Financial Therapy

Financial Therapy is required to address the epidemic of irrational behaviors in financial decision-making. This occurs at what can be described as the individual, the personal or micro level. This also occurs at the corporate, the government and the international or macro level.
As Personal finances have been a taboo topic until now, all that can be put forward to define Financial Therapy is a “fill in” framework to address the need that the concept identifies. "This vocabulary void exhausts our energy. Witness all the jabber over “life planning,” “financial planning done right,” “financial life planning,” “interior finance,” “financial therapy” and “financial coaching.” These ideas all stand as proxies for different approaches to our personal relationships with money, yet none actually communicates succinctly or effectively."
The framework uses the Big 3 tools of Personal finance to guide the decision making process. The Big 3 includes a Life Plan, a Personal Budget and a Personal Balance Sheet. The Plan addresses the financial facets of life plus the notions of what makes life worth living: Marriage, Children, Health, Jobs, Family, and relationships with others. Goals are set in short, medium and long-term time frames. A budget is used to manage cash flow and a Balance Sheet is used to manage assets and liabilities with goal of managing money to achieve the short, medium and long-term goals set in the Plan.
Therapy implies that there are actions to be taken to either heal a wound or injury or to prevent a wound or an injury. There are active techniques that can be used to heal injuries such as too much debt and there are proactive techniques that can be used to prevent injuries and promote financial health . The goal is to train clients to manage their money sanely and rationally without bias. The Path to Financial Literacy is through Financial Therapy.
Origins

The Canadian Task Force on Financial Literacy has identified that there are at least 6 more countries and the OECD searching for the key to making financial decision making more rational and rational financial decision making more of the norm than it is presently. Behavioral Economics makes some contributions but generally equate emotions with stupidity and irrationality. They contribute little to the dilemma of Main Street. Business is psychopathic in its nature and seems to contribute little to the dilemma of Main Street. Up until now there were very few people interested in financial therapy.
The Motivational Speaker Industry could be identified as the birth place of Financial Therapy. Pioneers of the industry like Norman Vincent Peale taught folks how to shape their behavior to achieve success. Financial success was often the focus but this industry made the link that financial success depended on executing a complete life success strategy. Only a few were direct about the need to physically make a life goals plan of some description. Most have a spiritual background to their teachings and motivation. Religion therefore gave clients the total life perspective for success. This is an industry and it is based on making money. The core of the industry is marketing courses that can cost thousands and tens of thousands of dollars. It thus evolved to service those who had money to find the key to making more money and having a more successful life.
Discussion
There is a lot of buzz about Financial Therapy by any name. It is Financial Coaching, Financial Literacy, Behavioral Economics or articles calling for “Better Words”. The concept starts with the fact that money operates in very rational and defined ways. Money is about numbers. Math is logic. When you put human behavior together with money, the result is anything but predictable. Obviously we need to look at human psychology to get some insight into what is going on and how to address it. But what are we looking for. We know that some humans can operate money sanely and rationally. What is the connection?
The Connection Between Money and Rational Man
The Connection is where “rational man” interacts with the ever rational money.
Money is Rational
Money operates in very set and logical patterns. It has many laws and rules.
*The Kiss rule of business… Keep it simple stupid .
*The Rule of 72 for compounding interest.
*The Don’t Lose your working capital Rule
*The a Fool and his money are soon parted Rule
*The Seven Laws of Money
To get through to the rational part of the majority of people you need to take a look at the chart that measures their capacity for rationality which is intellectual power over actions. Yes the IQ chart. 81.8% of the population has an IQ between 70 and 115. In our Ivory towers of education, our intellectuals live in a world where rational is king over on the right side where there is 2% of the population. I have had enough interaction to know that they will not connect with that 82% portion of the population. Money is like , we are all created equal but some of us are more equal than others. To keep communication lines open we need to look to the first law of business otherwise know as the Kiss law of business. Keep it simple stupid . So our Framework will be simple.
Freudian Psychology

Freudian Psychology offers some insight into our rational man. Freud outlined that we have 3 facets to our personality… The Id, the Ego and the Superego. The Id represents our genetically hard wired behavior. The Ego is the influence of parental and society’s nurturing or lack of. The Superego is our rational self. We grow into a being that can weigh out his gifts from nature, his training and his own independent judgments when making a decision on how to choose when decision need to be made. So our Framework must be a way to aid to our Superegos to connect with the rational machinations of money.
Developmental Psychology
Developmental Psychology tells us that our temperament and emotions are set by the time that we are 5 years old. We all act like kids in a sandbox if we depend on our emotions. However our capacity to be rational does come with maturity. Any emotion counselor will tell you that you cannot expect the rational part of your personality to take prime position over behavioral control until you are 35 to 45 years old. The Navajo Indians say a man does not reach full maturity until the age of 52. Up till that time our hormones and our emotions rule unless you have had exceptional parenting and mentoring. So our Framework must allow for patience and aim at those who have the capacity to hear our counsel.
Cognitive Psychology
Cognitive Psychology lets us know the enormous task we are facing in trying to get through the hormones and emotions. To make up for us being so limited, our brain has hardwired us to lie to ourselves. There is a list of 106 variations of how we will lie to our selves (aka cognitive biases) about how competent we are at financial management. These include the “Ostrich Effect”, the “Halo Effect”, the “Bandwagon Effect” and the “I knew it all along Effect”. So our Framework must be so simple and so clear that it cuts right through the nonsense that we tell ourselves to protect our own self esteem.
Clinical Psychology
Clinical Psychology identifies that there are some disorders that are beyond lies designed to protect ones self esteem and confidence. Several disorders are being discussed as potential candidates for being elevated to the full status of Psychological disorders. One example that I think is obvious is CBD…Compulsive Buying Disorder . Addictions also fall into this category. Whether one can be completely rehabilitated is still under research and discussion. Our Framework would refer challenges of this magnitude to those who are trained to address these problems first. Financial therapy could certainly be part of such programs.
The Framework for Financial Therapy
Your personal finances can be explained very simply with the perspective gained by using the 3 “Major” tools in the financial toolbox. These 3 tools are your life plan… your budget… and your balance sheet . Your life plan gives you direction and allows you to prioritize your goals. Your budget gives you a tool to understand where your income is coming from and where it is going to. You can see whether it is helping you achieve your goals or if you need to rethink how you spend your money on a day to day basis to make your goals achievable. Your balance sheet let’s you know if you are building wealth or digging a financial hole. The health of your balance sheet is very important for allowing the acheivement of your long term goals.
Life Goal Plan
If you take your life plan table and fill it out, you should have an idea of who you are and what you want from life. Once you set a goal, you can achieve it sooner than you ever expected. Focus is very important. If you don’t know what you want you just thrash around. That’s not living.
If you have a life plan filled out you will know what you want in the short term, medium term and the long term. When you are looking at the implications of using a tool you can ask yourself whether it helps you achieve the short, medium and long term goals that you have set out in all aspects of your life. Sometimes it is a matter of working with the tool to make it fit what you have set for your goals. Sometimes it is a matter that it is the wrong tool to achieve your goals and you can shop the toolbox for the right one. There are so many financial tools offered these days that you do not have to settle for anything less than what will get you exactly what you want. You are bound by the limitations of the tool and by the limitations of your personal situation but as long as you have achievable goals, you should be able to find a tool to get you there.
Your Budget
Your budget is for analyzing and managing your cash flow . You make a planned budget and then you have a reality budget. In both cases the only goal that is sustainable for a budget is that you should have positive cash flow. That means that on a month to month basis you should spend less than you earn. You may have short periods where you overspend. By monitoring your budget you know when you are in this situation and you know that you must either increase your income or decrease your spending to get back to a situation where you have positive cash flow. I repeat positive cash flow is the only goal you can have for your budget.
One of the limitations is whether you have room in your budget to pay for everything you want on a day to day…month to month basis. It may mean prioritizing your goals or making some wait in the longer term goals so that you can get more pressing goals paid for in the short term. Sometimes you have to realize some short term goals to make long term goals possible. Saving in the short term allows for the long term goals of home ownership and investing in the long term. The Achievement of life goals while keeping your cash flow positive is cyclical.
Your Balance Sheet
Your balance sheet keeps track of your wealth. Your net worth is the total value of your assets minus the total value of your liabilities. The first goal of your balance sheet should be that your net worth should be positive. The second goal of your balance sheet is that your net worth should be growing. It should grow like compound interest. It will be slow at first but the growth should be exponential. It will take time.
The most ignored or underestimated limitation of financial tools is how they affect your balance sheet. Debt tools are especially misunderstood for their effect on a balance sheet. Small debts can be taken care of by allocating a portion of the spending budget to paying of the debt over weeks or months. Long term debt sits on your balance sheet as a liability. If the debt is used to buy an asset, then the liability is offset by the asset and the impact on your net worth depends on a couple of things. First is whether the asset is appreciating in value or depreciating in value. The other aspect is whether you are paying down the debt or just paying the interest. Before using a debt tool you need to establish that it will help you build a positive and growing net worth. If it does not, look for a way to use the tool in a way that it does or shop for another tool that will.
Practical Financial Applications
The tools in the Financial Toolbox will be examined by how they work to help you achieve your life goals by managing your cash flow and your wealth to achieve them. On the negative side the same analysis will show you why you may not be able to achieve your goals with the way you manage your finances in your budget and balance sheet. That would mean that you will need to change your money management strategy. This means you would have to change how you spend and save money. Which is actually a positive because now you can see that your behavior must change before you can achieve your goals.
Most folks are exposed to financial tools through advertising. There is a lot of money to be made and a lot of people make their income in the financial industry. There are a couple of agendas going whenever you work with someone in the financial industry. The question is whether the transaction is going to be best for you, best for them or a nice transaction where both you and the provider of the tool get what you need. One of the major goals of this book is to show you how to use tools so that you win or at least you get a fair deal where it is a win-win situation. You need to avoid situations where you may not survive financially but the financial provider will at your expense. We do this by using the Big 3 to evaluate the perfomance of the Financial Application listed below when used to help you acheive your personal goals.
*Bank Accounts
*Insurance
*Financial planning
*Retirement planning
*Mortgages
*Credit cards
*Lines of Credit
*Payday loans
*Reverse Mortgages
*Investment Tools

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