Is Lifestyle Creep Impacting You?

Brad Sherman:  Today we want to discuss lifestyle creep, a big topic in the news, along balancing increasings costs, inflation, home prices, and more. We also want to talk about saving for your future and paying yourself first. Ashley, I know you wanted to talk about it being a really important balance strike, so do you want to share some thoughts and ideas that you may have about it?

Ashley Perlmutter: Yeah, well, for starters, for those of you who don’t know what lifestyle creep is, it’s pretty much when your income is rising or has rise, but your discretionary spending rises as well. So oftentimes, when you’re making more, you start to spend more, whether it’s voluntary or not. Obviously this varies per person, but sometimes life style creep makes it feel like your raise or increase in pay no longer feels like a raise, because your spending is going up as well. So a lot of times, we see individuals let their lifestyle creep get carried away. Brad, do you want to talk about some tips that you have for people who maybe let lifestyle creep take over when they get a pay raise?

Brad Sherman: Yeah, to bring it back where we started from, I think there’s two separate things here, there’s inflation that that people are concerned about. And then there’s lifestyle creep. So getting a $10,000 raise at work doesn’t necessarily mean buying a more expensive car, or going out to more dinners or taking greater vacations. I think that you should stick with your financial plan, regardless of the amount of money that you’re making. And certainly we want you to increase your lifestyle. But as you define lifestyle creep, it really is when your expenses are far exceeding your raise or increase in pay. So certainly understand the environment that we’re in where things cost more, but find a balance between saving and paying yourself first. I think that paying yourself first is really important. We always advocate to maybe increase your 401 K contribution. If you’re not already maxing that out. If you’re eligible for a Roth IRA, start contributing to that, maybe focus on your long term goals. And then we talked about this last week, but 70% of the folks out there don’t even have a financial plan, so it’s really hard to know where you’re going without a map in mind.

Ashley Perlmutter: Yeah, that statistic was really interesting and surprising. We wrote a blog last week about how important having a financial plan is, especially given the current market environment. Like Brad said, try not to increase your discretionary spending too much when you get a raise, and stick to those long term financial goals. And like we said earlier, with inflation, things are just becoming more expensive on the day to day, so keep that in mind if you decide to spend more.

Brad Sherman: Great, let’s keep all that stuff in check, like we said, if you get a 10% raise, maybe you allocate a certain percentage to going out to dinner more, something that makes you happy, whether that’s concerts, food, but don’t go too crazy to where you’re spending the raise in excess of what you can afford. So anything else you want to touch on?

Ashley Perlmutter: No, I think that is a great place to wrap up. Let us know if you have any questions about lifestyle creep. If you feel like you need to revisit your budget, I think that’s a great place to start, especially given inflationary prices and everything going on. If you’re stressed about your investments and your portfolio allocation, now’s a great time to revisit that as well. So let us know if you have any questions and if we can help in any way. Email us at info@shermanwealth.com or schedule a complimentary 30-minute intro meeting here.

Ep. 91 Launch Financial- Spring Housing Market Update with Andres Serafini & Daniel Esteban

Overview:Join us on this week’s episode of Launch Financial as we are joined by recurring guests, The Washingtonian Group’s Andres Serafini and Daniel Esteban. On this episode, Andres and Daniel come back on the show a year later to discuss the current state of the housing market and tips to think about when homebuying. 

For more information on Andres and Daniel check out their bios below: 

Andres A. Serafini, Founder & Principle of The Washingtonian Group at RLAH Real Estate is a proud DC Native and Bethesda Resident, as well as a First Generation Colombian & Italian American. Appreciative of the diverse nature of the DC Metropolitan area, Andres prides himself in servicing Domestic and International Clientele in the Residential, Luxury, & Commercial Markets.

Daniel was born and raised in the Washington DC metro area and is a proud Bethesda home owner. Beginning his real estate career during challenging economic conditions, Daniel’s experience in an arduous and complex market has granted him a deeper level of expertise in this dynamic housing industry.

For more information and inquiries about topics discussed in this week’s episode, please reach out to us at info@shermanwealth.com. 

Show Notes: 

Check out this episode!

8 Common Investor Biases That Impact Investment Decisions

Sherman Wealth Management | Fee Only Fiduciary

This article was originally published on investopedia.com

One of the biggest challenges to our own success can be our own instinctive behavioral biases. In previously discussing behavioral finance, we focused on four common personality types of investors.

Now let’s focus on the common behavioral biases that affect our investment decisions.

The concept of behavioral finance helps us recognize our natural biases that lead us to making illogical and often irrational decisions when it comes to investments and finances. A prime example of this is the concept of prospect theory, which is the idea that as humans, our emotional response to perceived losses is different than to that of perceived gains. According to prospect theory, losses for an investor feel twice as painful as gains feel good. Some investors worry more about the marginal percentage change in their wealth than they do about the amount of their wealth. This thought process is backwards and can cause investors to fixate on the wrong issues.

The chart below is a great example of this emotional rollercoaster and how it impacts our investment decisions.

The Psychology of Investing Biases

Behavioral biases hit us all as investors and can vary depending upon our investor personality type. These biases can be cognitive, illustrated by a tendency to think and act in a certain way or follow a rule of thumb. Biases can also be emotional: a tendency to take action based on feeling rather than fact.

Pulled from a study by H. Kent Baker and Victor Ricciardi that looks at how biases impact investor behavior, here are eight biases that can affect investment decisions:

  • Anchoring or Confirmation Bias: First impressions can be hard to shake because we tend to selectively filter, paying more attention to information that supports our opinions while ignoring the rest. Likewise, we often resort to preconceived opinions when encountering something — or someone — new. An investor whose thinking is subject to confirmation bias would be more likely to look for information that supports his or her original idea about an investment rather than seek out information that contradicts it.
  • Regret Aversion Bias: Also known as loss aversion, regret aversion describes wanting to avoid the feeling of regret experienced after making a choice with a negative outcome. Investors who are influenced by anticipated regret take less risk because it lessens the potential for poor outcomes. Regret aversion can explain an investor’s reluctance to sell losing investments to avoid confronting the fact that they have made poor decisions.
  • Disposition Effect Bias: This refers to a tendency to label investments as winners or losers. Disposition effect bias can lead an investor to hang onto an investment that no longer has any upside or sell a winning investment too early to make up for previous losses. This is harmful because it can increase capital gains taxes and can reduce returns even before taxes.
  • Hindsight Bias: Another common perception bias is hindsight bias, which leads an investor to believe after the fact that the onset of a past event was predictable and completely obvious whereas, in fact, the event could not have been reasonably predicted.
  • Familiarity Bias: This occurs when investors have a preference for familiar or well-known investments despite the seemingly obvious gains from diversification. The investor may feel anxiety when diversifying investments between well known domestic securities and lesser known international securities, as well as between both familiar and unfamiliar stocks and bonds that are outside of his or her comfort zone. This can lead to suboptimal portfolios with a greater a risk of losses.
  • Self-attribution Bias: Investors who suffer from self-attribution bias tend to attribute successful outcomes to their own actions and bad outcomes to external factors. They often exhibit this bias as a means of self-protection or self-enhancement. Investors affected by self-attribution bias may become overconfident.
  • Trend-chasing Bias: Investors often chase past performance in the mistaken belief that historical returns predict future investment performance. This tendency is complicated by the fact that some product issuers may increase advertising when past performance is high to attract new investors. Research demonstrates, however, that investors do not benefit because performance usually fails to persist in the future.
  • Worry: The act of worrying is a natural — and common — human emotion. Worry evokes memories and creates visions of possible future scenarios that alter an investor’s judgment about personal finances. Anxiety about an investment increases its perceived risk and lowers the level of risk tolerance. To avoid this bias, investors should match their level of risk tolerance with an appropriate asset allocation strategy.

Avoiding Behavioral Mistakes

By understanding the common behavioral mistakes investors make, a quality financial planner will aim to help clients take the emotion out of investing by creating a tactical, strategic investment plan customized to the individual. Some examples of strategies that help with this include:

  • Systematic Asset Allocation: We utilize investment strategies such as dollar cost averaging to create a systematic plan of attack that takes advantage of market fluctuations, even in a down market period.
  • Risk Mitigation: The starting point of any investment plan starts with understanding an individual’s risk tolerance.

The most important aspect of behavioral finance is peace of mind. By having a thorough understanding of your risk appetite, the purpose of each investment in your portfolio and the implementation plan of your strategy, it allows you to feel much more confident about your investment plan and be less likely to make common behavioral mistakes.

Working with a financial planner can help investors recognize and understand their own individual behavioral biases and predispositions, and thus be able to avoid making investment decisions based entirely on those biases.

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The views expressed in this blog post are as of the date of the posting, and are subject to change based on market and other conditions. This blog contains certain statements that may be deemed forward-looking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected.
Please note that nothing in this blog post should be construed as an offer to sell or the solicitation of an offer to purchase an interest in any security or separate account. Nothing is intended to be, and you should not consider anything to be, investment, accounting, tax or legal advice. If you would like investment, accounting, tax or legal advice, you should consult with your own financial advisors, accountants, or attorneys regarding your individual circumstances and needs. No advice may be rendered by Sherman Wealth unless a client service agreement is in place.
If you have any questions regarding this Blog Post, please Contact Us.

Do You Have A Financial Plan? Many Americans Do Not

With rising inflation and cost of living, the Ukraine war, and recent market volatility, the need for a financial plan has become more urgent. Interestingly enough, however, during this time, it has been revealed that many Americans do not have a financial plan or are letting the current economic uncertainty derail their original plan. In fact, “nearly 70 percent of Americans at or near retirement age have less than $250,000 in savings, according to a recent survey by Schroders, the London-based asset manager.” We found this statistic quite startling, as we believe that financial planning for the long-game is extremely important in order to achieve financial success throughout your lifetime and in retirement. 

While some may not understand the underlying purpose of financial planning, a financial plan and working with a financial professional allows individuals to take both a macro and micro view of their whole financial picture, assess both their life and monetary goals and qualitative and quantitative risk tolerances, and set strategies to achieve long and short- term financial success. They are also able to uncover hidden investor and behavioral underlying biases that may be impacting their financial decision making process. 

According to a February survey of 1,000 investors across the U.S. between the ages of 45 and 75 by Schroders and 8 Acre Perspective, “76 percent of Americans say they feel overwhelmed by the thought of creating one and 56 percent say life is too uncertain for a plan to have any value”. At Sherman Wealth, we believe that life is complicated, but your finances don’t have to be. We are here to simplify the financial planning process and relieve our clients of some financial stressors they may feel on the day-to-day. Given the rollercoaster the markets have taken us on so far this year, many of the “do-it-yourselfers” might be realizing that their life is becoming too hectic to also be navigating their financial picture which is why we are here to help. We believe that it is never to early nor too late to create a financial roadmap for yourself and your family, and that you never need a certain amount of investable assets to get started. 

For those of you who do not have a financial plan in place or would like to revisit your old plan that may be outdated given the current market conditions, please reach out to us and we are happy to help. Email us with questions at info@shermanwealth.com or schedule a complimentary 30-minute consultation here