Category Archives: General Economy

Financial Decisions: Taming unhealthy habits

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I’ve always been fascinated by how and why we continue with habits (behaviors) we know to be intrinsically out of line with what we want. There’s plenty of literature to explain the biology, particularly related to marketing and Artificial Intelligence (AI), that illustrate how our brains make decisions. I wrote an article some years ago on the science behind financial decision making (“Taming Our Irrational Brain,” Association for Women in Science Magazine, Summer 2009, Vol 39, No 3). If you’re interested in the science you may find it a good place to start. In summary, I think understanding how to change our decision making process begins with a deeper understanding of ourselves.

Choosing among competing options is a fundamental part of life. Historically cognitive processes or reflexive stimulus-driven automatic reactions. To deal with the massive and complex number of choices we face on an ongoing basis, individuals use multiple “systems” that offer tradeoffs in terms of speed and accuracy, but can optimize behavior and decisions under different situations. We shift quickly from “use your head” to “go with your gut” making daily decisions heart wrenching. This clutters the brain and adds uncertainty to decisions – making decisions stress-filled.

Ideally we would have automatic behaviors that keep us aligned with our planned (cognitive) objectives. I believe that sustainable change has to be linked to a simple consistent and believable process that can support you during stress-filled times. Though there are different approaches to creating these behaviors I will focus on Charles Duhigg’s three-step process for changing habits (he refers to them as CUE-REWARD-ROUTINE) and add my own thoughts as we go along. Obviously, my focus is on developing healthy financial habits.

  1. First, we need to acknowledge what it is that we want to change and what it is that we wish to attain. What financial behavior are we interested in changing? We need to visualize what we’d like to see instead of our current behavior.
  2. We must then identify the triggers for this behavior (or “CUEs”). Duhigg suggests that we ask ourselves what we were doing right at the time, who were we with, where we were, and, what we were doing just before the behavior. One of his best examples is when you get up to get a snack in the middle of your work – what were you doing just before you got up? What was your trigger? Some people have similar triggers for spending beyond their budget and, yes, even for making buy/sell decisions on their portfolio.
  3. Next, we must understand what “reward” we obtain from this particular behavior (habit). This step is essential because we need to find something equally rewarding to successfully implement a change in our reaction when we next experience the same trigger. The new reward must be one that is both doable and strong enough to replace the current reward but also in line with our plan. Was the reward for getting a snack really to satisfy hunger, or were we bored, or in need of social interaction or just anxious? For example, consider the person who checks their portfolio every time they feel the trigger. Their reward may be to talk to people about it (social interaction) or it may be boredom (interacting with a different software) or it may be something else. This individual will first need to identify the trigger that prompts them to check their portfolio often and determine what reward they receive for doing this action.To change a reaction to a particular trigger, the goal is always to identify a substitute reward that is aligned with your well-being and your plan. For example, going for a walk alone or with friends, taking up a mental or physical activity that is positive–anything that will actually yield the change you are hoping to make.
  4. Then lock it in, so to speak, by establishing a “routine” around both the triggers and reactions that will make the new habit permanent. If the reward is strong enough, over time it will seem less and less routine, even enjoyable. In our fast moving world more and more decisions are made quickly, even without thought. It doesn’t help that marketers are out to manipulate our choices at every turn even if it means deviating us from our personal wishes (after all that is their job). This imposes a degree of stress if not countered by healthy habits. Ultimately, a well-lived life is all about making daily choices that enhance our chances of achieving the goals we set for ourselves.

It is evident that establishing any new behavior (habit) needs a belief system and a support system that you can reach out to during stressful times to ensure that you don’t revert to the original behavior. I find that for some clients Aikapa has become this support system as they strive to adjust financial habits and align them with their financial plan. It’s our job to help clients remember the reason(s) why these behaviors are important and to help them visualize their financial rewards on an annual basis. We do this through client meetings and by examining savings, investment portfolio and retirement plans.

In short, attaining financial wealth and peace of mind are indeed possible when you can develop habits that work for you. It is our mission to educate and help you build a stress reduced financial life while maximizing your wealth. If you are working on building a new financial habit to support your dreams, don’t forget to include Aikapa as part of your support team.

Edi Alvarez, CFP®
BS, BEd, MS

www.aikapa.com

2012 -0213 Obama’s budget today

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Obama’s budget announcement today – not a surprise

Proposed 2013 budget would reduce dividend tax break, impose new rules, and raise top marginal rate to almost 40%

The $3.8 trillion budget that President Barack Obama proposed today for 2013 would generate $1.4 trillion in new taxes for the wealthy.

Perhaps the only surprising element of the proposal puts dividends paid by high-income Americans at ordinary income, boosting the rate paid to 39.6% from a current rate of 15%.

The higher rates would apply to couples making $250,000 or more and individuals making $200,000 or more IF they earn significant income from dividends.

Originally, the president had supported continuing to tax dividends at a favorable rate, but administration officials said Mr. Obama decided the nation couldn’t afford it.

“We don’t need to be providing additional tax cuts for folks who are doing really, really, really well,” Obama said today in a speech at Northern Virginia Community College.

This is not news, in 2003, dividends were taxed as ordinary income.

Not surprisingly, Republicans in Congress immediately criticized the president’s budget and predicted failure for the tax increases wanted by the White House. .

The change in dividend taxation would raise $206.4 billion over a decade, according to the administration, which has said the wealthy need to pay more to help the nation control its deficit and spur economic growth.

The president’s proposal would end the Bush era tax cuts and limit tax deductions to 28% for wealthy Americans, again defined as those couples earning $250,000 and individuals making at least $200,000.  Limits them to 28% but does not eliminate them. These high-income earners already were set to take a hit in next year when a provision of the 2010 health care law kicks in that will tax their unearned income at 3.8%.

The administration’s proposed budget also would boost the top capital gains tax rate to 20% from today’s top rate of 15% and the income tax rate would max out at 39.6% in 2013 (increased from 35%). As expected, the plan also would tax private-equity managers’ profits-based compensation at ordinary income rates (which it is) instead of the 15% current capital gains rate.

The president’s budget also sets a new rule called the “Buffett rule,” that would set a 30% minimum tax for individuals with $1 million or more of annual income, a proposal that’s been discussed since last year after billionaire Warren E. Buffett said the wealthy weren’t paying enough in taxes. That tax would replace the alternative minimum tax (AMT), which the White House contends hits the middle class instead of its goal of keeping the richest Americans from paying too little.  It is great if it replaces AMT.

Republicans do control the House and wield significant influence in the Senate so it’s unlikely that Obama’s budget will make it out of Congress but only time will tell.

Edi Alvarez, CFP®
BS, BEd, MS

www.aikapa.com

Shapiro on Small Business and our Economy

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Excerpt from Chair Mary Schapiro’s Nov 17, 2011 Review on how the SEC works to Support Small Businesses – U.S. S.E.C

As you know, studies suggest that small businesses have created 60-to-80 percent of net new American jobs over the last ten years.

But there is a footnote to that statistic: the most vigorous small business job creation comes from small businesses determined to get much larger. Job growth comes from emerging enterprises trying to grow out of their warehouse space and into a corporate campus or to jump from single downtown location into retail sites nationwide. It comes from companies that need access to capital to make that jump.

Today’s focus is on creating an environment in which those small businesses have that access, one in which they can compete successfully for a share of our country’s investment capital.

Cost-effective access to capital for companies of all sizes plays a critical role in our national economy, and we believe that companies seeking access to capital should not be overburdened by unnecessary or superfluous regulations.

As we examine ways that the regulatory structure might better facilitate small business capital formation, though, it’s important to keep in mind another critical facet of the SEC’s mission: investor protection. We must balance the instinct to ease the rules governing capital access with our obligation to protect investors and markets.

This can be a challenge. Even necessary regulation can impose burdens that are disproportionately large for small businesses with limited resources.

As the daughter of a small businessperson, I am familiar with the unique challenges small businesses face. I know that instead of planning year-to-year or quarter-to-quarter, that sometimes it’s day-to-day. And I recognize that challenges that a larger business would barely even notice can be significant drains on resources and time to an enterprise that needs to focus everything on making its place in a competitive market.

It’s also important to note that investor protection shouldn’t just be a priority for investors and their advocates. Confidence in the fairness and honesty of our markets is critical to capital formation. Investors who understand that financial market participants are honest, that disclosures are accurate, and that markets offer a fair chance to earn a reasonable return are more likely to make needed capital available, and demand less in return for doing so.

And so, in this forum and through other efforts, the SEC is seeking strategies for meeting regulatory goals while reducing the weight borne by small businesses.

That is why I have instructed our staff to take a fresh look at some of our offering rules, and to develop ideas for the Commission to consider that would — in a manner consistent with investor protection — reduce undue regulatory constraints on small business capital formation. Among the issues that we are considering are:

  • The restrictions on communications in initial public offerings;
  • Whether the general solicitation ban should be revisited in light of current technologies, and capital-raising trends;
  • The number of shareholders that trigger public reporting, including questions surrounding the use of special purpose vehicles that hold securities for groups of investors; and
  • The regulatory questions posed by new capital raising strategies, including crowdfunding.

In conducting this review, we are gathering data and seeking input from many sources, including small businesses, investor groups and the public at large.

In addition, two weeks ago, we convened the first meeting of the SEC’s new Advisory Committee on Small and Emerging Companies. This initial meeting has produced a number of insights on these and other relevant issues, from committee members representing businesses, investors, academia and regulators.

The re-examination of existing regulations is also of a piece with a goal I set when I returned to the SEC as Chairman: to make sure that the agency was up to date, that the regulations we enforce reflect the current realities of the financial markets.

For 77 years, the SEC has contributed to small business growth by supporting a capital marketplace in which confident investors invested money in growing businesses. We worked to create a culture of compliance that supported transparent markets marked by high liquidity, strong secondary market trading and investor protection.

Full transcript at http://www.sec.gov/news/speech/2011/spch111711mls.htm

Edi Alvarez, CFP®
BS, BEd, MS

www.aikapa.com