Financial Train Wrecks and 3 Ways to Help

One reason I loved being a banker was because of the front row seat it gave me to watch train wrecks happen with money. Of course, it’s also a great laboratory to study why some people are so successful with money too, but the train wrecks, while always sad, are infinitely more interesting!

I’ll share a couple of sad but true examples before offering three tools I’ve used to help those who suffer financial train wrecks.

The Day Trading Doctor

Take Fred (not real name) for example. He was a very successful medical professional. His income was several hundred thousand dollars a year. A valued customer of the bank. All he had to do was save a fraction of his income and he would be set for life.

But paying off student loan debt and saving diligently each month wasn’t sexy enough for Fred. He had excelled in medical school and knew he had a higher IQ than most people. He assumed he could repeat his medical success by mastering the stock market through day trading and boost results with debt.

As often happens when the “get rich quick” bug hits, things did not go as Fred planned. He made two big mistakes. His assumption that his above average IQ in medicine would transfer into stock picking was deeply flawed. And second, his false confidence led him into a lack of respect for debt. He leveraged himself up to his maximum limit to feed his day trading habit.

I’ll end this story with the sad scene that occurred when Fred came in the bank one day after suffering substantial losses and begged us like a drug addict to make him just “one more loan.” Fred knew he had finally mastered the market and could win back his losses with another loan, but he no longer qualified for additional debt. 

The Nasty Yard Sale Shopping Multi-millionaire

If you’ve never been in this world of yard selling, it’s eye opening! I love capitalism as the best system in the world for wealth generation, but when you see it at street level in a yard sale, it’s not always pretty!

Somehow my wife talked me into having a yard sale. Things we would mark down to fifty cents would get haggled over with requests to lower it to twenty-five cents. I loved to yell, “Sold!” But I really could not believe the amount of haggling over pennies.

Things got interesting when one of my older bank customers approached my wife and almost made her cry with some ruthless and relentless haggling over a few items. I was hiding in the garage as I didn’t want to cause a conflict with one of my bank customers. When the lady finally left, my wife was very upset at the incident. I couldn’t tell my wife that this miserly old lady had several million dollars parked in my bank along with several million dollars in rental properties.

This lady would not see herself as a financial train wreck at all. However, continued mindless accumulation of wealth without the ability to enjoy it through a generous spirit is just as much of a train wreck with money as too much debt.

My point is, rich or poor, everybody has a problem with money at times. I’ve classified the problems I’ve seen into three categories. Many financial advisors look to poor financial literacy or psychological caused bias, but I would also add the spiritual dimension of money. Let’s look at all three.

The Epic Failure of Financial Literacy in America.

Most bankers’ instinctive reaction is to assume financial problems are a knowledge problem.  If we can just impart better money management knowledge, the problem can be solved.

And it’s true, there is a big ignorance gap about basic financial literacy concepts in the USA.

Standard and Poor’s did a survey last year that estimated just 57% of Americans are financially literate, slightly above Botswana in a world ranking. And, more discouraging, our rankings are on a downward trajectory. Our youth are not being taught how to think about student loan debt, credit cards or other forms of debt. Nor are we doing a good job of educating our kids about planning for retirement and other common financial literacy topics.

While the real solution is to teach financial literacy early and often, especially in the home, a quick fix that works is the concept of “just in time” learning. If a couple are first time home buyers, direct them to take a tailored course on home ownership. They will pay attention because it has direct application. Or, if someone takes a new job, a course on retirement planning and the company’s 401k plan can be a big help.

But why do many with the finance knowledge, still make money mistakes?

The Psychology Behind Bad Financial Decisions

The ancient Greek saying, “Know Thyself,” is important in managing money. Ignorance of our own biased thinking has been shown by researchers to lead to a lot of poor decisions. Here are a few of the noteworthy findings in recent years:

• Some estimate that we get twice as much pain from our investment losses as we do from the pleasure of our gains. Implication: We may avoid investing in stocks out of that fear, even though the history of stock market investing shows a very high probability of long-term success.
• We believe that acquiring things will bring happiness, but fail to realize that we are wired to be on a hedonic treadmill. The more we buy, the less the happiness lasts, so we buy something else for happiness which also doesn’t last, and we repeat with encouragement from advertising promising happiness is just a purchase away!
• “Recency bias” is a tendency to project our recent experience into the future.  If we take on debt when times are good, we assume times will always be good and don’t factor in the risk of downturns.
• We cannot picture ourselves getting older and therefore live in the moment instead of deferring gratification for our later years.
• It’s not polite to discuss how much we are earning, so we make purchases we otherwise wouldn’t have made to “signal” to our neighbors how wealthy we are.

The Spiritual Dimension of Bad Financial Decisions

It’s true that psychological bias and poor financial literacy account for many poor financial decisions. However, neither one of those tools is adequate to explain all bad (or good) behavior surrounding our finances. If theology allows us to explain something about personal finance that economists might otherwise miss, then I think it should be part of the conversation.

Two views of money clearly exist in our culture. On the one hand, a purely materialist worldview would teach that we are all just random molecules that came together and whatever exists does not have a moral basis. Many people believe this deeply and adopt an attitude known as YOLO, “you only live once.” Living in the moment for only yourself makes sense in this belief system because there is no ultimate spiritual value to how we manage our resources.

One powerful scene demonstrating this view of money played out in my life in front of a District Attorney.  I was in a lawyer’s office when I had a bank employee confronted over an embezzlement accusation.  When the DA asked this employee why she stole the money, the response was because it was a way for her to live the good life she saw others enjoying. Theft, envy, and greed were a few of the spiritual problems I saw coming out without any sense of remorse. This was not a problem of financial literacy or psychological bias.

The Bible on the other hand presents a very different view of money. All things, including money, can be redeemed, and used for the good of ourselves and others.  But that’s another blog post for another day!

Let me know what you think!

Joe Kesler

Founder, Smart Money with Purpose