Growing Pains

Yesterday the Dow closed at 7,100, and man, was I mad. I felt disappointed, angry, and resentful. Is it irrational to have these strong feelings about a non-human entity? You betcha. Is it a little crazy to feel like the market's "behavior" is out of line? Sure, but I would wager I'm not the only one who is re-evaluating her "relationship" with the market these days.

It feels terrible to lose money -- nothing odd about that -- but why was I taking it all so personally? The intensity of my feelings caught me off guard and I found myself pondering the relational nature of my experience. What role was I projecting onto the market, and what enactment was I engaging in? 

The closest parallel I could come up with was one of an adolescent going through the pains of maturation. I had come to expect the market to be a kind of benevolent parent. I followed the "rules" -- save your money, invest it, diversify your portfolio -- and then I expected the rest of it (the nurturing and growth of my money) to be "taken care of." 

Obviously the market is not a parent -- that's not the point I'm trying to make. And lots of people who were a lot more hands-on than me have lost even more money. 

But the growth pain that I'm going through is one of waking up and knowing that I have to be more responsible for myself. I have to do more homework. I have to make more informed decisions. I can't ever trust that my money is just going to be "taken care of."

I don't know what change this realization is going to make in my net worth. Maybe it won't change anything. But at least I will feel like more of a financial grown up living powerfully in the world, instead of a disappointed child. 

Are You Worth It?

MP Dunleavey has a great article in the NY Times today (subs. req.) about why debt seems to “stick” to some people but not others. Debt may be the result of your negative cash flow, she posits, but it may also be tied to the “emotional underbelly” of your spending.

T. Harv Ecker says something similar in Secrets of the Millionaire Mind. He wrote (and you’ll have to forgive me for paraphrasing, I don’t have the book here in front of me) that most people do not have the internal capacity to create and retain great wealth.

For Dunleavey and for Ecker the solution to one’s financial woes lies not in a better spreadsheet but in cultivating a better mindset.

I’ve definitely seen this phenomenon in my work. People tend to have very strong beliefs about themselves and their place in a money world. The problem is that these beliefs are usually unarticulated and live unchallenged in the person’s unconscious.

Unchallenged beliefs create patterns of behavior that resist every effort to change. For example, if you have an unconscious belief that having money will expose you to envy and resentment, you will always release the money in your life rather than risk being a target of antipathy. You will probably spend a lot of money on others and generally treat money with great disrespect. Any accumulation of cash will create a huge amount of anxiety, and as your bank balance rises so will your fear that other people are judging you.

The “secret” here (it’s actually not so very secret, but it is hard work) is to do some digging into your own financial psyche. Millionaire Mind is a good book, but I feel that books that only focus on wealth building are rather narrow in scope. Financial wellness should be about a lot more than just a string of fat assets. Dunleavey’s book, Money Can Buy Happiness, is a good one, so is The Money Mirror by Annette Lieberman and Vicki Lindner. For those in search of a more interpersonal approach is to start a Money Awareness Club per the folks at the Women’s Institute for Financial Education. Whatever method you choose, bringing your unconscious beliefs about money into awareness can be the most valuable experience of your life.

The Money Complex Just Got Less Complex

I haven’t written in awhile for a couple of reasons. Number one, work and my practice have been really busy (as you can imagine). Number two, our culture has been on a rollercoaster ride to match the dips and loops of the market. Each day seems to usher in a whole new socioeconomic “reality.” It astounds to me how quickly our society has pivoted to embrace values of frugality, simplicity, and human connection over consumer expression. As someone who works from a systems perspective, this is mind-bending stuff. It also feels slightly schizophrenic.

It puts me in mind of Arlene Modica Matthews’ book, Your Money, Your Self. In her book Ms. Matthews talks about the five-layer “Money Complex” which resides in each of us. Whenever we are poised to make a financial choice or action, our process gets filtered through each of these layers:

Layer 1: Intrapsychic Response – Feelings, reactions, the "little voice" of truth in your head.

Layer 2: Family Training Response –What you learned or saw in your family and how you interpreted that as right or wrong.

Layer 3: Social Training Response – What you believe is true about others, especially those you admire.

Layer 4: Technology Based Response – Is there a financial instrument (such as a credit card, HELOC, floating 0% balances) that will enable me to take – or avoid – this action?

Layer 5: Pack-think Response – The pressure you feel to do what everyone else is doing or not doing.

Certain layers are stronger or weaker than others depending on the individual and the situation.

In recent years financial stress has ticked quietly higher as our debt levels rose and certain middle-class givens started to stretch out of reach. The Intrapsychic Response Layer (“this feels terrible, something is wrong here”) was ignored while the Social Training Layer (“people like me have this, it's the normal thing”), Pack-think Layer (“I certainly don’t want to be the ONLY person who doesn’t have that”) and Technology Layer (“I can have it if I charge it and just pay the minimum”) ran the show.

This seismic cultural shift seems primarily driven by the about-face in financial technology – the loss of cheap, easy credit along with job insecurity and the end of perceived wealth from a stock boom and housing bubble. When the technology abruptly changed the culture did, too.

I didn’t have a name for it then, but I feel like the last two or three years of my practice might be summed up as Layer 4 Mania. People have been completely distracted by the myriad of financial instruments and scams. Our culture has mistaken the ability to buy something as the ability to afford something.

What we’re experiencing now is a hard, painful look in the mirror. The Intrapsychic Response Layer is screaming, and it’s finally being heard.

Amanda in the WSJ: Keeping Spending in Check

Different life transitions bring with them different financial challenges. For young people just entering the workforce post-college, the challenges include establishing a professional identity, developing a budget that balances their new expenses with their new income, and managing all of the stresses that come with any period of transition or change.

One of the ways that people often blow off emotional steam is with spending. How do you know when the spending -- particularly deficit spending -- is worth it? Figuring that out can be confusing when the new laptop or suit is something you "need" for your new professional life.

In my financial counseling practice I have an easy rule of thumb for figuring out when people are spending based on mood versus based on necessity. Was the purchase made on the spur of the moment or was it planned for? If it was done on the fly, there's good chance that anxiety, unease, or insecurity was responsible for the impulse to buy. Rationalization after the fact won't make up for that.

Shelly Banjo writes the Starting Out column in the Wall Street Journal and asked me how young professionals can Keep Spending in Check.

Amanda in the NY Times: A Conflict that Came in the Mail

Spouses are always doing little things "for each other's good." In the past I may have taken it upon myself to retire some of my husband's more-than-gently-worn socks (to all the TSA agents who were privy to the site of his big toe poking through in the security line: you're welcome).

MP Dunleavey writes in her Cost of Living column for the New York Times about another case of marital editing, this one having to do with catalogs that (did not quite) arrive in the mail.

Reading, Writing, and Relevant Cost?

As a high school student, I never learned economics -- home, macro, or otherwise. Interestingly enough I went to a math and science-focused magnet school, so I was better prepared to handle infinitesimals than interest rates.

In fact, my personal finance education started right about the time I walked into mu college bookstore to buy my textbooks and was handed a Visa application. Fast forward a few years and I was the proud carrier of about 10 platinum cards and a whopping amount of gut-churning, insomnia-producing debt.

I learned most of my early economic lessons the hard way - by mistake.

Unfortunately it seems that my learning experience is the norm. In today's New York Times Freakonomics blog Stephen Dubner asks, “Are We a Nation of Financial Illiterates?” The sad answer is probably yes. And Stephen turns to Annamaria Lusardi, a professor of economics at Dartmouth, who has some answers that make sense.

Your Creditor is Silently Judging You

You stay below your credit limit, pay your bills on time, and always pay more than the minimum balance due. Yet your creditor mysteriously raises your interest rate and cuts your credit line in half. What gives? Maybe it was because you swiped your card at the bar or at a massage parlor, and the lender's scoring model deemed your purchasing behavior a credit risk.

Lenders, insurers, other financial firms (and, increasingly employers, landlords, cell phone carriers, and the voting public) have always used credit scoring models to make decisions about people. While we have some very general information about the design of the most widely-used models, many lenders use proprietary formulas based on their own evaluative criteria. In the case of CompuCredit's Aspire Visa, these criteria allegedly included individual spending behavior.

The Federal Trade Commission recently filed suit against CompuCredit accusing them of "deceptive" marketing practices because they did not properly disclose to consumers that they monitored spending. The suit alleges that when the cards were used at places like tire and retreading shops, massage parlors, bars, billiard halls, and marriage counselors (really? marriage counselors?), CompuCredit cut their credit lines.

Now keep in mind, the legal issue here is not that a lender monitored purchasing behavior and used it to evaluate the terms of credit. The legal issue is that the lender did not properly communicate the policy to cardholders.

But the relevance to consumers is far broader, because this suit gives us a glimpse into the heretofore secret world of credit scoring. Consumer advocates have long suspected that purchasing behavior is included in scoring models but because the models were protected as intellectual property there was no way of knowing for certain. As Jennifer Silver-Greenberg writes in BusinessWeek:

With competition increasing, databases improving, and technology advancing, companies can include more factors than ever in their models.... The worry is that companies may tweak the credit scoring system in unfair or biased ways, weeding out or limiting borrowers based on race, gender, or sexual orientation.

Personally, and this is my opinion here, I would say of course creditors are monitoring purchasing behavior. If they can do it, they are doing it. It's simple human nature to want to know things about others, and creditors are not any purer than the rest of us. They have the additional incentive of being in business with their customers, so if the mechanism exists for them to gather the information then I think we can safely assume that they will do so.

The concern is not that financial institutions are gathering the information, the concern is in how they are evaluating it. "Scoring model" sounds analytical, but in reality all models that evaluate data are exactly as biased as the person or people developing them.

Models are, in effect, hypotheses. You come up with a hypothesis, you enter the data, and you discover if the data predicts the outcome that you are expecting. If it does then you consider the hypothesis valid. It's reliable if it gives the same valid outcome again and again.

The problem with the credit scoring model is that it's only being selectively tested and only by the same biased people who developed it. In the natural and social sciences we cannot say, "Hey, psychotherapy and antidepressants are more effective in treating depression than psychotherapy alone. Don't ask me how I know this, just buy my medicine." The scientific method dictates that we present all of it -- our hypothesis, subject selection, testing process, data gathering, analysis -- and encourage others to try exactly what we did and produce the same results.

People might not be so outraged about creditors analyzing purchasing behavior if we were allowed to shine the light of public scrutiny on their scoring model.

This particular instance with the Aspire Visa also just smacks of moralism. Why is using your credit card at a bar or marriage counselor so bad? What about people who use a credit card "convenience check" to pay their rent -- that seems more indicative of financial instability than a night out at the pub. We can't ask the lender these questions because their process is protected.

In our complex financial world, selectively directing the quality and availability of credit products has profound social consequences. We've already seen how institutions were able to perpetrate bias (consciously or unconsciously) in the subprime lending market. With credit so interwoven into the social fabric, do we have a right to public oversight of how lenders make their decisions?