Mental Accounting: Help or Hindrance?
Mental Accounting attempts to describe the process where people code, categorize, and evaluate economic outcomes for their money. This term was developed by psychologist Richard Thaler in the late1980s when he discovered that people may have multiple mental accounts for various things, but all coming from the same kind of resource; for example money earned from their jobs.
People tend to put that money into categories, such as grocery money, mortgage payment, etc. But how do they react with something like a tax return? What about a bonus from their employer? This is money from the same source, but what one does with it has to do how they categorized it in their ‘mental accounting’.
This same theory shows that people’s spending is directly tied to which ‘mental account’ they placed it into. Have you ever justified a purchase based on which mental account the money is coming from because you decided to ‘trade spending’ inside your mind? For example, deciding to buy a new outfit instead of going out to dinner this week. But in reality, the money is the same and from the same source.
When it comes to Mental Accounting and your investments, be careful. People that use mental accounting may set up two investing accounts; one that is overly conservative and one that takes excessive risk. Working together with a financial advisor regarding your investments can help to eliminate mistakes in the types of investments you’re participating in due to Mental Accounting.
To avoid having Mental Accounting be a hindrance in your life, think about the best way to use the money that you make regardless of how it comes to you. If you have debt, take care of that before spending on things that are extra or lavish. Next, decide to use the money for future things, such as your retirement and fund those accounts fully. Lastly, the additional money can be put into unnecessary categories for you to ‘mentally arrange’ as you prefer.
Tips to Avoid Elder Financial Fraud
Sadly, financial fraud against senior citizens is much too prevalent these days. According to Consumer Reports there are some 5 million cases of elder financial abuse each year, but only 1 of every 25 are investigated by law enforcement.
What can you do to protect yourself or a loved one from being a victim? Here are some tips:
- If you are concerned about your mental competence, make sure a trusted family member or friend is aware of your situation and enlist their help in managing your finances. Scheduling a family meeting with your children or close relatives can help both you and your loved ones assess how to best deal with the situation.
- Remember the IRS will never call regarding an issue, they always initiate contact via the mail. Never fall for threats or pressure to send money or face arrest from this popular scam.
- Another popular scam is someone posing as a healthcare worker asking for personal information from you. Never give out information like your Social Security number to anyone over the phone, this may result in having your identity stolen.
- Review your account statements on a regular basis. Make sure that there are no transactions that you were not aware of. If you see something that looks suspicious call your financial advisor and ask about it.
If you are concerned about protecting yourself or a family member from elder financial fraud, contact your state Attorney General’s office for assistance on reporting fraud and for information on current scams in your area.
Retire and Spend Courageously
Retirement is a time of excitement and anxiety regarding if your savings will last through your entire remaining life. Many retirees find that their spending is more costly in the beginning, and slows as they age. If you are sure you’ll be cutting back as you age, you can budget for these changes. Here is a short list of tips to help you get started on your courageous journey:
- Have a financial plan completed so you have an overview of what is available to spend from all of your retirement income sources.
- Prepare yourself for market conditions by determining what income sources to spend at designated times. In a down market, be able to adjust withdraws to accounts that are fixed income streams so you don’t liquidate sources that will rebound at some point.
- Review your investments every six to twelve months. Retiring doesn’t mean everything is on auto-pilot. This is the time to review investments even more closely.
- Evaluate your expenses. Take a look at your spending to determine what is left over for other items that aren’t necessary but enjoyable such as vacations and larger purchases.
- Assume lifestyle adjustments are a part of aging and may come sooner than expected. Health circumstances, market changes, and spending habits may need to be changed and updated in your financial plan.
Asking questions in the investment world can save you from mistakes. There are all types of questions to ask that pertain to your investments. One good place to start is by asking about the costs associated with your investments.
There is no such thing as a “no cost” investment, but understanding if those charges are up front at the beginning of the investment, at the end of the investment, or if they are continual over the life of the investment will help you decide the best option for your situation. Asking questions is part of being active in your investing.
A second place to ask is about the investment choices and how they fit into your financial plan. Providing you with information will help to ensure you are comfortable with investments I may be recommending to you. When it comes to the choice to invest, it is really up to you. As your financial advisor, I help to provide you with options to meet your goals. When you take time to ask questions, I have a better understanding of where you may need additional information to make the best decision for yourself.