AS WE MANAGE OUR financial life, we’re compelled to cope with heaps of uncertainty—which way the stock and bond markets will head, what financial misfortunes will strike, how long we’ll live and so much more.
But there are also ways we can exert a measure of control: spend thoughtfully, save diligently, keep a close eye on risk, hold down investment costs and manage our annual tax bill. To this list, I’d add one other key way to reclaim the advantage: have a good handle on who we are.
To that end, below are nine questions I believe we should all try to answer for ourselves. As you’ll see, the questions often probe the same issues but from different angles.
1. What does money mean to you? There are all kinds of possible answers: security, control, freedom, power. If you have a good grasp on your overriding financial motivation—and not just specific goals like retiring early or amassing $1 million—you’re likely to better understand why you make the decisions you do.
2. Are you more concerned with getting rich or not being poor? This is less an either-or answer and more about figuring out how much weight you put on each. Even if your overwhelming desire is to grow wealthy or avoid poverty, that doesn’t mean that wish should always guide your behavior. Instead, you should ask whether your intense focus is leaving you open to financial peril, such as carrying too little insurance because you’re so oblivious to risk or investing too conservatively because you’re so concerned about losses.
3. What’s your investment risk tolerance? This is obviously related to the prior question. The big problem: Risk tolerance isn’t stable, instead rising and falling with the financial markets. Still, this is a great time to ponder the issue, while 2022’s stock and bond market slump are fresh in our memories. In reaction to last year’s plunging markets, did you sell, sit tight or buy more?
Your behavior is likely the best indicator of your true risk tolerance, and it should guide your mix of stocks and conservative investments in the years ahead, even if recovering markets tempt you to take more risk. My suggestion: Think of your portfolio as two parts, one offering downside protection and the other giving you upside potential. How much safe money do you need so you feel comfortable with that portion of your portfolio that’s at risk of steep short-term losses?
4. What’s your personality type? Psychologists have identified five key personality traits: extraversion, conscientiousness, agreeableness, neuroticism and openness to experiences. We all have these traits in varying degrees.
Where do you stand? Fortunately, there are free online quizzes available where you can get the answer—and knowing the results may help to improve your money management. For instance, a 2023 study found that personality was useful in explaining folks’ willingness to invest in stocks, while a 2022 study uncovered a link between personality and those who are self-made millionaires.
For a different, more specifically financial lens on the same issue, check out the money scripts developed by Ted and Brad Klontz. As you do, think about how your past—especially the way you were raised—influences your behavior today. Just as many HumbleDollar readers likely score high on “conscientiousness” in the personality tests, I suspect many will identify as “money vigilant” among the four money scripts.
5. What behavioral mistakes do you make? When psychologists look at personality and behavior, they tend to take a bottom-up approach, focusing on the individual and his or her unique characteristics. By contrast, economists tend to be top-down, often analyzing large data sets as they look for commonalities that explain the behavior of a wide swath of the population.
For instance, economists have identified a slew of biases that influence our financial behavior. Which behavioral finance pitfalls do you fall into? You might peruse Greg Spears’s comprehensive list.
The same top-down view comes into play when economists look at happiness: They’re less focused on what makes any one individual happy or unhappy, and instead try to identify common factors that influence the life satisfaction of a large portion of the population. You can read about some of those factors in this article. Ask yourself: Are your actions hurting your happiness?
6. What are your bad habits? We all have weaknesses as well as strengths. That’s just the way humans are. Are your weaknesses—perhaps spending too much, eating or drinking too much, failing to exercise—threatening your future? If so, you should look for ways to combat your weaknesses by developing better habits. That’s not easy to do. But both Rick Connor and Dana Ferris recently offered some intriguing suggestions.
7. What do you value? Rather than simply articulate what you think you care about most, examine the way you use money, especially your discretionary spending. How do you divvy up those spare dollars among savings, purchasing possessions, buying experiences, giving to family and donating to charity?
Let’s say you save heavily. That suggests a concern with financial security. Meanwhile, if you devote hefty sums to buying experiences, that might indicate a greater curiosity about the world, and perhaps a desire to spend more time with others.
8. What gives your life purpose? What will give it purpose in the future? This can provide the motivation to make financial sacrifices today. It’s also an important issue as we approach retirement and ponder how we’ll use our remaining time. Mike Drak recently wrote about the Japanese notion of ikigai and how you can use it to identify your life’s purpose.
9. If you had five years to live, what would you change about your life? This is one of three questions posed by George Kinder, a founder of the life planning movement. I find it a powerful question because it forces us to consider whether we’re devoting our time to the things that matter most to us—which, if you’re like me, would include friends, family and pastimes you’re passionate about.