Do We Need Financial Dr. Phils?

By: Roshawn Watson

With the US housing crunch, widespread business failures, and bailouts dominating the media headlines, it is easy to ignore those other less scandalous, personal, debt problems. Of course, debt from American households is interrelated with the US economy and results from the same ill-fated over-reliance on other people’s money. Whether referring to how Wall Street heavily leveraged itself with crappy loans or how US households spent tomorrow’s wealth yesterday, it really is the same pathology.

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Here are some sobering facts about US debt that are still affecting us today. The US personal savings rate may finally be creeping upward according to the Bureau of Economic Analyst. However, Americans have had dismal savings habits for years. We collectively spent more than we earned after taxes (U.S. Commerce Department). Last year, the household debt-to-income ratio reached an all-time high, topping 19 percent (Smart Money, September 2007).

Perhaps, you are wondering what we spent all that money on. Well, we purchased a record number of houses and filled our garages with brand-new cars. We tolerated ridiculously high car payments, the national average being $479 according to Kiplinger Magazine (Feb 2007). We financed expensive spending habits, namely “retail therapy” and “rewards for hard work,” on credit. In fact, the average household owes nearly $10,000 in credit card debt with a payment of ~2-2.5% of the debt owed. We ignored cost as a factor for selecting college, and incurred staggering student loan debt with the average monthly payment being over $182. In short, we were out of control.

Bridging the Gap Between Psychological and Financial Needs

A recent article from the New York Times suggests that perhaps our financial problems may be rooted in psychological dysfunction.

These “money disorders” represent several self-destructive behaviors associated with money. Nonetheless, a lot of personal finance IS behavioral. The following represents a compelling list of disruptive financial behaviors identified by psychologists…

The number of professionals offering to treat money disorders has multiplied in the last few years. These treatments typically involve group therapy combined with and financial counseling and special workshops and programs. Some proponents say that they have never seen participants respond faster than when both psychologists and financial planners are on board. Since this budding sub-specialty is growing, a key question is whether it is really needed?

Service Already Provided

Perhaps the biggest criticism of this sub-specialty is that many financial planners are already providing some basic financial counseling informally. For example, many great financial planners have no problem reining in their spendthrift clients. Others will freely offer encouragement and hope to clients struggling to clean up their financial messes. For many, this is all that is necessary because sometimes the causes of poor money habits are superficial.

Common Sense

Additionally, many of the basics are common sense. Even strong advocates of financial counseling and subscribers to the “personal finance is 80% behavior and 20% head knowledge” philosophy freely admit much of their function is to deliver common sense. Just because information is marketed to the masses does not mean it is necessary for the masses.

For example, if one’s annual income is only $24,000 and he has purchased a $24,000 car, he likely already knows that it was not a good idea and why he did it. He saw something that he liked and wanted it now and didn’t care about the consequences. In some cases, there is definitely more to it, but many people already know the behavior necessary to make smart financial decisions.

Several years ago I was telling a coworker at a hospital how much it bothered me that patients did not know how to eat properly. Her response was so clear and poignant it still resonates with me today. She simply stated “they know better. Sure, they may not read nutrition facts labels and appropriately plan meals, but they know enough not to eat pecan pie for breakfast (I’ve been there too!).”

Should we really undergo financial rehab or stage a financial intervention to whip our finances into shape? In most cases, the answer is no.

Cost Prohibitive

Another potential issue is cost. Cost could be a deterrent, especially if one is billed for two professionals instead of one. For example, if workshops cost thousands of dollars, it may be beyond the reach of the very people who need the services the most.

Clearly, there are some cases where clients do need to be referred to psychologists and other professionals, but I agree with the sentiment shared in the article that having Dr. Phil do your financial planning is not entirely necessary for the masses.