5 Steps for Establishing a Healthier Financial Future
As a young professional you are an expert in your field with formal education and training within your industry. You are on a clear path to achieve your professional goals. Chances are, however, that you are less confident about your ability to achieve long-term financial stability.
And you are not alone.
Since 2007, the American Psychological Association has commissioned an annual Stress in America™ survey. Year after year, the leading cause of stress in the lives of Americans in money. In good times and in bad, 75% of Americans are more stressed about money than about work, physical health or family.
The good news is you have the power to reduce this stress, even without a substantial salary increase, says Dr. Brad Klontz, Psy.D., CFP®, Associate Professor of Practice in Financial Psychology at Creighton University’s Heider College of Business. Brad and his brother Ted are the two core faculty members in the new Financial Psychology and Behavioral Finance programs at Creighton. They have both advised hundreds of clients, ranging from middle class families to a-list celebrities, on how to understand the psychological factors that impact financial behaviors, and the core principles we should all consider in order to reduce the stress we feel around this topic.
Here are five steps that Brad says every professional should take to improve his or her financial well-being, no matter your income bracket:
- Understand your financial psychology: It’s a common misperception that financial problems are the result of a lack of money or a lack of knowledge around financial matters. In actuality, financial problems stem from not recognizing how money scripts guide our financial decisions. Money scripts are those typically unconscious beliefs we have about money, learned from childhood and passed through generations.
Sometimes they are productive; at others, they are destructive. Holding on to a money script when it is inaccurate (“My self-worth equals my net worth”) or has lost its usefulness (“All debt is bad”) is a driving force behind many self-destructive financial behaviors. Reflect on three money beliefs you inherited from your parents. Write them down. Make a list of how these beliefs have helped you, how they have hurt you and how you can change them to help you better reach your financial goals.
- Set up a retirement account: Want to stop working someday? Better start planning now because Social Security won’t cover it. To make sure you have what you need in retirement, maximize your contribution to your employer-sponsored retirement plan (e.g., SIMPLE IRA, 401(k)). Self-employed? Set up your own retirement plan. Also, contribute to an Individual Retirement Account (IRA). Roth IRAs are particularly beneficial; you pay taxes on the money initially invested but the account grows tax-free.
- Start saving now: No time like the present. Don’t wait until you have “extra money” – when student loans are paid and your home’s down payment is saved. Save 10-20% of your income for retirement, and you’ll have over $1 million at retirement. Consider: If a 28-years-old professional saves the maximum yearly allowable contribution of $5000 a year in an IRA that earns 8% annual interest, he or she will have $1.3 million at age 67. Start saving now.
- Protect yourself and your family: In addition to professional liability and/or errors and omissions insurance, you need disability insurance. The chance of becoming disabled and unable to work is much more likely than premature death. Many financial planners recommend steering clear of whole life, variable life and universal life policies and opting for a term life insurance policy, which will cover you for a set number of years. A general guideline is to have a death benefit at least eight times your annual income.
- Ask for help: Let a tax expert do your taxes. Seek the advice of a financial planner to help you reach your fiscal goals. Look for a Certified Financial Planner™ (CFP®). Make sure your financial advisor is a fiduciary, someone who is required by law to put your financial interests before theirs and to not withhold important information from you.
If money is a stressor in your life, channel this stress into action to improve your financial health and, by extension, your mental health.
Want to become an expert in the growing field of Financial Psychology and Behavioral Finance? Creighton University’s Heider College of Business is now offering a Graduate Certificate and MBA with an emphasis in Financial Psychology and Behavioral Finance. Click here to learn more about these new, innovative programs.