana shared, “When I am more worried about money, I notice I don't keep myself as socially active. I exercise less and tend to be somewhat demotivated.”

  Even though Diana objectively “has enough” financially, she is not immune from occasional financial worries and the negative impact financial stress can have on anyone's physical and emotional well-being. To minimize the emotional highs and lows of financial health, Diana conscientiously aligns her spending and cash flow.

  No one wants to be miserable, financially, physically, or emotionally. So, if we want to feel better, we need to reverse the cycle of misery. We need to turn misery upside down and access our wisdom. To move from misery to wisdom, the key is to reduce financial stress.

  As Figure 4.2 shows, when we lower financial stress, we can turn the “M” of misery upside down, triggering a chain of events that becomes the “W” of wisdom. When we're able to reduce financial stress, our emotional competence increases, decreasing the likelihood that we'll make irrational decisions or act against our best interests. When we make rational decisions about finances, the better off we are, not just financially, but in all other areas of life affected by our financial decisions, such as health and happiness.

  FIGURE 4.2 WISDOM: REDUCING FINANCIAL STRESS

  THE SECRET OF WISDOM: PREPARING FOR THE CERTAINTY OF UNCERTAINTY

  In Doug's previous book, Financial Intelligence, he described the tragic circumstances of his mother's sudden death in 1996. Doug says that more than any other previous life experience, his mother's loss really brought home the “certainty of uncertainty.” He was rudely reminded that two things are true. One: We all will die. Two: We don't know when and how. But because we are uncertain about the second, we try to ignore the first. And that's the situation that many of us put ourselves in financially. Because we don't know when or how things will happen, we try to kid ourselves that they won't happen. But trying to deny that difficult situations are likely to happen during our lives doesn't work. At a physiological level, we always experience some emotional discomfort because of life's inevitable uncertainty, and that in turn can contribute to chronic stress. To minimize stress and the damage stress causes, we all need to prepare for life's predictably unpredictable events.

  Preparing for the certainty of uncertainty is the essence of the Smart Money Philosophy, an approach to financial planning that is one of the best ways to reduce financial stress. In addition to preparing us financially for life's twists and turns, the Smart Money Philosophy has two added benefits: By planning for the certainty of uncertainty, we are better able to ensure that our values will be put into action. When we plan, we have better access to our rational brain, and we're less likely to make ill-considered, emotionally driven decisions. And by putting our plans in writing, as discussed in Chapter 3, we have a concrete reminder of the financial strategies that we've decided will support our values and goals. Reviewing our plans regularly, especially with a trusted advisor, can reinforce our ability to maintain alignment with those values and goals, making it less likely we'll make impulsive financial decisions in moments of fear or excitement.

  WHAT CAN'T YOU KNOW?

  When it comes to life events and their financial implications, there are a lot of uncertainties. There is so much that we can't predict, no matter how smart we are. To be prepared for such unpredictable events, we must first understand what we can't know.

  You can't know what's going to happen with the overall economy. This includes economic factors such as inflation, employment, interest rates, the price of oil, GDP, and so on. Let's discuss a few examples from the time of the Great Recession. You couldn't know that the price of oil would go to $145 a barrel in July 2008. Nor could you know that two months later, it would be trading under $100 a barrel. Or that, even with a large drop in oil price, the price of gas would still be 60 percent higher than the previous year. You couldn't know that unemployment would be at a 25-year high in August 2008, eventually exceeding 10 percent by the end of 2009. You couldn't know that consumer inflation would hit a 17-year high in August 2008. And you couldn't know how any of that would affect your job security, your salary, or your family's expenses for basic needs.

  You can't know what's going to happen in the real estate market. For most Americans, the lion's share of their net worth is in their home equity. Given that 63% of United States residents own their homes (or are mortgage holders), most of us are deeply involved in the real estate market. It's a fact that values of homes go up and down. There's no way to know exactly how much or when, but the last 20 years should have taught us that the strength of real estate markets can vary widely depending on time or region. For several years prior to 2006 there were four real estate markets that people believed could not go down: Florida, California, Arizona, and Las Vegas, Nevada. Those four regions were hardest hit by the steep housing decline of 2007 through 2009. However, as of 2016, home prices in areas such as Miami, Las Vegas, and parts of Arizona and California are now seeing the sharpest gains.1 Despite significant rises in home prices in coastal urban areas, across the United States overall “home prices in 3 out of 5 metropolitan areas remain below their pre-recession peak,” according to a 2017 report by the Joint Center for Housing Studies of Harvard University.2

  You can't know what's going to happen in the financial markets. You couldn't know that in the fall of 2008, the financial markets would collectively lose more than 30% of their value, threatening retirement savings, even those in seemingly safe investments such as money market funds.3 You couldn't know that the Dow Jones Industrial Average (DJIA) of representative company stocks would reach 14,164 on October 9, 2007, and then fall by March 9, 2009, to 6,547, down almost 54 percent in less than 18 months. After such a catastrophic decline, it would have been hard to imagine that by January 25, 2017, the DJIA would reach 20,000, up almost 205% in a period of about eight years.

  What will happen to future financial markets? Will they go up? Down? You just can't know with certainty. But we predict the answer is yes. They will go up, and they will go down.

  You can't know what's going to happen around the globe.
As of 2017 when this book was being written, global political uncertainty seemed more widespread than at any time since World War II. You can't know what military conflicts might erupt across the globe. For example, you might be unnerved by North Korea's progress in developing the capability to deliver a nuclear weapon atop a long-range ballistic missile that can reach many parts of the United States. You can't know how global adversaries might capitalize on emerging technologies to wage new forms of warfare, such as Russia's cyberattack intended to influence the 2016 U.S. presidential election. You can't know the impact on the U.S. economy of Great Britain's potential exit from the European Union or how changes in the United States administration's policies will affect global alliances and economics. For instance, you can't know how potential changes in U.S. immigration policies may affect the financial health of major U.S. corporations, and therefore your personal job security or the value of personal stock investments.

  You can't know how weather and other natural phenomena will affect your life. You can't know when a disaster such as a hurricane, tornado, earthquake, flood, or fire will threaten your personal safety, your home, or your job. In October 2012, Hurricane Sandy battered a 600-mile swath of the northeastern U.S. coast, causing more than $50 billion dollars in damage to homes and businesses. Sandy caused 157 deaths and left 8 million people without electricity for days or weeks. Businesses, hospitals, and public transportation were closed or disrupted, and many people suffered significant lost income. In January 2016 the “storm of the century” hit the U.S. east coast, resulting in $3 billion in economic losses, according to Moody's Analytics researchers.4 In October 2016, Hurricane Matthew caused at least $6 billion in U.S. property damage alone, with a much higher toll when one includes the economic impact of business disruption. In advance of Hurricane Matthew, our colleague Kathy Jordan was forced to evacuate her home on Anastasia Island just south of Saint Augustine, Florida. Kathy left the island feeling it was a “just-in-case” scenario. Late in the night before landfall was expected, the National Weather Service predicted that Hurricane Matthew would flatten the island. Miraculously, the storm made a last-minute turn to the east, which kept the eye of the storm 30 miles offshore. Kathy's neighborhood suffered minimal damages despite peak 120-mile-per-hour winds. However, nearby areas on the island were devastated by flooding from the storm surge. As of July 2017, nine months after Matthew's unwelcome visit, many Anastasia Island residents were still trying to rebuild and recover from the hurricane. Kathy has flood insurance, but she knows that most of her neighbors do not, since their houses are set one foot above the elevation that triggers mortgage lenders' requirement for flood insurance. Kathy's perspective has always been that flood insurance is cheap compared with the cost of repairing damage caused by storm surge waters. She scratches her head when neighbors claim that while living one mile from the Atlantic Ocean and 11 feet above sea level, their homes are safe from flooding. Anyone who wants to roll the dice when it comes to property or flood insurance should consider this: 2016 featured 15 U.S. weather-related events that each resulted in at least $1 billion in economic losses. According to NOAA's National Centers for Environmental Information (NCEI):

  The year 2016 was an unusual year, as there were 15 weather and climate events with losses exceeding $1 billion each across the United States. These events included drought, wildfire, 4 inland flood events, 8 severe storm events, and a tropical cyclone event. Cumulatively, these 15 events led to 138 fatalities and caused $46.0 billion in total, direct costs. The 2016 total was the second highest annual number of U.S. billion-dollar disasters, behind the 16 events that occurred in 2011.5

  NOAA may have classified 2016 as an “unusual year,” but coming on the heels of 2011, which saw the costliest year ever of U.S. natural disasters, we think that preparing for the impact of natural disasters, via vehicles such as robust property and flood insurance, is a matter of common sense. Finally, while recognizing the economic impact of increasingly frequent natural disasters, we also must keep in mind the irreplaceable loss of life that accompanies them.

  You can't know when your employment will be disrupted. You can't know whether your company may experience financial difficulties or be acquired by another business. You can't know whether your expertise will become outmoded or outsourced. You can't know when your company will decide to lay off employees, or whether your boss will decide you're not measuring up to his or her expectations.

  Erin Wnorowski recently married co-author Ryan's close friend Pat McKenna. Erin is a talented healthcare administrator who is passionate about helping people improve their health and well-being. Pat is in graduate school studying Urban Planning, after having worked for a number of years in healthcare administration. For a year or so before their wedding date, Erin and Pat had budgeted for and planned their wedding. In alignment with the principle of responsibility, the couple decided that the expenses for the wedding should be their responsibility, not their parents'. So, they scoped their wedding expenses in a way that was affordable given Erin's salary and Pat's student status. Erin and Pat felt they had things under control. Then Erin was laid off from her job when the startup company she worked for fell on hard times. It was highly stressful for Erin to be out of work, especially at a time when she and Pat had higher expenses than usual. Erin recently started a new job. But with Pat in grad school, and Erin the sole breadwinner for the time being, they decided to economize by moving into a house with one of Pat's sisters.

  You can't know when your life or that of a family member will experience challenges. No one knows when they or a family member will be struck with a serious illness or disability, or even death. You can't know when a new family member might be conceived and how expensive it will be to raise and educate that child or subsequent children. You can't know if your child might suffer from a learning disability or be blessed with one-of–a-kind talent, either of which might have financial implications. Nicolas Perez* and his former wife have two wonderful children, who are now grown and on their own. Nicolas never imagined he would get divorced. But after many years, sadly, his marriage was in ruins. He and his wife used a mediator to help with the divorce process, and to the credit of both parties, the breakup was respectful throughout. As everyone knows, divorce is a very expensive proposition. But because Nicolas prepared for the certainty of uncertainty, his financial situation has made the process much less stressful. Reflecting on the circumstances preceding and during his divorce, Nicolas said, “The cliché that money can't buy happiness is true. It didn't keep my marriage from breaking up. But because of my financial success, I realized it's not worth it to be unhappy. Financial success enabled me to leave.”

  So, What Can You Do About What You Can't Know?

  Sometimes it may feel overwhelming to focus on the varied sources of uncertainty in our lives. In the short term, it may seem easier to avoid thinking about things that might happen to us that might cause us harm. But, if we deny the certainty of uncertainty, most of us will at some point in our lives be faced with a stressful, perhaps even catastrophic, financial situation that could have been avoided or mitigated. Perhaps the triggering situation could not have been prevented, but the negative financial consequences surely could have been minimized.

  What if, instead of burying your fear of those uncertain future events, you embraced the fact of uncertainty? What if you used the certainty of uncertainty as motivation to create financial security and independence for you and your loved ones?

  If you are willing to “reframe” uncertainty from a negative to a positive, you can prepare yourself financially for the certainty of uncertainty using the Smart Money Philosophy, a method that co-author Doug developed over 30 years ago as a young financial advisor. Doug initially taught this financial planning model to his clients, and later to many of the 10,000 advisors he led as executive vice president of Advice and Retail Distribution for American Express Financial Advisors (now Ameriprise Financial). In the last 15 years, Doug and his colleagues at his compa
ny, think2perform, have taught this approach to countless financial advisors who have used it to help their clients reduce financial stress and meet their goals of financial security and independence.

  The Smart Money Philosophy is based on the profound idea that the best way to prepare for the certainty of uncertainty is to organize your financial life so no matter what happens, you will be okay financially. When you follow the Smart Money Philosophy, you cover all your bases; so whenever you need money, you will have a smart place to get it.