The psychology of financial planning

Shannon Thielman remembers money being scarce when she was a young girl growing up in a farming community in eastern Wisconsin. While there always was enough food on the table, her parents—a teacher and a store clerk—knew little about finances and money was a constant source of conflict.

“I remember learning to add by watching my mom balance the checkbook in the negative,” Thielman says. “We never made it through a month without having to get a forward from the bank.”

While Thielman did her best to educate herself about money, her lack of a financial foundation in childhood trickled into her adult life. When she married her husband Darwin, the two had a hard time seeing eye-to-eye on finances. He was an “extraordinarily frugal” penny-pincher, while Thielman couldn’t stand to talk about budgeting. “It was an extremely agonizing experience for me,” she says, “and after a couple years together, he gave up [trying to change me].”

However, when Thielman’s husband died in 2016 and she was left with a large life insurance policy payout, she couldn’t avoid dealing with her finances any longer—for both herself and her now-13-year-old son, Jordan.

It’s not unusual for our earliest encounters with money to follow us throughout our lives. According to a 2022 study conducted by Brigham Young University and published in Family Relations: Interdisciplinary Journal of Applied Family Science, how parents handle money will affect their kids’ financial outcomes and satisfaction later on.

The research found that children who learned from experience, such as overseeing their own money, were more likely to be confident in making financial decisions in young adulthood. But that’s not everyone’s experience.

“One of the first questions I ask a new client is, what’s their history with money?,” says Victoria Lilley, a Thrivent financial advisor in Perkasie, Pennsylvania. “How did they grow up? What kind of financial household were they raised in? Did their parents talk about money? What experiences are they bringing with them?”

Lilley has obtained the Behavioral Financial Advisor (BFA) designation, which means she completed training and passed an exam in behavioral finance: the study of how financial decisions are influenced by human emotions, biases and experiences.

It’s a classic struggle between theory versus practice that Leslie Talbot, a Thrivent marketing strategist who also holds a BFA designation, likens to health and wellness. There’s evidence to support that working out and eating nutritious food is beneficial for our health. So why doesn’t everyone do that? The same can be true for finances—we all know we’re supposed to save more and spend less, but, in reality, internal and external influences can get in the way.

For example, if you grew up with parents who fought about finances, like Thielman, money might make you feel anxious or fearful. If you’re susceptible to group mentality, you may be more easily swayed to sell your shares of a stock if the market is dropping because others are, even if it’s not in your best interest.

Or perhaps you won’t invest in a company you’re passionate about because the pain of losing money now outweighs the potential financial gain if the business is successful later on. That is known as loss aversion. These are just a handful of concepts that fall under the behavioral finance umbrella.

“At the end of the day, we are all human and often driven by emotions, no matter how intelligent we are. We have to find those cues, those triggers,” Talbot says. “The financial advisor at your side is your accountability coach.”

More than studying financial concepts or monitoring the stock market, “I believe the psychology behind financial planning is the most important part of the process,” Lilley says. “Any financial advisor can come in and tell you how to allocate your money, but if you really want to get to the heart of the decision-making process that clients have to go through, you should get to the psychology of it.”

Early discussions with a financial advisor often start with a values-mapping exercise that challenges clients, both men and women, to identify their top five values from a card deck of 50 choices, such as security, family, space, integrity, ethics, relationships and wealth. The idea is to incorporate the client’s values into financial planning, aligning their monetary decisions with their goals and their goals with their values.

“I try to be intentional,” says Mandy Wright, a Thrivent financial advisor in Wausau, Wisconsin, who also holds a BFA designation. “Even with clients that have been with Thrivent for a long time, I tell them that I work with clients a little bit differently. I want to make sure I really understand what you want, what story you want to tell with your life and your finances, what values you want to live out. And then we can make the numbers work.”

It was just a couple years ago that Wright herself was learning this information for the first time. After she unexpectedly got divorced, the mom of three had no choice but to face the numbers. “I had a lot of negative emotions around money,” Wright says. “I had no idea what to do with it. Should I squirrel it away for retirement? Could I afford to keep the house I had? There were all these big financial decisions that I was uncomfortable making, and in the end, that’s what led me to becoming a financial advisor. I saw the value of having someone help me through a difficult situation.”

Thielman, who works with Wright, now substitute teaches and splits her time between Wisconsin, where her parents still live, and North Carolina. “After my husband died, I spent about a year dealing with his estate, which was financial baptism by fire. I needed somebody to manage it,” Thielman says. “[Wright] understands where I’m coming from and the difficulties I have with money. I’m comfortable talking to her.”

A major life event also forced Thrivent client Linda Reid to re-examine her relationship with money. An expatriate from the northwest of England, she moved to the United States 20 years ago when her American husband got a job in Minnesota. They started a family, then moved to Pennsylvania. Reid put her career on the back burner while raising three kids, now 20 and 18-year-old twins.

When Reid got divorced four years ago, she had no idea what to do with the settlement. “When I was married, I really didn’t have anything to do with our marital finances,” she says. “My husband organized our budget, tracked how much we had for household expenses, took on the retirement planning. I had no insight into our finances whatsoever.”

Reid turned to Lilley to help her move past the paralysis she felt anytime she had to spend money and to make a plan for retirement. This scarcity mindset was a holdover from childhood, when her parents—a construction foreman and a stay-at-home mom—struggled to afford even the basic necessities after a job-related injury took her dad out of the workforce for a few years. Every time a disability check came, Reid recalls her mom filling the car with gas in case her dad got an interview. They lived on whatever was left.

“Even though I still struggle with it daily, I’m able to have a lot more ease with money,” says Reid, who is now a community and economic development manager for the municipality Perkasie Borough. “It’s been a liberation. I enjoy my children more because I’m not always worrying about what I’m spending. I can enjoy my friends and chip in for dinner. It’s freedom. I can feel joy going about my life.” n

Even if your own biases and experiences have negatively shaped how you feel about and handle money thus far, it’s not too late to course correct. There are positive behaviors that can lead you to financial health.

When you hear the word “money,” what do you feel? Anxious? Ashamed? What are your earliest memories of money? The more you and your financial advisor understand your mindset around money, the stronger the plan can be to meet your financial goals.

Many people are afraid of money, so they avoid looking at their finances or talking about them altogether. Lean into the discomfort in conversations with family, friends and your financial advisor. “We can help facilitate those conversations,” says Thrivent Financial Advisor Mandy Wright. “The more people grow in confidence with understanding their plan, the more confidence they have with saving or spending to actually meet their goals.”

Whether it’s ensuring your kids graduate from college debt-free or making financial contributions to causes you care about, take time to find your “why.” Then re-evaluate it at least once a year. When faced with a significant financial event, fall back on those values to help you prioritize your decision-making. “It’s all about balance, like everything in life,” Wright says. “What I find is, some people, in an effort to not spend any money, are deeply undercutting their own values.”

Financial planning is a long game. There will be ups and downs along the way, but a good financial advisor can prepare you so you don’t panic when an unexpected, yet necessary purchase comes up, inflation hits or the market declines. “Rather than focusing on the money, focus on what the money can do for you,” so long as you can think long-term, says Leslie Talbot, Thrivent marketing strategist.

By addressing your preconceived notions and changing your behavior toward money to foster a more positive relationship, your impact is reaching far beyond your wallet. Financial health can improve your mental and physical health, too.

"If you are going through a stressful financial time, it can affect everything. But if you have a good plan in place and know you’re on top of your finances, you don’t have to worry about that aspect,” says Thrivent Financial Advisor Victoria Lilley. “There are certain things that are big building blocks [in life] that you should have in place, and money is one of them. If you have that taken care of, that can make everything else so much easier.”

Here’s a look at some common terms* relating to behavioral finance.

• Behavioral finance: An area of study that examines how psychology—your emotions and cognitive biases—influences your financial decisions.

• Group mentality: Making financial decisions based on what most people are doing, even if it’s not in your best interest. This phenomenon is observed commonly with investments—when the stock market plunges, people tend to sell shares just because others are.
  
• Mental accounting: Placing different values on the same amount of money depending on what it’s allocated for or where it comes from. You may be quicker to frivolously spend money that’s given to you—“free money”—compared to money that is earned, when in reality, all money should be treated equally.
  
• Anchoring bias: Allowing the first piece of information offered to guide your financial decisions. When a TV that was previously marketed for $750 (the “anchor price,” in your mind) drops to $500, it seems like a great deal, even though it may not be.
  
• Confirmation bias: Seeking out information to support your beliefs. You might over-invest in a company or sector that you like because you only absorb favorable news about that investment, completely ignoring the bad.
  

Sometimes in life, we find ourselves financially off course. A financial advisor can help you develop a strategy that enables you to stay focused on what matters most to you in those moments. Reach out to a Thrivent financial advisor.