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Eye on the Prize Finding success in financial planning involves a deep understanding of your goals. By Steve Lear and Lynn MacDonald
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oney is deeply personal and our experiences and environment shape our beliefs about it. How we approach investments or savings is often influenced by events during our formative years, such as the economic climate at the time. This psychological backdrop is critical in financial decisions, often creating traps that derail even the most well-intentioned plans. However, these traps can become stepping-stones for financial growth and success with awareness and the right strategies. According to the World Economic Forum, financial
literacy in the U.S. has been sitting at 48 percent for the last two years (2023-2024). These findings come from the TIAA Institute’s annual finance literacy index and they show that more than half of U.S. adults have a gap in their understanding of finances. This lack of understanding is especially glaring when it comes to understanding financial risk. Psychological Factors
Morgan Housel, author of The Psychology of Money, explains that many seemingly irrational financial behaviors become understandable when viewed
through personal history. For example, someone who grew up during a period of economic prosperity may take more risks, while someone shaped by financial hardship might be overly cautious. Understanding these influences can empower individuals and businesses to break free from unhelpful patterns and make decisions that align with their goals. Housel highlights a key opportunity: distinguishing between risk, luck, and skill in financial outcomes. By clarifying these factors, we can make smarter choices and confidently embrace opportunities. Sometimes we might get lucky in having an investment with really high returns, but that won’t happen every time. A successful investment strategy isn’t about having the highest returns, it’s about consistency. Earning decent, consistent returns over a long period of time is the biggest factor in helping money grow, thanks to the power of compounding interest. Investing takes both discipline and an ability to emotionally withstand ups and downs in the market. Most investments do not generate massive returns; most have modest returns, and many fail to produce returns. Humans tend to overestimate the likelihood of success and
Contributors ________ Steve Lear is the founding partner and a financial planner at Affiance Financial. Lynn MacDonald, Ph.D., is an associate professor of economics at St. Cloud State University.
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underestimate the likelihood of failure. Using venture capital as an example, in over 21,000 venture financings between 2004-2014, 65 percent lost money. Only 2.5 percent of investments made 10x-20x and 1 percent made more than a 20x return. “Half a percent— about 100 companies out of 21,000—earned 50x or more. That’s where the majority of the industry’s returns come from.” (Housel, 2020). If your time horizon is long enough, this risk and volatility can be viewed as a price of investing. There is an important cost to investing; being able to tolerate volatility in returns is a cost that is often overlooked but is also a standard part of a long-term investment strategy. Financial Empowerment
Housel stresses that knowing your goals and time horizon matter and they should influence how you choose your investment strategy. Be wary of trying to emulate people who might be trying to achieve different goals on a different time horizon. Pick a strategy that can help you achieve your goals and then start saving money to get there. Saving helps us manage unpredictable expenses and offers more freedom in how we use our time. Fostering financial literacy and wellness can create positive ripple effects. Employers can support employees with financial wellness programs,