Disordered thinking can lead you to making foolish financial decisions

There are times, much to my wife’s frustration, when no matter what I am doing, I have to drop everything and find an answer to something that is not very important.

I know it’s not important, yet I am too distracted to do anything else until it’s answered. I call this disordered thinking.

When it comes to money, we all exhibit aspects of disordered thinking.

Many people come into our office with a dollar amount in their heads that they feel they need to amass in order to retire, feel secure or be in a position to leave something to family or charity. But focusing on a dollar amount is disordered. What is important to understand is what that dollar amount represents to you.

For example, you don’t need “x” to retire. Instead, you want to be able to live a certain way in retirement. Defining how you want to live, what flexibility you have with your spending and what changes you will consider as you age forms the basis of your retirement plan. There are many ways to get there, though, rather than through simply a lump sum of money.

Sometimes, clients will say “I want to leave my children ‘x’ when I die.” “X” is just a number. What are you really trying to do? Help them buy a home? Save for retirement? Assist with their children’s education costs? Contribute to their cash flow? If you are in a position to leave “x” someday, try to do something sooner when they can use it the most.

We often have clients who have inherited money who create their own rules around it because it was not clear what their parents’ expectations were. They end up living out those unstated objectives in life-limiting ways.

Parents who wish to be generous might laugh and say, “Well, I won’t be around to see what they do with it,” as a way to avoid talking about it. This is disordered thinking. The ghosts of the family messages survive long after the patriarch or matriarch’s passing. If you aren’t interested in prescribing what the inheritors should do, then let them know that.

Another question I often field is what do people in “x” situation do with their money? This can be disordered because sometimes the subtext to this question is often “what am I doing wrong” or “are those people happier spending/saving/giving differently than I do” or “why don’t I have what they have?” Everyone’s relationship with money is different. And since spending is what you see and wealth is what you don’t see, you can never know what someone has by how they spend.

If a client is asking the question as a way to brainstorm what is possible for them given their personal values, then it can be an interesting discussion. But if they are asking this question to compare rather than explore, it can be disordered. Many variables come into money decisions, making a template unlikely. Personal financial planning is, at its core, personal. Spend enough time in conversation to discern what makes sense for you given your unique upbringing and set of circumstances.

Disordered thinking also happens when one particular issue has a misplaced priority in your life. Sometimes the unknown can be liberating and other times you can be trying to control things that are somewhat uncontrollable. I see this often with the Minnesota residency decision. Estate and income taxes are often why clients consider leaving the state, and those taxes can be burdensome. But so can trying to make sure that you don’t spend more time in Minnesota than you do in another place.

There are obvious costs to staying in Minnesota, but there are less obvious costs to establishing residency elsewhere. We have had clients content with a move as they built new community, escaped the weather and didn’t feel like they were tethered here. We also have had clients who left solely for taxes and moved back to Minnesota because of everything they missed.

Financial decisions are never about one thing. Make sure that you notice the many important things so you can avoid disordered thinking.

Ross Levin is the founder of Accredited Investors Wealth Management in Edina. He can be reached at ross@accredited.com.