While most of us invest in stealth mode and to some extent have developed adequate financial self-efficacy to go it alone, we don’t share this personal expedition with others. We attempt to scale and reach the pinnacle of Mt. NetWorth solo oblivious to where our personal peak is or even where it should be.
We assume that age (65) is the benchmark for retiring/doing something different, not even considering how compounding works later in life. There is no comparison because this type of expedition is private. All we hear about are the extremes, those scaling Mt. Neverest (billionaires) or those (in need) of funding to even remain afoot.
Financial self-efficacy (FSE) is a person’s belief or personal conviction in their ability to successfully handle money, manage their personal finances and achieve their financial goals. While related to financial literacy, FSE is a distinct psychological determinant that often better predicts financial behavior because it focuses on the confidence to apply financial knowledge rather than just having it.
Studies show that financial self-efficacy plays a significant role in developing the needed financial behaviors to achieve the overall financial satisfaction we strive for. We have to start somewhere to build the evidence for ourselves that we are indeed capable of being financially successful. Social learning is one of the ways in which we build efficacy expectations.
Recently, I was helping my Mom sort through some old papers and found my original savings passbooks. At 13, I had opened my first checking and savings accounts with the help of my Mom. By 17, I had accumulated over $2,100 in savings (the equivalent of $6,500 today). My brothers and I had earned money doing odd jobs before we got part-time ones. We began developing financial self-efficacy at a young age.
I remember sitting in our family car with my two brothers and one of them made an off-the-cuff remark that I always had money in the bank, which was true. That, however, does not prevent you from becoming complacent and making financial mistakes.
Some years later having just met my future husband, I was taking accounting classes at Iowa State and working at Wendy’s to stay afloat. It was back in the day when you still wrote checks even at grocery stores. I had gotten fairly good at playing the float, knowing I could write checks before my paycheck was deposited due to the length of time it took for that check to clear the bank. Until the day I bounced the check at Cub Foods.
As embarrassing as it was, at least I wasn’t publicly shamed like Jerry Seinfeld with his clown check and spelling forty incorrectly. As Kramer points out, it’s the only way you’ll learn. I never bounced a check again, but I did continue the occasional cavalier check floating until it became too risky with modern technology.
There is a song with a simple phrase of lyrics that is strikingly and descriptively true.
It’s tough to see through bullshit
When it’s up above your eyes
– Kiss it Goodbye, Nickelback
As we build our net worth, we are trekking into the clouds. Some of those clouds are truly blocking our view and we don’t know the obstacles in our way that could trip us up. The investment industry is traversed with bullshit. However, some clouds are of our own making whether we realize it or not.
In order to see the next level of the unknown, we have to step up which requires doing something new, risky or difficult. We can do this ourselves to learn it through trial and error or with the help of someone else. Really, though, who are we going to call? Financial advisors are hesitant to advise on an employment sponsored retirement plan because it isn’t one of their products nor assets under their management. Benefits Specialists will give you general resources or how to contact the plan sponsor.
So, we BS ourselves into thinking we can do this investing trek alone or at least continue at the same level. But then we become comfortable and complacent eventually getting tripped up. The mistakes happen or we miss out on a path we didn’t know about.
Since we often can’t see our own nonsensical justification for avoiding the next level, we do need the help (or shame) from others to point it out to us. It gets us to step up, metaphorically speaking, to do the hard thing. It’s why we need financial role models wherever we can find them.
Other people (trusted personal connections, not embarrassing saboteurs) weather the clouds and obstacles, downfalls and hard times. They help us locate the intellectual integrity that is needed and assure us that we are making the right decisions on the path forward. But where do we find these people that can help guide us through the investing terrain?
Home buying, we have a realtor, mortgage loan officer and sometimes an attorney to help guide us. A new job, we have a recruiter, onboarding program and others who we feel comfortable discussing the opportunity with. When we truly do get off the ground, we have TSA, baggage, ticketing and gate agents, flight crews, pilots, copilots, air traffic controllers. Investing is a completely different experience.
We are expected to begin investing with our first real job into a retirement plan that we don’t know much about, only really knowing that Social Security wasn’t ever intended to be the full plan. There is no true fiduciary out there to help us navigate into this and through it for our entire working life. We are left to our own devices. Social learning is great for helping build financial self-efficacy but is much more nuanced to effectively use for investing.
Investing shouldn’t be a solo expedition, but it essentially is.
Featured image – Point Reyes National Seashore. Photographer – Cary Wauters
Financial self-efficacy isn’t a term that is popular outside of academia. Other than academic papers, not much has been written on this concept for personal finance or more specifically, investing.
Part 3: Connection Without the Shock | LinkedIn
Why Financial Self-Efficacy Is Crucial To Financial Success
On bullshit in investing – Noahpinion
For those of you paying attention, I have changed the title on the Home page of my website a number of times over the last several months. I wanted to see how it changed my readership (I only get a total number) and unsolicited feedback. The result, people want to understand investing. Not money, not personal finance, not the technical Wall Street talk but the missing context. And that is the direction I am taking this.