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New Money, New Problems

Behavioral strategies to navigate new-money situations

Morningstar Staff


Everyone’s heard the horror stories of lottery winners who go broke a couple of years after hitting the big jackpot. Or maybe it’s the stories of celebrities in bankruptcy court, or pro athletes who’ve squandered their millions and are now in debt.  

These extreme cases are examples of a much wider behavioral phenomenon—one that covers not only people with sudden millions, but also recent college graduates who are flush with cash after getting their first real job and small business owners whose hard work finally pays off after years of squeaking by. 

People who come into new money need good advice to turn it into lasting wealth. 

We asked Morningstar behavioral economist Sarah Newcomb, Ph.D., author of the book Loaded: Money, Psychology, and How to Get Ahead without Leaving Your Values Behind, about the psychology behind new-money behavior and how advisors can help. 

The time value of money works both ways 

Persuading clients with new money to invest for the long term can be difficult. But, Newcomb said, the time value of money works in two directions—and that can be quite a reality check. 

The time value of money works against us in the form of inflation. To ensure that our money withstands the test of time, we can use investments, Newcomb said. 

“People think about how much their lifestyle’s going to cost them on day one of retirement, but they forget about year 25. They end up in their 90s on a fixed income,” she said.  

This income can be enough when they’re 60. But by the time the client is 90, that income can be worth next to nothing.  

“That’s why you have to start with, ‘What lifestyle do I want to live? What will be comfortable for me?'” 

From there, you can work with your client to calculate how much that lifestyle will likely cost them in the future.  

Kick-start change with the “fresh start effect” 

As a clear financial plan comes into focus, advisors can use what behavioral scientists call the “fresh start effect” to make a client’s new financial outlook stick in their minds.  

“When we think of something as being a fresh start, we are naturally motivated to put our best efforts into reaching our goals,” Newcomb said. “That fresh start can be the start of a week, New Year’s, a birthday, the start of a season,” or another landmark in time. 

Research clearly supports this. In a study done by Wharton University scientists, people were asked to describe a goal that they would like to accomplish. Then they were asked when they would like to get an email message reminding them of that goal. Some of the participants were given the option to choose the first day of spring as a date for the reminder; others were given the option of choosing the third Thursday in March. Those both occurred on the same day, but participants overwhelmingly chose the first day of spring. This indicates a preference for making personal changes coincidental with temporal landmarks or milestones. 

More than numbers 

In the end, Newcomb said that financial planning goes beyond spreadsheets and charts, and that advisors who understand their clients’ lives and motivations have the best chance of getting through to them. 

“So much financial advice consists of numbers and ‘shoulds.’ But the reality is that we make all of our financial decisions in the larger context of our emotions, our desires, our sense of identity, and our desire to be accepted,” Newcomb said. “Very little of it really has to do with numbers. It has to do with these stories that we’re telling ourselves and the stories that we want to believe about ourselves.” 

This blog post is adapted from the white paper “Financial Turning Points: New Money, Old Habits.” 

Read the full paper “Financial Turning Points: New Money, Old Habits.”

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