What Your Financial Planner Secretly Thinks About You

What does a financial planner do

If you’re like many people, you probably have a bad money habit or two hidden up your sleeve or within your portfolio. We rounded up five of the most common money mistakes and asked financial planners what they think when they identify each, along with what steps a saver or investor can take to overcome these self-sabotaging money patterns.

Bad Money Habit No. 1: Overspending

It’s easy to overspend on food, clothing and housing, particularly if you reside in an expensive city. Even so, those who can’t get a handle on their budget are at risk for increased debt, decreased savings and inefficient retirement planning.

What your financial planner is thinking:

“There is no judgment on my part,” said Dominique Broadway, CEO and financial planner at Finances Demystified, which provides personal finance coaching and financial capability solutions. She even admitted she once had this bad money habit herself. “But, I immediately understand the issue and can identify the type of lifestyle they live and how it will need to change in order to fix this habit.”

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What does a financial planner do when she identifies this pattern? Broadway uses her personal experience as an overspender to relate to her clients. She doesn’t want others to feel isolated and assume they’re the only ones trying to break free from this habit. Broadway works with her clients to create a realistic strategy to overcome overspending.

Financial advice:

The first step to building a solid money management strategy is to identify spending triggers, said Broadway. “It can be people, locations or even certain feelings that cause them to overspend,” she said. Once a client can understand what activates the impulse to overspend, it becomes much easier to avoid those triggers.

Related: 5 Signs You Have a Spending Problem

Bad Money Habit No. 2: Living Paycheck-to-Paycheck

“Clients who spend everything they earn run the gamut from recent college grads to high earners,” said Stephanie Genkin, a certified financial planner (CFP) located in Brooklyn, N.Y. “It’s a matter of behavior and not being mindful rather than income.”

What your financial planner is thinking:

“The first thing I think is: we need to fix this,” said Genkin. Fortunately, the fix can be as easy as automating savings directly from one’s paycheck. Financial planning decisions become much simpler once an automatic strategy is set in place to distribute your money exactly where it needs to go each month.

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Financial advice:

If you’re burning through your paycheck too fast, Genkin suggests this first step: automate a small percentage of your paycheck to a savings account for rainy days and emergencies. “By automating the savings, clients don’t have to think about it, and then they can continue to live on the rest,” she said. This works best when you keep those funds at a separate bank, particularly an online institution. “It’s there when you need it, but it’s more difficult to raid on a whim,” she said.

Genkin also tells her clients that without three-to-six months’ worth of reserves in a bank or money market account, it’s easy to fall victim to high-interest credit card debt when money gets tight.

Bad Money Habit No. 3: Investment Product Overlap

“I can’t tell you how often I get handed five statements for five different accounts, and the investments are identical in identical proportions,” said Jason Lina, chartered financial analyst (CFA) and CFP at Resource Planning Group, a fee-only registered investment advisory firm in Atlanta. A couple might come to Lina with statements for a joint brokerage, separate individual retirement accounts (IRAs) and even a couple of Roth IRAs — and each individual account will be allocated the exact same way.

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This money mistake comes with increased upfront sales costs “since you’re buying the same position five times and selling it five times, maybe to the broker’s benefit,” said Lina, as well as “significantly higher taxes since you’re ignoring the different tax characteristics of the investment accounts.”

What your financial planner is thinking:

“When I see this situation, I immediately know they’re working with an advisor,” said Lina. “No individual investor replicates investments across accounts.”  He added, “I know the advisor is either being apathetic or has simply failed to invest in resources to effectively take care of smaller clients.”

Meanwhile, an appropriate asset allocation strategy can go a long way toward improving the aspects of an investment portfolio that’s within an investor’s control.

Financial advice:

What does a financial advisor do when he identifies this common money mistake? “The prudent approach is to think of the five accounts in this example as a single portfolio and then determine where specific investments fit best,” said Lina. Lina suggests clients hold fixed income securities within a traditional IRA and save stocks or stock-heavy mutual funds for a Roth account, where earnings grow tax-free.

Building Wealth

Read: 10 Good Investments for Risk-Takers

Bad Money Habit No. 4: Carrying Credit Card Debt

Financial advisors know that one of the quickest ways to crush wealth potential is to carry a credit card balance. The power of compound interest works two ways: it can boost your investment potential over time, but it can also quickly increase your level of debt if a balance is left to languish.

What your financial planner is thinking:

Buying on credit and carrying a balance is a real wealth killer, according to David Melnyk, a financial advisor with Verus Wealth Management. Once he identifies a credit card habit, the first thing he thinks is, “How deep of a hole did they dig for themselves, and can I get them out?”

Financial advice:

When he identifies this bad money habit, Melnyk gets real with his clients. “This is what credit companies do to make their fortunes,” he tells them. “They give credit cards to people who overspend.”

Then, Melnyk does the math and shows his clients exactly how credit card interest is chipping away at their wealth potential — and what could happen if they flipped the switch and started earning compound interest through an investment vehicle instead.

Building Wealth

Next, Melnyk asks his clients, “Would you rather build your wealth to become financially free, or would you rather let your credit cards destroy your wealth and make you captive to debt?” It’s a tough lesson for many, he noted, but it’s easier than carrying crushing credit card debt for years — or even decades — to come.

Bad Money Habit No. 5: Selling When the Market Tanks

Selling at the market bottom is a sure-fire way to guarantee investment losses. Instead, staying the course, particularly through choppy waters, is the most likely path to financial success. If you’re not sure how to manage money during turbulent times, a little financial planning help can go a long way.

What your financial planner is thinking:

“Sometimes, money behaviors are deeply rooted in emotions, and that is difficult to overcome,” said Chris Chen, CFP and wealth strategist with Insight Financial Strategists. Despite a careful financial plan, sometimes client fear can overcome rational thought. “A client called today and told me that she liquidated the holdings in an IRA and bought a fixed annuity yielding 1.5 percent,” he said. The market had hit a rough patch but even so, it wasn’t the right move for her — or the right timing.

Financial advice:

Before one can change a bad money habit, they first have to identify the emotion that’s behind that habit, said Chen. “A relationship with money is rarely objective,” he said. When a client wants to sell an investment at an inappropriate time, Chen suggests a deep dive into the emotional trigger that’s prompting a client to veer from his or her pre-determined course.

Once he and his client identify the root cause of concern — often it’s panic or fear in a situation like this — it’s easier to “circle back to the initial reasons why we are invested in a certain way,” he said.

Keep reading: Dow Jones Stock Market Recovery: Help Your Stock Portfolio Survive ‘Black Monday’

Want to break your own bad money habit? Financial planning experts agree: It’s often about the emotion underneath the behavior. Understanding your behavior can help you identify the pattern, come to grips with why it developed and create a strategy to build a new financial blueprint.

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About the Author

Alaina Tweddale

Alaina Tweddale is a Philadelphia-based freelance business writer who has been writing about money for more than 15 years. Along with GOBankingRates, her work has appeared on major sites like MSN Money, Time.com, Business Insider, FOXBusiness.com, the Motley Fool, and Wise Bread.

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