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By Savita Iyer-Ahrestani, Contributing Editor Investment Advisor Magazine

As much as the metrics of conventional economics – GDP numbers, unemployment figures and the like – are important components of the consumer confidence indexes that many financial advisors take into account as they plan for the year ahead, those who really want to get a better grasp on financial confidence, according to Dan Geller, author of “Money Anxiety” and an expert on behavioral finance, should be looking at what people do with their money in good times and bad.

To that end, Geller’s Money Anxiety Index is a key tool for financial advisors as they engage with their clients at the end of the year.

“The index is a true predictor of financial behavior because it measures what people do with money by looking at spending and saving patterns,” Geller said. “Not surprisingly, there are big differences between what people say about their money and what they do with it.”

Case in point: In the months leading up to the recession that began in 2008, most consumer confidence indexes reported high levels of financial confidence. In reality, though, consumers had already started changing their financial behavior, according to the Money Anxiety Index, Geller said. People were saving more and spending less, guided by their increased money anxiety.

“When money anxiety goes up, our thought process defaults to the instinctive part of our brain, the reptilian brain, which is the part of the brain in charge of survival,” he said. “That’s the part of the brain that told our ancestors to run when they saw a tiger in the woods, and it’s the same part of the brain that’s activated when our financial stress level goes up, telling us to cut spending and put money aside.”

While the natural instinct to cut spending and investing in periods of high money anxiety may feel like the right thing to do, though, it also results in people making some serious mistakes that can be detrimental to their financial future, Geller said. Advisors can therefore benefit from following the direction of the Money Anxiety Index to guide their clients away from instinctive reactions that result in unwise saving and spending patterns.

Today, the Money Anxiety Index is at the lowest level it has been in the last six years, Geller said, “and that’s a very good thing.” Consumer spending is high, buoyed by strong economic data such as a much lower unemployment rate than in recent years and lower gasoline prices.

“Psychologically, people are getting a good boost and this is making them spend more money,” Geller said.

However, a decrease in financial anxiety coupled with increased spending and a decrease in saving can also have a negative impact on wise financial planning for the future.

“Because the Money Anxiety Index is so low, this is a good time to put money aside in a smart way. As such, the role of the financial planner now reverses and should become more about helping customers have a longer term view,” Geller said. “Financial advisors should work with their clients to overcome the natural instinct to spend everything lavishly, which is what most people do when things are getting better.”

This is a good time, he said, for advisors to encourage clients to invest in financial products they wouldn’t consider in times of high money anxiety, but which could yield good results for their future.

The Money Anxiety Index is a monthly measurement of consumers’ financial anxiety for over 50 years.  It spans from January 1959 to date.  Historically, the Money Anxiety Index fluctuated from a high of 135.3 during the recession of the early 1980s, to a low of 38.7 in the mid-1960s. Today, Geller said, the index stands at 67.1.

 
 
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The race for rising interest rates is about to begin in the first half of 2015 as a result of lower financial anxiety, congressional action and anticipated tightening of Fed policy.

Lower financial anxiety among consumers combined with the recent congressional ease on some of the Dodd-Frank financial reform law, and the anticipate increase in the Fed funds rate are setting up the stage for a “rate race” starting in the first half of 2015.  Rate race is a behavioral finance phenomenon where interest rates start rising as a result  of higher demand for loans brought by improving economic conditions,.  In order to fund the increase in demand for loans, banks have to compete for consumers’ money by raising interest rates on deposits

On Saturday the 13th of December, congress passed a $1.1 trillion spending plan that includes a roll back to the 2010 Dodd-Frank financial reform law on certain types of derivatives trading by banks.  This ease will make lending more attractive and profitable for banks since they can now add new revenue streams based on the loans and mortgages they issue.  In order to fund the anticipated increase in lending demand, banks will need to increase rates on consumer deposits even before the Fed increases the funds rate.

The Fed is expected to increase the funds rate during their June 2015 meeting.  However, based on historical data of the 1994 and 2003 cycles of rising Fed funds rate, banks started increasing their deposit rates about 6 months prior to the anticipated increase by the Fed as a preventive measure to protect their consumer deposits from going to other banks with higher interest rates.  The same scenario is expected to occur in the early part of 2015.

Rate race is one of the six financial behaviors consumers engage in based on their level of money anxiety.  In Behavioralogy, the science of consumer financial behavior, consumers modify their savings and spending behaviors based on high, medium and low levels of money anxiety.  The six behavioralogy orientations are “mattress money, “power play”, “rate race”, “durable diet, “tiny treats” and castle craze”.  The behavioralogy financial orientation matrix was developed by Dr. Dan Geller, author of the book Money Anxiety. 

 
 
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It took consumers seven full years to regain financial confidence and return to the same level of money anxiety they had on the eve the Great Recession. 

Only 4.7 points separate the December preliminary Money Anxiety Index, at 67.0 from its level on the eve of the Great Recession.  Exactly seven years ago, in December of 2007, the Money Anxiety Index stood at 62.3,  then climbing up to a high of 97.6 in the aftermath of the Great Recession, and gradually declining to its current level of 67.0.    

A major factor in the gradual improvement of the Money Anxiety Index is the continued positive news on employment.  The November employment figures show that the economy added 321,000 nonfarm jobs, which is the strongest monthly gain in nearly three years increasing the three-month employment average to a gain of 278,000 per month.  

The Money Anxiety Index measures consumers’ level of financial worry and stress.  Historically, the Money Anxiety Index fluctuated from a high of 135.3 during the recession of the early 1980s, to a low of 38.7 in the mid 1960s.  The money anxiety Index was developed by Dr. Dan Geller, who is an expert in behavioral finance, and the author of the book Money Anxiety.  The index is highly predictive.  It signaled the arrival of the Great Recession over a year prior to the official declaration of the recession in December of 2007.