The Magic of Personal Finance is that there is No Magic

I wanted to talk a little bit today about illusions and our brain. No doubt most of you are familiar with magic. We call falling in love with the right person magic. We think of good fortune as magical. Yet, magic is based on three key principles and these are best illustrated with the simplicity of a card trick.

Although I am not a magician I do know that every kind of magic hinges on the ability of the magician to create something your brain wants to believe. And this precarious attempt to fool you depends on you wanting to be fooled. In fact, every magic trick is based on this belief: that the magician can fool you. But noted magician Penn Julliette of Penn and Teller fame also is quick to point out that any sort of illusion, designed to fool the brain is a disaster waiting to happen. Surprisingly, attitude has everything to do with the success of any trick – not you attitude, but that of the magician.

Mr. Julliette explains that in a simple card trick, the key is for the magician to act as if he doesn’t care. He could care less whether or how much you shuffle the deck and his attitude portrays exactly that. Then, when you return the deck of newly shuffled cards to the magician, he or she then offers you a card, any card. You do and this also doesn’t matter. But where you put the card upon returning it after memorizing of course, it does.

Now the magician’s job isn’t finished. He or she does care where you put the card and uses any number of techniques to get the card back to the top of the deck. But your brain believes that it has controlled everything up until this point. In effect, the unwilling suspension of disbelief has taken over our thought processes. Even when the magician offers to have you re-shuffle the deck, you won’t.

Now I have been writing about the state of personal finance for over thirteen years. Which means I have spent a great deal of time with people who are looking to achieve the same financial success in their post-work life as they may have in their pre-retirement life. But our brains are working and I fear that we aren’t doing a very good job talking to those brains.

As financial educators, we are well aware of what the people we focus on do with the information we have. In fact, most of us find some sort of information, latch on to it and actually look for confirmation of that thought. In 2007, researchers at the University of California – San Diego found that once we expose ourselves to information, it becomes an acquired memory. Not permanent mind you. Your brain doesn’t work that way. Instead it seeks out information that permanently fixes it in our heads. This is what brain folks call spaced repetition. Given the right info your brain performs impressively. Given the wrong information, and your brain still performs impressively.

Another bit of research points to what is called retrieval. Seems your brain performs better if the memory you have stored there is pulled and examined. Each time we do, the memory gains some importance. We as financial people fail here as well. We do make those we deal with think about what they want and how they think it should be once they get it. But inevitably, we add to the problem by giving them something they hadn’t considered. The memory of what we thought we knew is still there. But now we have something else to remember.

The last problem we encounter is as financial educators is the act of dumbing down. We fail to do what some educators have found is the most important of functions: interleaving. We try to explain things in so simplistic a way that we actually confuse more than teach. We tend to piecemeal our lessons, a bit about debt here, something about insurance there and perhaps a little estate planning antidote thrown in for good measure. Yet we define them as parts of a whole instead of a whole. They are intertwined and we make the mistake of suggesting all too often that they are somehow pieces to be taken at their own worth, an approach that doesn’t seem to help according to the journal Applied Cognitive Psychology. Those we are hoping to help, according to this august publication would do better if we lumped it all together, somehow tying it up in a neat bundle of problems and issues instead of giving the whole process a linear feel. It can’t be helped in books, as as any editor or writer knows. One thing needs to lead to another.

And far too often, we break that linear explanation of money into something like this: hope, fear and confidence.

Unfortunately, hope for something better is dashed by the fear of what we don't know and ultimately, your confidence begins to wane. This is problematic for anyone who attempts to try and describe what they know, How do you parse the necessary information amongst the thousands of messages out there and make it meaningful across all readers?

Perhaps boiling it down, removing the illusions, forgetting the magic might work. Personal finance is no magic trick. It involves challenging what you know; not simply believing what you need to know. You need to save and invest and yet, even as you commit to those hopes, you are challenged by what you hear and this creates fear. Fear that perhaps you haven't done all you could do. Perhaps confidence stems from doing what you can with what you have to achieve what you are capable of. Lofty goal setting aside, you are the magician looking at the trick. Tell yourself what the magician tells you.

You are probably better off than you realized. You are probably capable of fixing the small things which in turn lead to the bigger solutions for the problem. Be the magician against the markets. All you need to know is how to your card on top.

Retirement Planning and the Disgruntled Worker

You will be able to pick them out much easier in the coming months. You will see them with disappointed looks on their faces, trudging through their day wondering if they will ever be able to retire. Not just because they haven’t saved enough. Some of these folks have and were fully prepared to quit their day job in favor of a new life after work. Instead the angst they wear on their shirt sleeves is because they underestimated the volatility of the equity markets and over estimated the value of their homes.

The latest release form the Employee Benefit Research Institute portrayed an American worker who has lost confidence in their ability to save enough to retire. According to the report, “The percentage of workers very confident about having enough money for a comfortable retirement decreased sharply, from 27 percent in 2007 to 18 percent in 2008, the biggest one-year drop in the 18-year history of the survey. Retiree confidence in having a financially secure retirement also decreased, from 41 percent to 29 percent, a drop of 12 percentage points. Decreases in confidence occurred across all age groups and income levels but was particularly acute among younger workers and those with lower income.”



Those that had already retired, also part of the survey were just as concerned as though who seem to be putting off their plans until the markets recover. Among those 54 percent told the surveyors that they left the workforce because of health problems or disability. What incomes they received from pensions and savings was largely eaten up by expenses, with 44% of those who responded telling that they spent “more than expected on health care expenses”.

Once retired, the primary concern is not outlasting your savings. It is what we focus on, mostly in the abstract while we are working. But once we leave the workforce, those concerns become very real. The EBRI found that “More than half of retirees (54%) say they are now more concerned about their financial future than they were right after they retired, a 14 percentage- point increase from a year ago (40 percent in 2007)”.

While health concerns both while working and retired have deeply impacted this confidence indicator, the real day-to-day expenses have begun to erode the average workers ability to save for retirement.

Cost of living wage increases have all but ceased, with number showing that over the last seven years, the average worker has lost one percent in the category of take home pay. Premiums for health insurance, while workers were still employed have grown by an average of 6% and those number look to increase. Couple that with wage stagnation and you can see why some workers feel as though they were moving in reverse.



The housing crisis has shaken many people to the core, even if they are confident that they are well positioned with their mortgages. Even if your debt level is manageable, the economy will make its downtrodden presence known to even you. Fuel costs will make an ever-increasing impact. Inflation will erode not only your current dollar but future ones as well. And if the economy seems bad now, wait until the job market begins to deteriorate as the credit markets continue to tremble with fear. That fear is very real. Creditors wonder, almost out loud, will they get paid back?

One bright spot: those fears seem to lessen with income. The fewer dollars you gross, the report seems to indicate, the lesser the chances are you are worried about retirement. Perhaps that is because you may never know what retirement is.