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.