Financial Confidence

December 10, 2012

You know investor confidence. Various measures of it are announced periodically to explain movements in the equity and bond markets and, since the housing bust, even in the housing market.

You know consumer confidence. The University of Michigan and the Conference Board each measure it monthly because consumer spending accounts for 70 percent of U.S. gross domestic product.

Now financial confidence is getting attention. A large insurance company devotes a portion of its website to helping African-Americans develop financial confidence. A large financial advisor company offers a quiz to help potential clients measure their financial confidence. And books, magazines and websites are offering financial confidence advice to women.

There’s definitely something in it. A serious academic study in the Journal of Behavioral Decision Making recently concluded that people with greater confidence in their financial abilities are more likely to be planning for retirement and more likely to be minimizing investment fees. This was true even if their financial knowledge wasn’t high. It seems that confidence is a necessary ingredient in one’s ability to begin the difficult and complex retirement planning process.

No one is born with financial confidence but, if you’re reading this, you’re capable of growing your own.

Start by writing down your goals. Divide them into less than a year, one to five years, and longer than five years. Put a dollar amount on each. Then, match up your finances with your goals. Even if they’re not matching particularly well, you’ll have gained confidence simply by understanding your situation.

Max out your 401(k) contributions to leverage the tax advantages and the employer matching contributions. There’s no easier or more efficient way to grow your financial assets and therefore your financial confidence.

Many sources recommend managing risk with disability, life and long-term care insurance as a way to gain confidence.

While these may be fine starting points, we think your next step should be learning by working with a professional. Find a fee-based financial planner that you like, and make those product-purchasing decisions jointly with your planner. The surest marker of financial confidence is the willingness to seek a partnership with a professional who knows more than you do. After all, financial confidence isn’t an end in itself. It’s a means to begin planning for a successful retirement, and the best way to do that is with a financial advisor.