Seminar: Remain Calm, Create Wealth

If you are in the New York area and are looking for a hands-on, solution-focused personal finance seminar I would like to recommend the June 30th session of Remain Calm, Create Wealth. MP Dunleavey (personal finance journalist, MSN Money contributor, and New York Times Cost of Living columnist) and Galia Gichon (founder of Down to Earth Finance) will guide participants through setting up a quick financial plan, establishing a strategy to control spending, and setting investment goals. Register here!

Is There a Doctor in the House?

In my financial counseling practice sometimes I have to deliver bad news. Whether it’s showing a client how his income doesn’t support his already modest lifestyle or helping a family understand the terms of their unmanageable debt, I am there when painful economic realities are revealed, often for the first time.

My role in these scenarios is not unlike a doctor sitting down with a patient to give him a poor test result. Given this parallel I watched with interest a lecture by Elly Hann D.O. on How Best to Deliver Bad News to Patients and Family. Dr. Hann, a hospice physician specializing in palliative care and pain management, emphasized the importance of communicating bad news clearly and compassionately so that the patient is able to begin organizing his thoughts around the diagnosis and treatment plan.

Without the doctor’s effective communication, patients remain stuck in a state of anxious confusion. These feelings compromise the patient’s ability to trust his doctor and follow through with necessary treatment.

While this all seems obvious in a medical model, it really made me think about our socio-financial model and how we meet consumers’ needs for assessment (diagnosis), communication, and support.

In the medical model the doctor is the expert, the one with the information. The doctor is required to be the patient’s advocate without any conflicting loyalty. Thus the patient can trust the doctor to decide and to act in his best interest.

In the financial world, one can retain similar unbiased expertise in the form of a fee-only financial planner or accounting professional. These services are excellent but can be prohibitively expensive for all but the most affluent. Some professionals offer pro bono or reduced-fee services through local non-profits or public agencies but these programs are spotty and not scalable to the population at large.

In the absence of expert guidance what has happened is that we’ve made “doctors” out of lenders. We assume that because lenders incur risk the market drives them to become experts on how to extend credit, at what competitive terms, and to whom.

This is not a patient- or consumer-based model. This would be like a person going into a hospital with pain in his shoulder and being told by the radiologist, “Hey, what you need is an x-ray,” and then the orthopedist countering with, “But if you sign up with me now I will give you an excellent deal on this cast!” How is the patient supposed to determine what to do with something as complicated as his health?

Our financial world has become similarly complex. Many consumers feel lost, anxiously confused about how to diagnose their own needs, identify the right course of action, and organize themselves around a plan.

Anxious confusion poisons the whole system. We can see the erosion of trust in the lending establishment. Whereas once consumers put too much faith in the promise of credit, now you see people suspicious of lenders’ motives to the point where they feel the system is out to get them.

I definitely see a need for a more widespread combination of consumer advocacy, information, and support. Right now all of those functions are operating somewhat disjointedly. For example, I can provide expert communication and support in my counseling practice, but I must partner with financial services professionals to get clients the information and analysis they need. The financial services industry has the information, but is mostly geared at helping already stable people protect their security and not at being a consumer sounding-board. Consumer advocates exist, but they often take an adversarial, system-focused position that is not necessarily based on the needs of the individual consumer.

I’m writing this post as a real thought-in-progress. Our socio-financial set-up seems inadequate but I don’t know what the right answer is. It’s hard to point to the state of the health care industry as any sort of positive example, but I think that the doctor metaphor is helpful in illustrating the vacuum that currently exists. This is not generally a comment-heavy blog, but if any readers have an opinion on this I would be glad to read it.

My Future's So Bright, I Gotta Buy Shades

In The Secret Life of Money, Tad Crawford offers this revolutionary concept:

Keeping the symbolic value of money in mind....we can gain a new view of debt, seeing it not as merely an obligation to be paid but also as a statement about how our inner richness will be expressed in the future (italics added).

That is actually completely brilliant. Until I read that I had not heard the phenomenon articulated so clearly.

When it comes to understanding how money doesn't work in a person's life, debt is often where the narrative begins. Debt is the manifestation of some sort of imbalance, either internal or external (or sometimes both).

An external imbalance may be quite difficult but it's usually pretty straightforward. Perhaps a major life crisis affected a person's finances, or their resources are simply not adequate for their needs.

An internal imbalance, on the other hand, can be many things. It may be around self-concept, such as when you buy things to try to feel like a new person or to correct for some felt deficit. It may be around impulse, when the desire to buy something rises up and cannot be deferred. There are a million ways we might be slightly skewed in perception, judgment, mood, etc. and all of these can affect how we use money.

What I love about the Crawford quote is how artfully it captures a distortion of both self and time. It shows how debt is a way of not fully living life in the present, but rather projecting oneself forward into some fantasy future where money is more abundant (along with approval, achievement, and sex, most likely).

This more affluent future-self is perceived as the true manifestation, and the debt is simply the price we pay to express our confidence in that belief.

I see this again and again in my counseling practice. When people arrive at a point whereby they can no longer afford to sustain their debt, they experience an accompanying personal crisis. It is not that they are so attached to the things that they bought on credit. It is that their coveted future self -- who is much more real to them than the life they live in the day to day -- must be sacrificed to come to terms with the reality of their financial position.

The good news is that most people who get appropriate support through this crisis come out healthier on the other side. It's true one can amass huge amounts of debt but there is pretty much always a limit. Being forced to a financial reckoning brings many activities that are effective in re-aligning the temporal distortion and the imbalance in self-concept. Tracking spending, for example, reinforces connection to the present and helps a person to remain grounded in their life as they actually experience it.

Unless there is true mental illness, a derealized existence actually gets pretty uncomfortable after awhile. You only get one life. Spending all that "future richness" wastes so much more than just money.

Explanatory Styles and Financial Baby Steps

This morning as my daughter was learning to pull herself up in her crib, I became aware of how I kept my hand on her back, supporting her. Without thinking about it I maintained a presence that was close enough to mitigate a swift fall that might injure, but not so close that she couldn't experiment on her own (and perhaps get a minor bonk or two to the head as she went along). It occurred to me that even this small activity of learning a new skill was a template for her in how she would see the world.

Our experiences shape our beliefs, and experiences are quite subjective things. My daughter's experience of her new activity might be "I am so strong!" or "The room looks different from here." Should she fall, her experience would indicate "Well, that was unpleasant but I sure liked standing while I was up -- maybe I'll try again." Or if the fall was enough to hurt or scare, she might believe that standing is a dangerous activity that should be avoided.

This is a small example (and one that probably only occurs to a caffeine-deprived therapist whose baby wakes up at a quarter to 6:00), but the idea behind it is well-established.

The beliefs that we use to give meaning to our experiences are generally organized into patterns, or Explanatory Styles. Dr. Martin E.P. Seligman is the clinician who is most often associated with the concept of Explanatory Styles through his work in the field of Positive Psychology.

Awhile back I developed a simple quiz to demonstrate how people bring their Explanatory Style into their experiences with money. The quiz asked respondents to identify the thought or belief that would occur in the following situations:

1) You overdraw your bank account and are charged a $39 fee.
Option A: "I never have enough money."
Option B: "This month I didn't account for some extra expenses that I had."

2) You find $20 in a jacket pocket.
Option A: "This is my lucky day!"
Option B: "I'm so lucky!"

3) Even though you've always paid your bill on time, your creditor mysteriously raises your APR.
Option A: "Maybe a temporary dip in my credit score caused this creditor to try to raise my rate."
Option B: "Creditors are unfeeling beasts."

4) Someone with your creditor's fraud department calls to alert you to suspicious activity on your account.
Option A: "Here is one instance when this creditor actually did something right."
Option B: "Creditors do their best to provide good customer service."

5) Your investment portfolio grew significantly in value over the last couple years.
Option A: "The market did well."
Option B: "I did a good job choosing investments."

6) When bringing some items to the register for purchase, the total price is higher than you'd anticipated.
Option A: "I must have miscalculated how much these things cost all together."
Option B: "Some of these items must have been mis-marked."

The six items are organized into three sets of one positive scenario and one negative scenario. The positive/negative dyads correspond to the three dimensions of interpretation that constitute one's Explanatory Style.

The first two scenarios have to do with the value of Permanence, or how we perceive time. When something bad happens, do we think that such a result is to be expected always? What about when something good happens? Is that a result of something that is permanent (such as a character trait) or is it something that just happened randomly?

The second set of scenarios relate to the value of Pervasiveness, whether something is seen as specific or something that is true across all situations. A jump in APR could thus be experienced as a particular event relating to the one account or it can take on the specter of everything that is terrible about the credit industry. A helpful customer service agent could be seen as either an anomaly or as an accurate representative of overall good business.

The final two scenarios demonstrate the value of Personalization, whether we see the event as due to our own actions or whether it occurred because of outside forces. Personalization is the most important dimension when it comes to determining how we feel about our ability to change. A person who sees negative events as universal and always true might still find the will to alter his behavior, but only if he believes that doing so might make a difference. If he believes that he himself is the source of his misfortune then what motivation is there to change?

I posed these six scenarios to a group taking the Seven Weeks to Financial Sanity teleconference organized by Galia Gichon and M.P. Dunleavey. What we discovered was that even people who were familiar with Explanatory Styles and Learned Optimism were surprised how often they identified with the pessimistic/negative statement when it came to money. It seems that we can view the world as generally good and believe in our own positive self-agency, and money can still be an area of our lives where we struggle with destructive frames.

Why is this true? Well, perhaps we grew up in a home where money was treated as a great evil or a cause of conflict. Perhaps the consequences we experienced around our earliest financial decisions were too punitive or hard to bear. Perhaps issues of money separated us from others and caused us to feel isolated.

Perhaps we did not have that supportive parental hand guiding us, preventing the worst spills but still allowing for experimentation and learning. Not to blame parents here -- it's much more straightforward to help a child learn to walk than to navigate the complexities of financial self-care.

Whatever the particular cause (or more likely accumulation and reinforcement of causes), it behooves us to think about how we view ourselves as agents in a money world. The benefit of being an adult is that you can bring events from the past forward into consciousness and apply adult maturity and cognition to understanding them. This new understanding can, with applied practice, become a new cognitive frame that supports healthy financial self-care.

ING Direct "Funny Money?!" Event on May 21st, 2008

I'm going to be participating in an event on May 21st in conjunction with ING Direct NY Cafe. The event is geared toward engaging artists and performers to think about the ways they use money to take care of themselves. Below is the press release. If you are interested in the event and are in the New York area I encourage you to RSVP to cafenyterm1@ingdirect.com and stop by. All attendees are eligible to sign up for a savings account that starts with a $25 balance, and there are raffles for other financial prizes.

For Immediate Release
Contact: Katie Northlich, ING DIRECT NY Café, knorthlich@ingdirect.com, 302-255- 3394; Diana Santana, ING DIRECT NY Café, dsantana@ingdirect.com, 302-255-3407.

New York, NY (5/01/2008)–ING DIRECT NY Café, The Actors Fund, and comedians Rick Younger, Keith Alberstadt, and Mike Siscoe team up to present FUNNY MONEY?!, a night of entertaining and informative dialogue on financial challenges artists and performers face in New York City. On Wednesday, May 21, 2008 at 6:30PM at the ING DIRECT NY Café (45 E. 49 Street, between Park and Madison Avenues), these hilarious comedians lighten up the crowd for the financial solutions provided by Amanda Clayman of The Actors Fund and the savings solutions of ING DIRECT. Entry is free. Food, beverage, and door prizes are provided. Please RSVP to cafenyterm1@ingdirect.com by May 19, 2008.

Rick Younger has made audiences around the nation roll in laughter. From television to the Broadway stage, Rick’s performances have shined on BET's Comic View, It's Showtime at the Apollo, NBC's Last Comic Standing, NBC’s The Today Show, the Broadway musical RENT and popular national commercials for Verizon, Staples, and McDonald’s. His current status as star of The Rick Younger Show, featuring Dean Edwards (SNL) and Todd Lynn (My Wife and Kids), allows Rick to give the audience what they need most – the joy of laughter and the comedic energy of Rick Younger.

Keith Alberstadt has entertained audiences nationwide with his easy-going sense of humor and approachable personality. Appearing on the nationally syndicated Bob and Tom Show, The John Boy and Billy Show (radio), and the Boston Comedy and Film Festival, Keith delivers consistently entertaining performances. He has traveled the globe entertaining U.S. troops in Kuwait, Iraq, and beyond, and has been featured on Country Music Television's "Funniest Video Countdown" and "Greatest Redneck Moments." Keith is a contributing writer for National Lampoon's syndicated "Sports Minute" and for The Complete Sheet, a nationally broadcasted radio show.

Mike Siscoe’s quick-witted, high energy shows keep audiences laughing for hours. Voted funniest comic in San Diego by The Reader (1999), Mike began his stand-up career in 1997 at the world-famous Comedy Store in La Jolla, CA and was soon opening for Tommy Davidson, Jeff Altman, Mitch Hedberg, Margaret Cho and Richard Jeni. Now based in NYC, Mike performs at marquee clubs including Gotham, The Laugh Factory, The Improv, Dangerfield’s, and The Laugh Lounge. He has also been featured in national television commercials.

ING DIRECT, fsb is best known as the revolutionary on-line savings bank whose mission is to “Lead Americans back to Savings.” Operating in the US for 8 years, ING DIRECT has stayed ahead of competitors by providing exceptional customer service, high yielding savings products with no minimum requirements and no monthly fees, and through its innovative Cafés, the face-to-face interaction with the internet bank. ING DIRECT NY Café is the only one of its kind in the NY region and is a focal point for customer interaction and outreach.

The Actors Fund is a nationwide human services organization that helps professionals in performing arts and entertainment by providing programs and services such as supportive and affordable housing, emergency financial assistance, employment and training services, and skilled nursing and assisted living care for those in need, crisis, or transition.

Amanda Clayman, a pioneer in the field of Financial Wellness, counsels individuals and couples on the topic and has developed a number of workshops that support the unique financial challenges facing entertainment industry and performing arts professionals.

Media: For information, press inquires, or interviews, please contact Katie Northlich, ING DIRECT, knorthlich@ingdirect.com, 302-255- 3394, or Diana Santana, dsantana@ingdirect.com, 302-255-3407. For more information on the comedians or institutions, please visit http://www.rickyounger.net/; http://www.keithcomedy.com/; http://www.mikesiscoe.com/; http://www.ingdirect.com/; or http://www.actorsfund.com/.

The New Value of Value Consciousness

Which is easier: trying to make healthy food choices when you’re surrounded by people who value nutrition and find creative ways to enjoy food, or trying to make healthy choices when you’re in the midst of folks who binge on transfats and disdain calorie counts?

It takes a lot of effort to moderate our desire for gratification – not just with food but in all areas. It helps when our efforts are seen as positive, valuable, and are reflected by others in our social context.

This is why it is so interesting to me how the media has pivoted lately in their coverage of personal finance stories. People have been in financial distress for years. Years. The unsustainable rises in housing prices, coupled with massive amounts of consumer debt and student loans have been akin to a thin person with 90% blocked arteries. Just because you can fit into a size 2 doesn’t mean you’re healthy, darling.

It’s hard to put yourself on a debt diet when you feel like you’re the only one who has to watch what you spend. But now that we are in a recession, budgeting and frugality suddenly have positive social value. I see evidence of this in how the media has begun to favor stories about efforts to manage family costs over pro-consumption pieces. Open the paper or watch the news, and you will see article after article about how generics are beating name brands and the top ten hot new ways to save.

If you agree that the economic trouble is not new, then how do we explain the new frame?

I think there are two major forces in play. Number one, the problems have reached critical mass. Denial can no longer protect us from being aware of threatening material without great damage to the collective self. What kind of society would we be if we didn’t pay attention to the record number of foreclosures and utility shut-offs? It would seem callous and insensitive to celebrate free-wheeling spending when thousands of people are in crisis.

Number two, when the challenges are external and commonly felt, then the locus of the problem shifts. The experience is no longer framed as “I struggle with the price of gas (because I personally have no money)” but rather “The price of gas is a problem.” When the cause is externalized the ego can still preserve the self as good, and thus activities of problem-solving are seen as good as well. Living on a budget goes from being ego dystonic to being ego syntonic.

This shift in how our media frames the issue may seem incidental to how we as individuals experience it, but it is actually of profound significance. In modern society media serves as the closest thing we have to a collective voice. When that voice does not reflect – with sympathy and affirmation – the individual’s struggle, then the struggle becomes a source of shame and steps to resolve the struggle are usually inhibited.

I think that we as a nation are ready to embrace the ideals of economic contraction. I want to be careful here. I do not suggest in any way that any person enjoys financial distress. Economic troubles are painful and the crises are real. Rather, going back to the point I made earlier I believe these troubles have been present for a long time and it has been a source of unconscious frustration that they’re been rather ambivalently acknowledged. For the past five years at least, people’s anxiety about the economy has been met with encouragement to go out and spend more or to just find another credit product to tide them over until… something (that part was never quite answered).

A brief sidebar – the growth of the Green Movement, especially among the higher income strata, constitutes an interesting complement to the rise in value consciousness. Because the movement promotes conservation as part of ecological stewardship, even those who don’t experience personal economic strain can still demonstrate support of activities of sustainable (lowered) consumption.

In a way, I think people are a bit exhausted by the prolonged pressure to consume. Deficit spending is anxiety-producing, and the individual members of society have been containing those feelings in isolation for too long. Being value conscious is suddenly the thing to be, and I am glad of it.

MyFICO, Myself

I’m going to go out on a limb here and say that some people need to stop worrying so much about their credit scores. When did credit scores become an obsession? If I see one more article about how people spend hours each month trying to “game” the model to drive their score up a few points, I am going to tear my hair out.

Look, I understand that a higher credit score can save thousands (or tens of thousands) over the course of a major loan such as a mortgage. I’m not saying that the number is unimportant or that we should ignore it.

My point is that I feel like people have a tendency to become overly distracted by their credit score. This distraction can constitute a relatively benign waste of time or may range all the way to financial paralysis or even self-destructive behavior.

For example, I’ve met with several people who have been under terrible duress with their credit cards: late payment fees, default interest rates in the 30-percents, collection calls coming non-stop. But these people are too afraid to take action (contacting a credit counseling service about a debt management plan or even learning more about bankruptcy protection) because they’re irrationally concerned about the effect these actions might have on their credit score.

At the other end of the spectrum there are people like Jeffrey Sheldon (from the credit score article referenced above), a 36-year-old systems administrator in Virginia, who is taking great pains to bring his 740 credit score even higher in hopes of qualifying for the best terms on a planned home refinance:

When Mr. Sheldon was shopping for an auto loan last fall, he first compared rates online. Then, he allowed only two lenders to pull his credit report because he knew that lots of inquiries could drag down his score. Now, he’s making extra payments so that he can pay off the five-year loan in 3 ½ or four years. He figures the lower debt level will boost his score, which is already near the upper end of … the range.

I applaud Mr. Sheldon for doing what he can to save money and reduce his debts. But I see a lot of people who go through these same efforts who are not even planning to take out a major loan in the near future. They want a higher score simply because they see it as some sort of personal validation.

The credit score is tantalizing because it pushes specific psychological buttons. It is seen as completely empirical measure of our behavior (ha!) that provides feedback about our actions. It presents an individual “score” (double ha!) based on that behavior. The score categorizes and ranks us. Additionally, there is the reward for a good score that comes in the form of better terms on loans and therefore saved money (just tell that to all of the borrowers with good credit scores who still got subprime loans).

Let’s take a minute to address these assumptions. First of all, the credit score is not a measure. It is a model. It compares specific financial behavior against the behavior of others in order to predict the likelihood that a person will default on a payment. Period. It doesn’t measure how “good” or “bad” you are with credit – it simply lets lenders know how they can best make money off of you. If you get a high “score” (I’m going to force myself not to put that word into quotes for the rest of this piece even though I’m tempted to – indulge me just this once) lenders know they can make money off of you slowly over a long period of time. If you have a low “score” (okay, I promise that’s the last time) then they need to make money quickly before you are statistically likely to have trouble making the agreed-upon payments.

Why are credit scores so commonly misunderstood? Why are they so broadly applied outside of what the model is designed to capture?

I think people get distracted by their scores because humans are social creatures and thus hard-wired to crave feedback and validation from external sources. Credit scores can seem like the ultimate measure of all the things adults strive to be– mature, trustworthy, and responsible.

A high credit score can also serve as a psychological balm during insecure times or when facing a daunting challenge. It’s as if you say to yourself, “See – Fair Isaac Corporation thinks that I’m going to be financially stable enough to make these payments for the next 30 years. I’m going to believe that, too.”

The reward that we get for having a high score can indeed be of significant monetary value. But the more we try to game the score the more we pervert the validity of the model. This touches on the Observer Bias, where people change their behavior when they know they’re being watched. The Observer Bias can skew the results to the point where the validity of the measure (model) is ruined and must be revised.

Overemphasis on score is also problematic when people focus on the number to the exclusion of the good behavior it is supposed to measure. When we don't take the actions that we need to (such as accepting a short-term dip in score in order to address a pervasive debt problem) or when we lose significant amounts of time or quality of life in order to game the system, then I think we have lost sight of what's important.

Remember that the actual scoring algorithm is kept completely confidential so at the level of specific action we can't even know for certain how our behavior will change the score. For the vast, vast, vast majority if we just pay our bills on time, live within our means, only take out the amount of credit that we can manage, and check our credit reports for errors, then our scores should reflect that we are capable financial stewards without any more self-conscious forms of management.