Every morning when I awaken, I wonder whether the politicians changed all the rules again.…
Inertia: The Number 1 Enemy of Personal Finance
To an investor, the main obstacles to wise investing are greed and fear. How often do people buy stock simply because they think that they are going to make a significant amount of money? Greed can make the most rational of investors act foolishly.
On the other side of the coin, panic often increases with market volatility. When fear is out of control, a portfolio can be devastated during a selling spree of irrational survival. Although greed and fear can be detrimental to an investor, it is inertia that serves as the real enemy of personal finance investing.
Inertia in Investing
Inertia is defined as “a tendency to do nothing or to remain unchanged.” Inertia often is the culprit as to why those, who earnestly want to make changes to their personal financial situations, end up doing nothing.
The reason for this inertia can range from a lack of urgency and a negative emotional response to the change to confusion from various financial opinions and an unconscious desire to self-sabotage, financially speaking.
How an Advisor Can Help
A professional financial advisor must counsel his or her clients to help them overcome these inertia-related obstacles and advise them as to the best financial steps to take. For years, the financial services industry has been geared toward selling products for commissions. If a transition in the industry to client-centered professional advice is to occur, these former sales skills need to be directed towards communicating sound fiduciary advice.
Inertia in Estate Planning
Inertia is often to blame for why many individuals delay in the preparation of their estate documents. Consider the aforementioned root causes of inertia. Most people do not feel an urgency to initiate the preparation of estate documents. Plus, estate planning can invoke thoughts and emotions that the average person would prefer to avoid (who wants to spend time thinking about the potential orphanage of their children?).
Yet, the simple preparation of a few pieces of paper can make all the difference in protecting those you love if—God forbid—your untimely death should occur. Knowing that you have chosen a loving guardian and have set aside protected funds to support your guardian in the raising of your children can ease any troubled mind.
Inertia in Savings
Inertia also serves as a deterrent to opening an online savings account. So many people have thousands of dollars sitting in brick-and-mortar banks that pay almost nothing in interest. Virtual FDIC-insured banks, which pay upward of 2–2.5% on savings/money market funds and 0.2–1% on average checking account balances, are popping up every day.
A person with $50,000 savings in a brick-and-mortar savings account that yields 0.01% per year (i.e., $5/year) can transfer those funds to an online savings account that yields 2.4% per year (i.e., $1,200/year).
This sounds like a simple, sound financial decision, but many people will not open an online account because of fear—for example, fear of a virtual (instead of a physical) bank, fear of online attacks, fear of moving away from a bank that they have used for years, or fear of unforeseen complications. Such fears are valid, yet none of these fears stand the test of logic.
I, personally, am 62 years old, and for over 12 years, I’ve used only online bank accounts with no problem—online accounts are not just for the young and tech savvy!
When opening an online savings account, if you prefer, you can establish an automated clearing house connection back to your brick-and-mortar checking account so that direct deposits, bill pays, and automatic withdrawals do not need to be altered.
Inertia in Fiduciary Relationships
Inertia can present itself as a roadblock with regard to other financial-related matters, such as increasing your 401(k) contributions, paying down debt, refinancing your home, dropping life insurance policies that are no longer needed, canceling employer benefit choices that are inappropriate, etc.
There is still one particular financial-related decision that is logical but may require extra incentive to change: leaving a stockbroker or insurance agent who you like but who serves as more of a salesperson instead of as a fiduciary who is working in your best interest.
Certain stockbrokers or insurance agents are not trained or credentialed in all areas of comprehensive personal finance and should be working independently of insurance companies, brokerage firms, and banks. Professional financial advisors should not be willing to take commissions, should be educated and credentialed, and should serve as a fiduciary (i.e., work to serve your individual best interests at all times).
The vast majority of people have advisors who do not fulfill most or all of these criteria, but an established rapport or collaborative relationship with their advisors spurn the feeling of inertia. It is unfortunate that the financial services industry has realized the staying power of a friendship between clients and financial advisors and has trained their representatives on how to foster a convivial relationship to maintain client control.
To avoid such a manipulative scenario, it would be wise to search for a professional financial advisor who fulfills all of the aforementioned criteria. The best place to start is by searching for an advisor via The National Association of Personal Financial Advisors (NAPFA), which is the only organization that requires such high standards for its members.
Financial Consulate aims to help lessen the worry and burden of wealth management and enhance financial wellness so our clients can pursue relationships and true fulfillment. Choose the professionals at Financial Consulate as your Certified Financial Planners™ (CFP®) to take advantage of our educational, ethical approach to financial planning. Our services are comprehensive, including tax planning, investment planning, retirement planning, estate planning, and more. We operate completely independently and offer fee-only services to keep your vision in line with our recommendations at all times. While we have offices in Hunt Valley, Maryland, Fernandina Beach, Florida, and Gettysburg, Pennsylvania, we serve clients across the nation. To begin your partnership with a trustworthy wealth advisor, please contact Financial Consulate today.