Financial Turning Points: New Money, Old Habits

Written by: Morningstar

Everyone’s heard the horror stories: lottery winners who go broke a couple of years after the big jackpot, celebrities in bankruptcy court, or pro athletes who’ve squandered their millions and live on the street.

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 or small business owners whose hard work finally pays off after years of squeaking by. People who come into money need good advice to turn their money into wealth.

“They’ve never been in that situation before, and it can be quite shocking,” said Morningstar behavioral economist Sarah Newcomb, Ph.D., author of the forthcoming book Loaded: Money, Psychology, and How to Get Ahead without Leaving Your Values Behind.

To help advisors navigate new-money situations and talk about them with clients and prospects, we asked Newcomb about the psychology behind new-money behavior, and how advisors can help.

Help your clients learn to save for larger savings goals by starting to save for smaller savings goals.

“Money turns up the volume on everything,” Newcomb said. “Let’s look at someone just coming out of college. Suddenly you find yourself with a paycheck that’s bigger than you’ve ever had before, and you don’t quite know what to do. One of the biggest things to recognize is that you’re now going to have a lot more ways to either do great things or get yourself in trouble.

“If all your extra money and all your extra time during college was spent in certain ways, then just having a new job isn’t necessarily going to change the way that you’re spending money. It’s just going to give you more opportunity to spend more in the same old ways.”

For advisors, breaking down bad habits and demonstrating the need for early career long-term planning can cement client relationships and build the trust that’s crucial to every advisory relationship.

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