Create a New Financial Plan for the New Year, Part 2

Ivanna Hampton: Welcome to a special episode of Investing Insights. I’m your host, Ivanna Hampton. Many people have made resolutions to create a financial plan this year. Morningstar, Inc.’s director of financial psychology, Sarah Newcomb, talked about how to rethink budgeting and overcome overspending in last week’s episode. So, check out Part 1 in case you missed it. Part 2 focuses on another way to improve your financial health: how to stop fighting about money. Here’s the second part of our conversation.

All right, so now there’s discussion you brought up earlier that our financial habits, our histories come with us wherever we go to the store. What kind of financial habits or histories do we tend to bring into relationships?

Sarah Newcomb: Each one of us has a whole financial narrative that we’re walking around with, and we think that it’s just the truth with a capital T. And so you have two people sitting down to work on a budget or two people approaching their financial lives, and each of them is a whole collection of different beliefs and attitudes and experiences with money. And yet we’re not conditioned at all to talk about these things. It’s most pronounced when you have people coming from different class backgrounds into a relationship. But even people who grew up in the same socioeconomic situation can still have very different attitudes towards money depending on the examples that they’ve seen, the situations that they’ve been through. And so understanding that your personal history is walking around with you and your attitudes and beliefs about money are a perspective—they’re one little perspective in the whole universe of possible perspectives. It can help you have a little bit of humility when you’re talking to somebody else about their perspective. It can be great, just as a conversation starter, to get talking about finances as a couple or family member to just ask what their experiences were like growing up with money. You may learn a whole lot, and it might even explain some of the head-scratching behavior that you may have already noticed with those people.

Hampton: So we’re going to have the conversation. What’s the next step in meshing financial lives together if you’re a spender or a saver?

Newcomb: I think there’s a big topic here about boundaries with money. And you know there was recently an article that was published in The Wall Street Journal about how couples who blend their finances are happier. In it, the researcher who was interviewed said that, while they couldn’t be sure, it did look a little bit like it was possibly a causal relationship—not that they were happier first, and then they blended their finances—but the blending of finances, controlling for everything else, seemed to actually contribute to long-term happiness. I tend to subscribe to the yours, mine, and ours approach. There’s no right answer here, but the reason why I think yours, mine, and ours is beneficial, especially when you have people who have two different approaches—if one is a spender and one is a saver—is because, just like with emotional intimacy, you need to have a full sense of yourself as well as the relationship.

There is a similar dynamic with money. I think having joint accounts where you contribute to your collective life together is great, but each person having a little bit, at least a little bit of money, where they can express themselves financially—that spender can spend without needing permission, the saver can save without needing permission—you have a chance to express your uniqueness through a little bit of money that is your own and having just at least a little bit that you don’t have to always get permission, I think that sense of autonomy and individualism is healthy. But you can still share the things that you’re working toward together.

Hampton: OK, I got a question for you—it may be loaded—but why do emotions rise up when people start talking about money?

Newcomb: Well, I mean when you think about it, money represents our opportunities in life. Everything we want to do, all the things we want to do and be require money, and so it’s really impossible to take the emotions out of our finances. Economics is social science, so I think money is loaded because it is the tool. It is one of the most important resources to building the lives we want to build, and if someone, if you’re sharing finances and someone is using money in a way that you don’t agree with, that represents a threat to the life you want to be living. And so that’s important. Of course you’re going to have an emotional response to that.

Hampton: So if we’re having that emotional response, what should we pay attention to? Is there a trigger in us that’s happening that we can see before things get too tense?

Newcomb: So generally, couples need good communication, and if you don’t have good communication in other areas of your life, having good communication about finances is not likely. So I would say there are some couples where finances become what psychologists call a gridlock issue, where you’re just not able to make progress. In that case, you might really need to bring in a third party to help you talk about it. Otherwise, you use the same skills that you use in other areas of disagreement with someone that you love. You recognize when emotions are starting to color your own perspective, you take a break. Sometimes you take a time out, you come back to it, but you remember that you’re on the same team, that you are working toward similar goals. And again, I think with finances you have this opportunity to dream together, to build toward those dreams together, to come up with creative solutions together so that both of you can thrive. It can be a wonderful exercise, but you have to start with good communication or else you won’t get anywhere.

Hampton: Sarah, how will we blend the short-term outlook from one person and the long-term outlook from someone else when it comes to money?

Newcomb: What I found in my research is that people who tend to be savers are also more likely to have a long-term mindset. So, when they’re thinking about their money, they’re thinking years, decades, maybe even generations, and so they have a long-term mindset and they’re building toward that. The emotional needs they may be meeting are security and safety, right? Now a spender, on the other hand, is often a much shorter-term thinker. They’re thinking in days, weeks, or months. And so there you can see why the strategies might be different, and they’re also with the shorter-term mindset, they might be meeting needs for freedom and autonomy and enjoying life, and so you have one person that’s like, “Why can’t you live in the moment? Why can’t you enjoy your life?” And the other person that’s saying, “Why are you so irresponsible? Why can’t you plan for the future?” This probably sounds familiar to people.

And it has to do with both the emotional needs that people are meeting, the need for safety, the need for security, because they’re looking into the future and they see all the things that could go wrong so they want to protect against that, and then the need for being in the present and enjoying life while we have it. And so both of these things are legitimate. And what you’ve got here is a situation where the long-term financial, the protector, the person who’s thinking in the long term, but all they see is all the things that could go wrong. They actually may need to relax a little bit and learn how to enjoy their life a little bit more and learn that if they spend a little bit more, they’re probably still safe. And the short-term mindset person needs to elongate their mental time horizon and to see that there are things that they should be planning for that they don’t know about yet, and so they should always have money in reserve. And so both can learn from the other. You can come to the middle where the long-term thinker can teach the short-term thinker how to stretch their mental time horizon, but the short-term thinker can also help the long-term thinker to tap into that sense of not everything is a doomsday scenario and we need to enjoy life while we have it.

Hampton: So, communication again.

Newcomb: Always communication.

Hampton: We’ve talked about rethinking budgeting, overcoming overspending, and how to avoid arguing about money because we’re going to communicate. What’s your advice to the audience if they experience a setback and if they experience a win?

Newcomb: Yeah, so whenever you experience a win, even if it’s just that you’ve always argued when it comes to money and this time you just had a conversation. You know? You just talked about what was money like for you growing up and you learned a little bit. Stop there, take that win, and walk away because what you found is that you don’t always argue when it comes to money. Now there’s at least one time that you didn’t, and the more that you build that up, it will strengthen your relationship. It will make it easier to talk about. You can’t necessarily dive into the deep end and expect for it all to work out just because you’ve learned that there’s some emotional things happening here. I think when you have a win, savor it. We tend to hold on to the negative more than the positive. And when you have a setback, you’ve got to let it go. It is so normal. Behavior change takes time, especially if you’re trying to communicate with another person. It will not happen overnight. But baby steps do lead us where we want to go.

Hampton: Thanks, Sarah, for sharing advice. Much needed advice on how to reset our money priorities in the new year.

Newcomb: Thank you.

Hampton: That was Part 2 of Create a New Financial Plan for the New Year with Morningstar, Inc.’s director of financial psychology, Sarah Newcomb. Be sure to check out Part 1 if you missed it. Thanks to Sarah for providing financial tips like how to reframe how we think and talk about money. I’m thanking podcast producer Jake Vankersen for his hard work. And thanks to all of you for tuning into this special episode of Investing Insights. Subscribe to Morningstar’s YouTube channel for videos about investment ideas, market news, and personal finance. I’m your host, Ivanna Hampton. I’m a senior multimedia editor here at Morningstar. Take care.

Read about topics from this episode.

Hate Budgeting? Try Rethinking It.

Got the Urge to Splurge? 4 Steps to Overcome Your Overspending Habit

How to Avoid Arguing Over Money By Sarah Newcomb