Step 1: The Launch Point
Begin by answering the following questions to evaluate your current financial situation. Use your own words. Your answers can be as short or as long as you wish. These questions are designed to recall your experiences and viewpoints, so they will be top of mind in the subsequent steps. These questions will also help you identify areas where you feel confident, and uncover those that require more attention. The answers you provide will ultimately lead to the development of your PEVs.
I feel best about my finances when…
My first memory of money was when…
If I die, my financial affairs are…
The current state of my investments is…
The money I’ve borrowed is…
The professionals that I enjoy working with are…
The characters that I don’t want to deal with are…
The one piece of advice that I could use right now is…
The actions/processes I can delegate are…
I should stop spending on…
I want to learn more about…
I am most proud of my…
What keeps me up at night is…
Step 2: How Do You See Yourself?
Use the following space to list what you want to have in your life. These can be assets, adventures, experiences, or a way of living. For example, you may want to achieve a master’s degree, run a marathon, or build a business. Experiences may include hiking the Himalayas, having grandchildren, or winning an award. You may want to acquire a family vacation property, an art collection, or a 26-foot catamaran.
Identifying what you want to have in your life will promote thinking about your future and set the stage for the financial resources you’ll need to execute these objectives. Your intentions and life-objectives will determine the actions to take in the activities to follow.
Over my lifetime, I would like to achieve:
The adventures and experiences that I would like to have:
Assets that I would like to acquire over my lifetime:
Step 3: What Are Your Financial Skills?
A skill is an ability in which you have developed knowledge, experience, or proficiency. Everyone has varying degrees of knowledge and experience in managing money. You may acquire skills from formal education or everyday life. For example, as a long-time union worker, you may have a good understanding of how your pension plan works.
List the skills that apply to managing the various aspects of your finances, in which you have a high comfort level. Possible skills include budgeting, investment decisions, haggling, shopping, saving, financial planning, portfolio management, tax strategies, investment analysis, debt reduction, tax filing, and negotiations. There is no limit to the number of skills you may include on your list. Focus on the most useful financial skills that you have rather than compiling an exhaustive list.
Estimate your degree of comfort executing each skill you identify by circling whether you are knowledgeable, experienced, or proficient.
The third step is to clarify how you apply each skill in your daily life. For example, you may list investment decision-making as one of your skills, and circle “experienced” and “knowledgeable.” In the description, you might clarify that you are able to assess your risk tolerance and investment performance accurately but prefer to have an advisor manage the daily investment decisions. Others might state that they enjoy making their own investment decisions.
By identifying your strengths, you can determine which roles you are willing to manage directly and which areas you prefer to engage outside resources or support.
Skill #1: __________________
Skill #2: __________________
Skill #3: __________________
Skill #4: __________________
Step 4: What Are Your Beliefs About Money?
Values are relatively permanent beliefs about what is critical, worthy, or just. Opinions are an invisible force that can influence your actions. Determining what you value will help you execute choices consistent with what you stand for and what you want to achieve. Your interpretation of values may not be the same as someone else’s, and you may desire certain values more than others.
In this step, provide at least one value from each category of financial, saving, spending, and investing values. Limit the number of values you list to no more than three, focusing on those that are of primary importance to you.
Possible financial values include career, education, security, passive income, profit, trust, family, or balance.
Possible savings values include consistency, regularity, maximization, passive income, blue-chip, conservative, or active.
Possible spending values include generosity, frugality, leverage, worth, minimalism, essentialism, luxury, quality, name-brand, or discount.
Possible investing values include accuracy, active, transparency, quality, tax-sensitivity, innovation, social-minded, hedging, diversification, momentum, value, growth, risk-free, inflation protection, environmentally sensitive, stable, or cost-sensitive.
Values: Green living
Description: I believe that the essential factor in living life, running a business, and choosing an investment is the environmental impact that I’m making.
Values: Quality purchases
Description: I prefer to spend more on something that is made well and of higher quality, knowing that it will last longer.
Values: Conservative investing
Description: I am not a risk-taker and prefer to know that my savings will be there in the morning, even if that means that I only earn a small return.
Step 5: Understanding your Risk Thresholds
Most people tend to accept a game of chance when the reward is roughly double the wager. Most people also appreciate the value of a gain about half as much as they regret the same quantity lost. We also know that your appetite for risk is affected by what has recently happened in your life. After a recent win, you may be influenced by the house money effect, or in the case of a loss, you may be inclined to increase your risk, especially when you believe that there’s an opportunity to regain the loss. Refer to Chapter 2 and review the desire to control risk, the follies of relying on intuition, and how people can feel compelled to increase their risk at the wrong time.
People generally view themselves within a consistent risk-framework, and categorize themselves as low, medium, or high risk-takers. Understanding your general risk tolerance helps to determine the types of investments that are suitable, which then determines the expected level of variable returns you can anticipate. It is vital to consider the impact of loss aversion on your outlook, and to think about how your choices may be influenced by your experiences. Once you understand your comfort level, you can establish barriers to avoid biased decisions that do not reflect your PEVs.
For the purpose of this discussion, we use the term risk to describe variability and volatility, rather than permanent loss of capital. The measures below are intended to reflect typical long-run market fluctuations, rather than extreme events. These can provide general guidelines to assess your tolerance for volatility and variability. Circle the most relevant level from the five categories below. Then, provide any additional comments to describe your willingness to accept risk or your discomfort with risk in your own words.
0% volatility: I don’t expect the value of my assets to increase. My primary goal is to know my money will be there when I need it.
0–5% volatility: I can better protect my purchasing power over the long run by having some variability, but I prefer that most of my investments are reasonably stable.
5–10% volatility: Balance is an ideal mix for me. I understand market-traded assets fluctuate, but that by diversifying my holdings will limit volatility. Also, reinvesting recurring income produced by my investments and selecting higher-quality investments is expected to keep volatility lower than the broad investment market.
10–20% volatility: I want to earn as much or more than the broad stock market. I cannot tolerate mediocre returns, but I can’t afford to throw caution to the wind, either.
20%+ volatility: I don’t mind taking a chance if the wins are big. I don’t have daily financial issues to worry about, so I can afford to take chances and I’m rarely rattled.
Step 6: What is Holding You Back?
Bias results from thinking shortcuts that you use in everyday choices. People also rely on rules of thumb in decision-making, based on past successes and mistakes that they vow never to repeat. Everyone is susceptible to interference from bias that can undermine the intended financial outcome. You may notice that certain biases are more influential in your life than others. Identifying which behaviors interfere in your financial decisions most often can help you to focus on the most critical habits for you to adopt.
List the three or four decisions that come to mind, made in the heat of the moment, that you later regretted. Then, describe what led up to those choices and your decision process. For convenience, you may want to skim through the various biases in the first three chapters to refresh your memory of typical scenarios that can cause unintended financial outcomes. Lastly, consider which steps you can take or habits you can adopt to avoid those situations. After reading the next chapter on adopting unbiased habits, feel free to come back to this step and add any habits that address your most critical issues, and can be easily integrated into your plan.
Bias: Overtrading/Loss Aversion
Description: I check my investments every morning, especially when markets are volatile. I feel anxious when asset values drop and try to reduce my risk by selling when that happens.
Habit to adopt: I will keep a written log of my decisions, describing my rationale and how long I expect to hold the position to remind me of my long-term strategy.
Bias: Disposition Effect/Selling the winners
Description: I feel terrible about the stocks in my account that have dropped, and I can’t bring myself to sell them at a loss. I feel good about the ones that rise, so I have no problem selling those!
Habit to adopt: On my regular portfolio review date, I will sell stocks that are no longer suitable or do not offer prospects of growth, regardless of their current price relative to my purchase price.
Habit to adopt: I will
Habit to adopt: I will
Habit to adopt: I will
Step 7: The Key Ingredient
Think about where you are in your life and the answers you provided in the proceeding steps. The following question will help to focus your attention on how best to improve your financial situation right now. This may be a habit to integrate, a task to accomplish, or something that you wish to have, experience, or learn.
Don’t be tempted to compile an exhaustive list. The less complicated your answer, the more likely you’ll achieve it. The point of this step is to put the most amount of effort into the single-most critical aspect of your financial affairs. If this is the only course of action you take, it will be a rewarding step.
What single accomplishment would most positively impact your financial status over the next 12 months?
Step 8: Bringing It All Together: Your Personal Economic Values
Your particular personal economic values can be summarized by a statement you create and refer to at important inflection points throughout your life. It aligns the vision of your life’s priorities with how you will execute your key goals. It is built around your strengths, and can be used to structure how you make financial decisions. It is also a reminder to focus on the key objectives that are most important to you when you’re faced with unpredictable circumstances.
Your PEV statement will prepare you to avoid the decisions that negatively impact your financial well-being. With it, you’ll be armed with the confidence that your decisions are leading you in the right direction. It should be meaningful, yet relatively brief. You can print it out on a piece of paper, frame it on your desk at home or in your office, or keep a copy where you keep important financial documents. This is a reminder of your purpose and the habits within your control to move your objectives forward.
Below are suggestions to get you started. Writing a PEV statement may seem daunting at first, but once you get started, you’ll find it comes naturally. Also, remember that you can change it whenever you like, and writing an imperfect statement is better than writing nothing at all (status quo bias).
To begin, complete the following statement. Consider your list of your critical values from Step 4, your risk appetite from Step 5, and your key goals from Step 2.
I will (action) for (audience) by (doing something) to (achievement).
You may also wish to use your own free-form statement or adapt any of these:
I believe that a successful life …
To achieve my priorities, I will…
I am confident that I …
When financial decisions are challenging, I can consistently rely on…