Afford Anything - How to Build Financial Resilience in 2020, with Dr. Brad Klontz, financial psychologist

Episode Date: June 30, 2020

#263: It’s been a tough year, and we’re only halfway through it. Today’s guest has insights and actions to help you build financial resilience in 2020. Not only will you emerge from the events of this year stronger, you’ll also face future personal challenges and economic downturns with more confidence and knowledge. Our guest is Dr. Brad Klontz, a clinical psychologist and Certified Financial Planner. He’s the author of five books on the psychology of money, a founder of the Financial Psychology Institute, a managing principal of Your Mental Wealth Advisors, and a fellow of the American Psychological Association. He’s also a former associate professor of personal financial planning at Kansas State. Dr. Klontz appeared on our show in April 2018 to discuss unhealthy attitudes towards money. We invited him back for his expertise on coping with recent situations and developing financial resilience For more information, visit the show notes at https://affordanything.com/episode263 Learn more about your ad choices. Visit podcastchoices.com/adchoices

You can afford anything but not everything. Every choice that you make is a trade-off against something else, and that doesn't just apply to your money. That applies to your time, your focus, your energy, your attention, any limited resource that you need to manage. And that leads to two questions. First, what matters most to you? Not what does society say should be important, but what's truly a priority in your own life? And second, how do you align your daily choices to be able to reflect that? Answering these two questions is a very important.

lifetime practice, and that is what this podcast is here to explore. My name is Paula Pant. I am the host of the Afford Anything podcast. And today, financial psychologist, Dr. Brad Clantz joins us to talk about how to develop financial resilience. 2020 has been a very stressful year to state the obvious. And in today's interview, Dr. Clantz discusses how we can develop the resilience to not only come out of 2020 stronger, but also develop skills that can help us survive and cope with the events of the following decades to come. Dr. Clantz is both a clinical psychologist and a certified financial planner. He was an associate professor of personal financial planning at Kansas State,

where he ran a financial therapy clinic in which he trained financial advisors and psychologists in how to do financial therapy. He's written five books about the psychology of money. He's a founder of the Financial Psychology Institute, a managing principle of your mental wealth advisors, a fellow of the American Psychological Association, and he's been a columnist for both the Journal of Financial Planning and for Psychology Today. He's also big on TikTok. I'm not joking. You'll hear about it at the end of the episode.

We recorded this episode about three weeks ago on June 9. The market was pretty high at that time. At the time that we recorded, the Dow Jones was above 27,000. There's been even more volatility in the three weeks since we recorded this episode, and that makes what we talk about, how to develop financial resilience, how to cope with anxiety, how to avoid destructive thought patterns. It makes those conversations as applicable today as it was a month ago. Before we launch into today's interview, I want to make one quick announcement.

As you recall, we are raising money for three nonprofit organizations. One is the Committee to Protect Journalists, and they are a 501C3 nonprofit that is at the forefront of protecting journalists who are being put in harm's way while they're out there doing. doing their jobs. The second group that we're supporting is the Children's Development Academy based in Atlanta, which addresses social and economic injustice through early childhood intervention. It provides affordable early learning programs and child care to low-income families in Atlanta who might not otherwise be able to access such programs. And finally, we are also

raising funds for the Atlanta Food Bank. Now, good news. As of last Tuesday, as of Tuesday the 24th at 6 p.m. Eastern, we have raised a total of $9,271 across all three of these, and that's excluding my matching contribution. So the most, most of that money has gone towards the Committee to Protect Journalists. You, this community, has donated $8,175 to the Committee to Protect Journalists, as well as another $725 to the Children's Development Academy, and $371.50 to the Atlanta Food Bank. Again, that's as of June 24 at 6 p.m. Eastern. We'll continue raising funds through the middle of July. I am matching donations up to $3,000.

If you would like to support any of these organizations, please do so and then send me a screenshot. DM me on Instagram. I'm on Instagram at Paula P-A-U-L-A-P-A-N-T. DM me a screenshot, and that's how we will update our totals. So with that said, we now turn to today's interview with financial psychologist Dr. Brad Clantz on how to develop financial resilience. Hi, Brad. How's it going?

It's great. How are you doing? You know, hanging in there. Things are going okay. A lot of people right now are experiencing tremendous anxiety about everything that's happening in the world. Let's start by talking about financial anxiety, but we can broaden it out from there. For a lot of us, we're living through our second once-in-a-generation market crash.

When we went through 2008, everyone said, this is once in a generation. You're never going to experience this again. And boom, 12 years later, here we are. And for people over 40 or 45, people who were investing during the dot-com burst, this is their third gigantic once-in-a-generation crash. How do we cope with this? Yeah, so I've been through a few of these myself. What's so interesting about it is it actually gets easier, the more you go through. this. For me, it was the tech bubble was the first one I experienced. Actually, what got me

interested in financial psychology was losing all my money there as a young, young man. It's an opportunity, actually, I think part of what you're saying to is there's a history around these crashes, and that's super important to just keep in mind. Like, we experience it as this unusual event, similar to the way that we experienced this pandemic. It's like this, oh, my goodness, this never happens. Well, actually, it happens all the time. It happens constantly. Every time, I take my children in for their shots and inoculations. Each one of those represents some global pandemic that would devastated humanity. And this is something that just happened.

Same thing with markets. Markets crash. You know, they run up and they crash. And this has been happening ever since markets came into existence. And so part of, we're already, I'm already going into what do you do around the anxiety? Part of it is avoiding catastrophic thinking around, oh, no, this has never happened before. The world has changed. What am I going to do?

I'm going to lose all my money. and just keeping in mind that those catastrophic thoughts were the same ones we had back in 2008, the same ones we had back in 2000, and probably all the way back, that's about as far as I can go with my age. But I'm sure they're the exact same thoughts. And they're all sort of baked into the pie there. It's like things are totally different this time. And that's true for every single crash.

That is, it's a consistent pattern that it's not a consistent reason for the crash, which is really interesting to think about. And of course, fear that it will never come back. So that catastrophic thinking gets automatic. And if you run with it, you're going to be very tempted to do all the things you shouldn't do when it comes to investing by engaging in the panic. In terms of catastrophic thinking, many people often express the thought, but this time it's different. And it seems as though that thought can lead to catastrophic thinking. Are there other things that we commonly tell ourselves that fuel that catastrophic thinking?

Yeah, absolutely. I'm going to lose all my money. That's one that's really profound for many people. Because if you have money in the market, chances are you've worked really hard to get that money in there. And so you've dedicated a lot of time and effort and sacrifice, and so it can feel like your entire future. And so that panic becomes really real.

This time it's different. The thing I love about that is that belief is never different. It's always there. So that's the thing that's consistent. The details are different. And then, of course, but this time the market may never recover. And it's sort of this, oh, no, but this time it's the end of the world. That's sort of what the anxiety says to us.

And of course, you never really know. I mean, so it's baked into the pie. Nobody can read the future. But it really does help for me to look at things historically and realize that this has happened dozens, if not hundreds of times over the years. We've been told that each of these are once-in-a-generation events. The dot-com burst to the tech bubble, which coincided also with 9-11. That felt very once in a generation when it was happening because we'd never had the internet before.

Nothing like 9-11 had ever happened before. So that felt incredibly unique. And then fast forward to 2008, again, we learned that this is a once-in-a-generation thing. Should we be throwing that phrase out? I think that's probably a good idea. Because obviously it's not. And I wonder what we mean by that. It might mean with our young minds, right?

It's like, I know with very experienced investors who've really ridden this out, I mean, it's three or four times. It happened in the 80s. It's five times. So what do we mean by a generation? I think what people are often referring to are when your mind is really malleable as a young person. And that's also something that's really interesting and something we actually need to be very, very careful about is these types of market events, if you don't have a lot of experience and you haven't lived through several of them, they can really radically change your beliefs around money. and it can actually have devastating effects for the rest of your life. For example, the Great Depression led to an entire generation of hoarders who had a,

who had a scarcity mentality. My grandfather lived through it, lost his money when the bank's collapsed, never put a dollar in the bank the rest of his life. Those are the sorts of things we need to worry about and be concerned about because what our brain is trying to do is survive and make sure we never have to experience this trauma essentially again. And so it's going to organize itself to try to keep us safe. And that's why it's really, really important to have an open mind about what's happening,

to process, you know, and this is the psychologist coming out, you know, to process the grief and the terror and the anxiety. Because what you want on the other side is to be more resilient, to be wiser, to not be asleep at the wheel in terms of thinking everything will be fine and nothing bad will ever happen to me. However, we don't want to be so jaded and fearful that we never participate in the stock market again or that sort of thing. And we saw that actually with the last, the previous financial bubble burst with the real estate bubble. We saw an entire generation of millennials

when they were doing studies that were very anxious about the stock market, didn't trust it. They had lived through seeing their parents lose their retirement savings, some of them losing houses. And that type of trauma has a lasting impact. Some of it can be good, but some of it can be bad. What are some other ways in which, if left unchecked, the experience of something like we're going through in 2020, what are some other ways that it can radically reshape our thinking, both for better and for worse? Yeah, so a lot of it has to do with the beliefs we land on as we're trying to make sense of what's happening. And, you know, the parallel is the pandemic, too. We're having a bunch of beliefs that we're learning and adopting right now to cope during this time.

But for example, my hypothesis is we're going to see a lot of more compulsive hand washing, just as an example. Guilty. Guilty. I wash my hands like 25 times a day now. Right, exactly. And obsessive compulsive disorder, I'm not saying you have that. But that's a real thing. For example, I have young children. So I'm very much aware of, is my anxiety around what's happening going to get passed into their little minds? as a seven-year-old who believes that everything you touch will kill you. Like, that's sort of how the seven-year-old brain works. And so I'm trying to be really conscious of making sure that I'm modeling a reasonable and healthy response to what's happening without instilling him with a bunch of unnecessary fear

around things he can't control. So just as an example of things that can really shape your thinking, especially when you're young. And a lot of my work, as you know, Paula, is around financial psychology and getting people to look back into their past and their early experiences around money and what their parents taught them and what their parents modeled for them. Because the beliefs that we get from those experiences, our studies have shown, end up predicting your financial success, your net worth, your income, your financial behaviors. And so I think it's really, really important for us to take a moment

to look at what sort of habits and beliefs are we adopting right now. The more conscious we can become of that, the more we're going to be able to adjust them as times change. Because essentially, the big problem here is that when we get really emotionally activated around a market event or something we experience as traumatic, the beliefs that we have that are really much focused on survival and making sure we live, those can become really rigid and tough to change. And in order to be financially healthy and most successful you can be, you have to have an open mind. You have to be willing to challenge some of these things because the circumstances are always changing. The rules are always changing, and so we need to be able to adapt to those changing circumstances.

You gave the example of, in terms of how we model behaviors for children, how do we balance the need to do things that are prudent in the current environment with not instilling a sense of fear? Yeah, so I think it comes down to trying to separate out what you can control and what you can't control. We know this from all the research on post-traumatic stress also, that when people focus on taking actions that they can control that better their lives or perhaps make themselves safer, they're less likely to have post-traumatic stress disorder on the other end where this traumatic experience essentially interrupts your life and makes, makes them thriving difficult. And so it's trying to find those things that you can focus on that you can control that are going to be of benefit to you

it helps reduce your anxiety overall, and it also helps you improve your life. Like, there is an opportunity in this crisis, and one of the things I was going to share with you is this mantra that I have that I've been saying to myself five to ten times a day, and it's where is the opportunity? So we're in the midst of a crisis. People are losing their jobs. Incomes are going down. Where is the opportunity?

I know people who've launched online businesses that they've been meaning to do for years and are now making more than they were making before this crisis. That's an example of somebody who really took advantage of the opportunity that this was providing for them. My wife and I sat down and we don't usually do this. Even though I'm an expert in money, I don't want to sit down in budget, Paula. Come on. What a terrible experience that is. But that's exactly what my wife and I did.

We're like, okay, let's prepare. You know, we're not going out to eat as much. Let's start tracking things. Let's look at where we can cut. And what an incredible opportunity for us. And if this crisis hadn't occurred, we probably wouldn't have done that. We probably had just been trucking along doing what we're doing. So we took advantage of that opportunity.

You know, I'm stuck home with my, I'm stuck home with my kids and my wife. So where's the opportunity? And so I can honestly tell you that I think I'm a better father now than I was three months ago because I'm, for example, my son came and he's like, dad, can I help you with that? And then first thing off my mind was like, no, don't worry about it, buddy. I almost got it done. And then I thought, well, look, he's not in school. So we've basically been put back about two or three hundred years in our development as a culture.

And so I need to mentor him. And he needs to be my apprentice. So I adopted this like he's my apprentice mentality. And it's been really incredible as I've been able to help teach him things. And he's really engaged. So anyway, just another example of where is the opportunity? It's a mantra that it's really been in the forefront of my mind in the midst of this. And it's something that's incredible to just go through life with.

How should people approach decision-making at such times? In the span of a given year, you know, you may be presented with opportunities to take a different job versus stay at your current job. You may have opportunities to start business A versus business B, to invest in real estate or to invest in index funds. What type of thinking should a person be using as they approach decision-making? So one of the challenges is that when we become emotionally charged, we become rationally challenged. And so this is how our physiology works. When we become really upset, scared, or excited, doesn't really matter. When that emotion turns up, what happens is the thinking part of your brain, the part of your

brain that weighs the pros and cons, that thinks about the future, that is required to delay gratification as an example, that part of your brain essentially shuts off. And so when you become emotionally charged, that's when we're very likely to make a decision that we later regret. And so the best advice I have in moments of turmoil is to put some time between your impulse and your action. You just don't want to make decisions right away. And so this is true with spending.

You know, there's lots of little hacks here, you know, where you just put things in your virtual card and then, you know, you're not going to buy it for 24 hours or you're going to consult with somebody else. and this is actually my favorite one, is you have an impulse to quit your job, you have an impulse to start a business, you have an impulse to do any of those decisions. Get out of the market, get in the market,

change your asset allocation. Consult with somebody else. You really want to bring these beliefs and thoughts. A lot of what's so interesting about consulting is when you start talking about it, 90% of the time, as you say the words out loud to another human being, you're immediately analyzing whether that was a good idea or not.

And so it's such a powerful thing, talking and shining light on it. And then, of course, talking to an expert who can give you another perspective, super powerful, super important. And it also helps calm that emotional brain down. With regard to calming down that emotional brain and to understanding that this is not catastrophic, do any of those rules change or does any of that advice change based on your age or your timeline to retirement? Yes, I think it does. That's why it's really tough to give anyone specific financial advice. There is an opportunity, though, like, in the midst of a crisis, that's not the best time

to be changing your asset allocation in a profound way and redesigning your retirement plan. But maybe you didn't really have one. Maybe you hadn't really sat down and thought it through. And I definitely know people who in the last crisis realized that they were way too allocated towards stocks and equities. Like, obviously, the risk tolerance was a lot lower than they thought it was. So they systematically adjusted moving forward. So what you don't want to do is make these emotional decisions in the midst of a wild market.

Because just understanding that your impulses, whatever you feel an impulse to do is actually going to be self-destructive. Just understand this. Like one of the best tips I can give you is whatever your impulses to do around money, don't do it. Because chances are it's the opposite of what you should be doing. And so that's why you really want to like give yourself some time to calm that down and really think it through and consult with another. expert. But it does. Like your frame of reference really does matter. And that's another thing that I think is really important for us to talk about is your frame of reference. And just as an example of anxiety, when you see on TV, you know, the market's down, you know, like hundreds of points and all of this.

It's going to create anxiety. As a matter of fact, they use red, the color red, which tells your brain, danger, danger, threat. You're about to die. Okay. So that's what the color red tells us. And so of course you're feeling anxious and you're worried. Of course you are. But what is your frame of reference? because, yes, the stock market went down 20% over the last three months or whatever frame you're looking at, a three-month frame, a one-month frame. Well, and you can actually do this visually by looking at a Dow Jones Industrial Average chart. I encourage people to kind of get online and sort of look at what it looks like three months, six months, and then stretched out all the way to 100 years. Because your frame of reference really matters. And if you look at a downward market with a three-month chart, it looks like somebody just fell off a cliff.

It looks like you're plummeting to the ground and it's going to be an ugly mess at the bottom. Terrifying. When you stretch it out to what is probably more accurate for your timeline of investing like 20 years, 30, 40, 50 years, and just for fun, stretch it out for 100. It looks more like a pothole, you know, a little bit of a speed bump. And that frame of reference, it's so important because you can immediately change your emotional experience by changing your frame of reference in the direction of making it more applicable to your financial situation. How do you deal with the opposite emotion, the emotion of bewilderment, if your perspective is that the market is too high? I'm sorry, I have to laugh. Because if you think the market has anything to do with some sort of objective reality, let's, listeners, just please, let's just take that off the table. Okay. Like, it's such an important thing of what I'm talking about. Markets are about human psychology. They're about human psychology. This human psychology and,

predictions of the future and optimism, you know, this is all subjective, right? It's not objective. And essentially when a stock or a company is worth more, like if you look at a PE ratio, price of earnings, if it's worth more than one, essentially like this is what we make, this is what it's worth, everything above that is built on optimism, which is a projection of what we think might happen in the future. Like, are you happy and excited about the future? Or are you really scared and pessimistic. That's what essentially determines prices in a market because this is a shared agreement. We're saying, hey, I think it's worth this. What do you think? And you're saying, yeah, I think it's worth this. Actually, I think it's worth more. I think it's such a great lesson

because what happens, we get into trouble when we're trying to predict the market based on, quote, what it should be. And because, yes, I agree. Very often the market looks absolutely insane. You know, prior to this economic collapse and then recovery, at least in the stock market, people were talking about the market was way overbought. Like, for years, people were saying, oh, it's going to drop any second. It's going to drop any second. And I saw people make that prediction for 10 years, you know. And if you happen to sit on the sideline trying to predict what's happening next week because it's totally insane. Like, the market should not be this high.

And of course, you have tons of graphs and charts to prove your point. People sit on the sideline and they missed out on the gains. And then what happens is they get anxious and then they're like, you know, okay, I should get back in. And then they buy in high. And then it starts to drop and they're like, oh, my gosh, see, I knew it. I told you it was overbought. And then they sell. And so this is why the average person is terrible at investing and blows themselves up. Right. So essentially, if you are bewildered by the fact that the market is so high, it's an indicator that you have a greater degree of pessimism than that of the overall market. Perhaps. And I actually applaud your beware.

I actually think it's your one step closer to knowing what's really happening by being bewildered. And I think you should be bewildered all the time about it. I think you should look at it like, wow, isn't this interesting? And try to sort out, how does this make sense? And when you think about sorting it out about how it makes sense, think about human psychology, think about herd behavior. Think about all of us looking at each other with our cave person brains going, which way are we going to run? You know, are we going to run this way or are we going to run that way?

And it's that collective assessment we're making on pessimism or optimism that I think has the biggest impact on the market. You know, just as an example, you'll see one company that for reasons that have nothing to do with the entire sector fall on really hard times and the price drops. And then it's so interesting. Companies that do similar things, their prices are dropping also, even when it has nothing to do with something that's happening in a sector. And essentially, it's that human emotion, that herd instinct, that game of hot. potato that very often is happening in markets. And so I think B. Wilderman is actually a step of evolution in terms of your understanding what's really happening. And on a side note to that, overconfidence, believing you think you know what's happening has been shown to have a negative

correlation with how well you do when it comes to investing. So the more you think you know what's happening, the more at risk you are for having worse results. We'll come back to this episode after this word from our sponsors. The holidays are right around the corner, and if you're hosting, you're going to need to get prepared. Maybe you need bedding, sheets, linens. Maybe you need servware and cookware. And of course, holiday decor, all the stuff to make your home a great place to host during the holidays. You can get up to 70% off during Wayfair's Black Friday sale. Wayfair has Can't Miss Black Black Friday deals all month long. I use Wayfair to get lots of storage type of items for my home,

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But they also have the fintech hustle that got them named one of America's most innovative companies by Fortune magazine. That's what being a fifth-third better is all about. It's about not being just one thing, but many things for our customers. Big Bank Muscle, FinTech Hustle. That's your commercial payments of fifth-third better. On the topic of overconfidence, anecdotally, one thing I've been noticing is that many people who, I've heard more examples of people expressing. market timing related ideas. I've heard more of that in 2020 than I've heard for the last five or six years. And often these aren't people who are predicting necessarily what the stock market will do.

They don't consciously even realize that their market timing. But they might say something like, I'm reluctant to refinance my mortgage because I think that interest rates might go even lower in six months. Or I'm reluctant to buy a house right now because I think that housing prices might drop further within six months? To what degree, if any, is that appropriate? And why do people do that? Is that future prognostication a way in which we exert control over the uncontrollable? I think you nailed it. I think it's our attempt to make sense of an unpredictable and scary world. What's so interesting about, and I'm using the word trauma on purpose, like I feel like this, we've experienced some mass trauma as a country and as a world. And the double whammy, of course,

worrying about our health as well as our finances. What happens is with a traumatic experience, some researchers have talked about it as a, you know, an earthquake, like an emotional earthquake. And what happens is we have this sense of reality, like how the world is supposed to work. Like kids are supposed to go to school and we're supposed to shake hands and markets aren't supposed to act like this. And what happens when we experience a traumatic event, essentially what happens is that that belief around a stable, secure, safe world gets shattered. And we sort of flounder around trying to figure out, well, how can I keep myself safe? Like, what did I miss?

And so this is where we start to look for any sort of signs that we can use to predict the future because we don't want to see this happening again. And so I think we see more of that in times of turmoil when we're sort of scrambling around as a species to figure out how to make sure we're keeping ourselves safe and this doesn't happen to us. But essentially, I think it's especially when it comes to what's going to happen in the future, in any direction for the most part, but like around markets or interest rates, etc. Nobody knows. Nobody knows. And the problem is you might be right. And I say that's the problem

because now you think because of these two variables, that's why I was right. And unfortunately, the more times you're right in a row, the bigger the fall later, because you actually can't predict the future. And as a matter of fact, nobody can. It's part of that, in terms of markets, we would call it the efficient market hypothesis, right? Where it's like you might have really positive feelings about this company, but the price of the company in terms of that stock is already baked in with all the collective knowledge that everybody has around it. So it's like this collective wisdom is smarter than any one person.

And so it's just understanding that the price is actually means only one thing. It's the agreed upon value of a particular item or thing in this current moment. The one thing we do know is it'll probably change, probably won't stay the same, but we have no idea if it's going to go up or down. And when we start making big gambles on whether it's going to go up or down, it's like a coin flip. You might get it right three or four times in a row, but you're going to miss. How can people develop the awareness to even know that their market timing? Oftentimes, as I mentioned, when people say, I'm thinking about buying a home, but I'm worried that I'll buy one now and then home prices will be even cheaper in six months. how can people develop the conscious awareness to recognize that as a statement of market timing?

Yes, that's a really, really good question. And I think the focus should be more on personal timing. Like it's a much more important question to me is now the right time for you to buy a home. By the way, this happens when people are trying to predict it going up or down. Like people will be tempted to go in and buy a home because prices are going up, up, up, up, and they're worried they're going to keep going up. And so when you feel like you're missing out, this is what happened. You're getting emotionally activated.

And it's your cave person brain, which is really, really important. When you feel like your tribe is moving in another direction and you're standing still, and by that, I mean, you know, three people who just bought houses, you know, or people who bought a certain stock, what happens is your cape person brain says, oh, no, don't leave me alone because I'm going to die. essentially when the tribe moves in one direction and you say still historically for like 99% or more of human evolution you died and so just understanding that you're going to have this intense anxiety that comes up if you feel like people are either buying or selling around you it might not be right for you and quite often when you're following the herd in that way unless there actually is a lion chasing

you if you're following the herd in that way quite often it's going to end in a bad way for you. And so the temptation to keep up with the Joneses, essentially, not just in terms of consumer spending, but also in terms of investments that you might enter into, that intensifies, perhaps, during moments of anxiety or trauma. Yes, absolutely. And it gets a bad name sometimes because it's quite often attached to, like, buying expensive things.

And so that's easy to kind of tease people about or disparage people about, oh, you had to get a new car because they did. But it happens in every area of our financial lives. including in spending less. Like you can have tons of pressure to ride a bike to work, for example, depending on your community versus riding a car. Like, how dare you? So it really just depends on the culture, the microcosm in which you're living in terms of

what is sort of expected behavior. What do you need to do to feel like you're fitting in? And we all have this subconscious desire to do exactly that. Right, the wisdom of the crowd, so to speak. And being aware that you're wired to go with the herd. And I think it's the awareness is so important because if you're not aware, you're just going to rationalize why you're doing it. You're just going to come up with all these incredible reasons about why it totally makes

sense that you buy a pickup truck. And what's going to happen is you're not even going to really realize it. Well, actually, the reason you bought a pickup truck is because that's what everybody drives in your town. But you didn't think about it like that. You're not like, oh, I want it because everyone else wants it. It just sneaks into your subconscious. And before you know it, you really, really think it's practical and you have all these

great reasons why you want to buy a certain type of con. are and why it makes sense or a watch or a purse or shoes or whatever it is. But really what's happening is you want to feel connected and you want to feel like you belong. I'm glad you brought up rationalizing because that leads to another area of discussion, which is that I've heard people say, oh, you know, you should never make decisions that are emotionally based. You should make decisions based on logic and reason, look at studies, look at data, look at research and make your decision based on those objective facts. To what extent would you agree with that statement or disagree with that statement?

And how do we approach that? How do we approach making logic-based decisions, given that we are emotional creatures? Yeah. So, you know, we like to think that we're rational beings, but we really are rationalizing beings, essentially. So I think it's just, it's critical, like, around all these things is just having this self-awareness, not trusting your instincts, having always just second guess. these impulses you have. And you might go ahead and decide to do it anyway. Like if you want to buy it,

I'm just using a pickup truck because this happened to me once. When I was living in Kauai, I was like, yeah, I really want a Toyota, you know, truck. And, you know, I don't know, I never wanted a Toyota truck until I lived on Kauai for 10 years. And then all of a sudden I got one. And it's so funny, again, I talk about this all the time, but I'm driving down the road. And I'm like, oh, my gosh, not only does everyone else have a Toyota pickup truck, but they all have one this color. And when I was on the lot, I just thought, no, that color looks pretty cool. So I just, I just, just think it's really important for us to understand that we're wired to kind of do it wrong and to second guess ourselves and always be wondering and being curious about the impulse.

Like, isn't that curious? Like, that's a great mantra to. Isn't that curious? Like, you have this thing you want to buy. Just approach it with some curiosity and think about your thinking related to it. Now, you might want to go ahead and do it anyway. But I think it's really, really helpful to understand your own psychology around why you're trying to do things.

because if you don't do that, just understand this. You're going to cobble together an incredible rationale for why you're going to execute on this behavior. Not only that, it's called the confirmation bias, Paula, which I'm sure you've heard of. Not only that, you'll go find the 10 studies that tell you this is exactly what you should do. And then you'll go take these studies and put them in front of your partner to just really argue your point. So we have this confirmation bias. When we decide something's right and it's the way we want it, we'll just go collect all the evidence to prove us right. and we'll discount all the evidence to prove us wrong. And we can do this in a very logical way

that makes total sense to us, a flawless argument, but essentially just understanding that most of our decisions and impulses are coming from our emotional brain, it's related to our survival, our desire to fit in and thrive, and just being constantly curious about it and never just taking it for granted that you're going to be a logical creature. Are there ways in which we can improve our ability to be logical, or should we, do we need to accept that any attempts to do so might be a reflection of self-deception? Obviously, I'm an educator. Logic is really important to me, too.

And so I'm not discounting that part of our brain. Just understand this. It's much smaller. It's a much smaller part of your brain. And when you get excited, it gets basically essentially shut off. But I do. This is where I feel like getting some outside advice and counsel becomes really important. You know, it's also important to, like, who you talk to,

like if you're trying to go to a new part in existence for you, so for example, you're middle class and you want to become wealthy, or you're wealthy, you lost your job and you want to figure out how to live the middle class lifestyle, what you're going to need to do is you're going to actually need to pick the brains of people who are already doing that. You're going to need to have an open mind, open-mindedness in all the studies too, Paula, Paul is really associated with success. So being open-minded, not believing what your beliefs to, not holding on to them too rigidly. Not only does that make you really, really annoying,

it's also not good for you and you're going to miss out on opportunities and the shifting environment and taking advantage of it. So being open-minded and not being too attached to what you think you know to be true. As an example, we're talking about financial stress and this is a mindset shift that I think is really important because what it feels like when you're financially stressed,

you feel like you're going to die. You feel like it's the end of the world. And this is the way our stress response works. It's basically an on-off button. It's a lever. You know, either, oh, no, I'm going to die. And this is the way we're wired. Run away, save yourself, or everything's fine.

It's almost like we have two gears here. And so what happens when we're experiencing financial stress is we have the physiological response to keep us alive. And studies have shown that chronic financial stress, and I'm talking about financial stress in particular, will kill you. it's a huge mortality risk factor that's right along the lines of like heart disease and diabetes and smoking and all these other things that aren't good for us so financial stress can absolutely kill you however your financial life is probably not going to kill you there's probably a very low risk

that your financial life is going to actually lead to your death especially if you live in the united states so very low probability you're going to die your financial stress is going to tell you you're going to die. And that makes it actually really, really dangerous. Your stress is actually much more dangerous than your reality. So what I would encourage you to do, in the midst of this, my wife and I did this exercise, which it wasn't fun, okay, but it ended in a really good place. It's the, in psychology, we would call it an exposure technique. So all the studies show the best way to treat anxiety is exposing people to what's making them anxious. So for example, if you have a fear of dogs, a good psychotherapist is going to get you thinking about dogs, talking about dogs,

and maybe on the last session, we're going to get you to pet a dog, right? We're going to find a safe dog for you, but we're going to want you to pet that dog, and that's the only way to get through anxiety is facing it. And so there's this exercise that I've been encouraging people to do called the worst case scenario exercise. And it's really based on that assumption, your financial stress to kill you, your financial life probably won't. So the worst case scenario exercise sounds exactly what it's exactly what it sounds like. So what's the worst possible thing that's going to happen in your financial life. Let's see, I might lose my job. Okay, then here's the question. Then what would happen? Okay, well, I probably wouldn't be able to pay my mortgage or my rent. Okay, well, then what would

happen? Well, I mean, there might be some sort of program that could help me, but worst case scenario, yes, give me the worst case scenario. Well, worst case scenario is I'm going to get evicted. I'm going to move out. Well, then what would you do? Okay, well, to be honest with you, I'd have to probably move in with one of our grandparents or one of our parents or a sibling or a friend. And I got to tell you, Paula, that wouldn't be fun. Like, that would actually stink. Would it kill me? No. And as a matter of fact, my kids would probably look back on it as the best six months or year of their entire life, where they got to go live with someone else, you know, that they cared about. And at the end of the day, I can recover and I can rebuild. So that worst case scenario exercise, if you really run down

the worst case scenario, it's actually a lot of freedom for a lot of people on the other side. And yes, it would be brutal. Yes, yes, yes. Yes, I'd have to embrace failure. Yes, yes, yes. How embarrassing. All that kind of stuff. But it also helps me to know that the study show the average millionaire has had approximately three major financial catastrophes in their life. three, gut-wrenching failures, losing things, failed businesses. So I like to redefine the whole idea of failure. And if you haven't had three major financial failures, get out there and have some more because we want you to become that successful, ultra-wealthy person. And there's something that people who are successful do. And what they do is they deconstruct those failures. They mine them for gold. Like, where did I go wrong? What were my assumptions that weren't correct? Who did I not talk to that could have taught me more than I needed to know? The average non-million. has less slightly less than one major financial failure. So that tells me they either didn't try or maybe they tried and they held on a little bit too long and they destroyed themselves financially. They didn't know when to quit or stop or get out or they just got discouraged after one loss and

they quit. So I like redefining and by the way, if you have to file for bankruptcy, oh my goodness, you're in good company. It's like it's the trending thing to do, you know, so don't beat yourself up if you have a failed business right now. If you have a failed business right now, mean, of course you have a failed business. I mean, there's lots of reasons that were totally out of your control that something like that would happen. So beating yourself up, it's not helpful at all. That's not what successful people do. We all make mistakes. Learn from those mistakes. And that is the opportunity for many people who are experiencing this. It's terrible to start to give some advice and say, well, you should have had an emergency fund. Of course, you should have had one. But chances are a lot of

people on the other side of this might actually have one, right? So let's fast forward. four or five years from now, I bet you there's a lot more Americans who will be having emergency funds than had it coming into this. Just an example of another way to embrace the opportunity of what we're all experiencing. We'll come back to the show in just a second, but first, going back to the example that you gave about, all right, what's the worst case scenario? All right, let's say that I can no longer pay my rent or mortgage. I get evicted, and I have to move in with my parents or grandparents. In 2020, that could actually kill them. You know, the coronavirus risk, the risk of moving a whole group of people in with high-risk individuals where there's more people coming in and out of the house, there's more exposure.

There's more, you know, the more people that you have in your home, the more risk there is that somebody will contract the virus and will then spread it to other household members. To go back to what we were talking about earlier with this time it's different, what makes this feel so different is that those solutions, that were once an option, you know, the solution of if everything goes to hell, I'll move in with my grandparents, or if everything goes to hell, I will go to a country with a super low cost of living. Those solutions that we had previously thought about now could quite literally kill us or kill a loved one. Yep, absolutely. So there's a few different ways to look at that. I mean, thankfully, I guess there's a lot of talk and programs. I haven't looked into these very close. but chances are you won't get evicted right now. But this could be something that happens. This could

be something that happens six months or a year from now. You know, hopefully they'll be a vaccine. Hopefully we would be in a little bit of safer conditions. Maybe we would need to, if we did have to move back in with somebody, maybe we would need to isolate for a couple weeks, you know, quarantine to make sure everything's okay, limit our contact with other people. So those are the things that we actually can have some control over. But you're bringing up an excellent point. And I think one of the things that makes this crisis different on the financial side, is this legitimate fear of the people I love or perhaps even myself could actually die from an illness that is, obviously, they're correlated with the financial stuff, but it's a totally separate issue. And I think that just adds fuel

to that fire of anxiety. And just by itself creates tons of anxiety. And actually, Paul, I think we are in the midst of, we're going to look back on this as a major mental health crisis in the United States and probably across the world. I think that we don't have data on this right now, but I think looking back on this, we will absolutely see massive increases in the amount of people who are suffering from anxiety and depression,

because one of the biggest predictors of depression is something called social isolation. And this is something you've been hearing a lot about because you're being told by everybody to socially isolate. And what we know in psychology is that is one of the ways people become clinically depressed. And so I think this is happening across the country.

and I think we're going to look back on this as very different, and they're all very different, but I think it really is taking that anxiety to the next level because we're worrying about our actual physical health and safety. So how do we cope with that? Like, how do we cope with the anxiety and the depression that comes from legitimate fears around health and safety as well as the prolonged periods of isolation? Yeah. I always like to say that the grass is greener on the other side of the quarantine. Yeah, I just think it's important to know that. Like parents of young children, and I can, if I could speak for all of us, it's like we just, oh, really like, Paula, you live alone. Oh my God, I would kill to be in a bath and read a book, you know. And of course,

people who are, it depends on their situation, of course, but some people feel bad about being alone and they wish they were with a partner and then people in unhappy marriages just really wish their partner would leave. So it's part of the human experience that this is a rough, rough time. I don't care what you're saying. My father, like, I love this metaphor. He says that, you know, we're all in the same stormy sea. We're all experiencing this together. But we're in very different boats, very different experiences, even though we're all going through this. So it just helps me to know that our impulse to compare socially. This is one of those other ways of looking at thinking about your thinking that is so important. When I see things on Instagram, when I see things on social media, I just understand that I'm going to automatically have the response of like, oh, don't they have it better than I do? this is just automatically going to happen. So it helps me to know that because I can sort of calm that down and realize, well, they're not posting all the fights, you know. They're not posting all their time when their kid was on the iPad. They're posting it when they were putting that bicycle together, that happy Norman Rockwell painting that I wish my life was.

So just understanding that we have this social comparison is hugely important. The other thing that I like to think about is, and I love this one too, because it's really important to understand that this is going to pass. It is going to pass. And I can say that with a lot of conviction because I know that every other pandemic has passed and ones that were way worse in terms of killing people, way worse. And they have all passed. This isn't something we were worrying about five years ago or 10 years ago. We weren't worrying about the Spanish flu.

And so I know this will pass. I know there'll be vaccines or the virus will decrease in its letality. So we know this is going to happen. So understanding that, then what I like to do is picture myself five years from now. picture your future self five years from now that future self looking back to today what do you wish you would have done what sort of attitude do you wish you would have had what sort of things do you wish you would have taken advantage of during this time where's the opportunities because you are going to be on the other side of this and you are going to be looking back and so I love to have that frame of mind

too because you know what I want people to say is oh my gosh Brad he was such a hero I probably nobody's going to tell me this, but this is my fantasy. He was such a hero, such a source of inspiration and love. Brad, how did you do that in the midst of all this uncertainty? How were you able to do that? So I have this fantasy of myself in the future. And then I try to be that now. So I try to be that source of inspiration.

I aspire to do that. But I'm trying to do it now because I know that's how I'm going to want to look back at this point in time. Given how many people are suffering right now, one of the other major questions that has come up quite often is, how do we deal with all of this in an ethical way? How do we conduct ourselves in a way that is best not only for ourselves, but for society and humanity? What are some ways to think about that challenge? I know, that's a big question. Well, yes, and also, if you don't mind, Paula, can you tell me a little bit more about what you mean by ethical? There are many conversations around people who are,

like me, mom and pop landlords. We are not giant Fortune 500 real estate companies. We're regular people who have a handful of rental properties and we're asking ourselves these questions around, what do I do if I have a tenant who can't pay their rent? I don't want to evict somebody, but I also have bills to pay. Like I also have to come up with mortgage payments. You know, all of those questions, distribution of resources and fairness and justice. these are our issues that are really coming to the forefront right now. I actually think that this is a huge opportunity. This has been a wake-up call for our culture on so many levels, as you're saying,

around in what areas are we enjoying privileges that others aren't? How can we support people, you know, like Black Lives Matter? How can we support the message that many people are putting out in the world around, this is my experience in the United States. it's please hear me, please help me. Please do what you can. It's incredible. I'm so happy. You know, one of the things I really love to see is obviously peaceful protests that are so multicultural and diverse in terms of the people who are doing it. I just love that. Markets going up are typically related to optimism. So there's some obviously, there's some optimism going on around what's happening. Perhaps it's optimism related to the virus. Perhaps I don't really know. But obviously that's what's happening.

And there was tremendous pessimism a few months ago, which led to the market collapse. And so I just love the question. And I think we all should be asking it of ourselves. Like, how can I be a better listener? How can I really expand my conscious awareness to understand the experience of others? This goes back to our cave person brain also. We're wired to be tribal in nature. We're wired to, a lot of research on implicit bias and racism comes from this.

You know, we're wired to put ourselves into categories and groups and feel safer and connected with one group over another. This is how human beings are wired. And so it's just another example of how we have to consciously become aware of this and seek to override it. In that sense, it's similar to some of our biases that get us in trouble in our financial life. So anyway, I'm actually really excited about the future. I think that on the other side of the pandemic, on the other side of the protests, on the other side of this economic collapse, there's an opportunity for us all to be better financially,

to be healthier. Like the next flu season, we're really going to be paying attention to that, and be better human beings in terms of how we treat each other. We're coming to the end of our time. Thank you for spending this time with us. Where can people find you if they would like to know more about you and your work? So I'm Dr. Brad Clantz on social media.

I think I'll just go ahead and come out with it. I'm pretty active on TikTok. I noticed on Skype that your away message was putting together my next TikTok video. Yes. So I actually am part of TikTok's creative learning fund, which is really excited. They're basically investing about $50 million into creating learning experiences for people and knowledge-based experiences. So that's something I've been involved in in the last month or so. But I'm super passionate about putting the financial wellness, financial health, financial planning, financial psychology message out on that platform. And it's so fun because essentially you have 15 seconds and you got to do it while lip syncing and dancing and taking these challenging financial concepts and making them simple, interesting, and actionable. So I've been having a lot of fun there. Are you a good dancer? No, I try not to dance. Okay, so let me let me put it this way. I was great in the 80s,

okay, but I haven't upgraded my moves. I mean, that's cool. If you can nail 80s moves, like that's Exactly. So I've been to have a lot of fun on that platform. But Dr. Brad Clontz on social media. All right, including on TikTok. Yes. Excellent. And we will link to all of your social platforms in the show notes. Sounds great. Thanks so much for having me. It's always a pleasure talking with you. Thank you, Dr. Clants. What are some of the key takeaways that we got from today's conversation? Here are five. Number one, when you become emotionally charged, you become rationally challenged. Think about a time when you were emotionally charged. Maybe you were drawn in by some really exciting consumer item like a car or a laptop. Or maybe you were emotionally charged by watching your portfolio tank during the Great Recession.

Or conversely by watching it do exceedingly well to a point to which you then developed unrealistic expectations of how well it would always do. Or maybe you became emotionally charged during a fight about money. In those times of high emotional charge, were you being completely rational? probably not. As humans, we are emotional and our emotions take over easily and this can take a large toll on our decision-making abilities. When we become emotionally charged, we become rationally challenged. This is how our physiology works. And so when we become really upset, scared, or excited, doesn't really matter. When that emotion turns up, what happens is the thinking part of your brain, the part of your brain that

weighs the pros and cons, that thinks about the future, that is required to delay gratification as an example, that part of your brain essentially shuts off. Letting our emotions override our decision making can lead to regret. And so the solution is to put time and space between impulse and action. Don't make a decision right away. Pause, slow down, consult with others, talk with experts, create a gap between impulse and action so that your emotions don't end up getting the better of you. That is key takeaway number one. Key takeaway number two.

Don't try to predict the future and be especially cautious of predicting the future if you attempted it in the past and you were right, because that can lead to false confidence. In times of volatility, times of anxiety, when we experience a traumatic event, our belief in a safe, predictable world is shattered. And so it's natural to want to look for signs, look for patterns, or make prognostications so that we think we can be better prepared for the future. The temptation to predict the future is, in part, the temptation to exert control over a situation in which we feel out of control.

But if we try to make guesses about the future, if we're wrong, that's a problem, and if we're right, that's an even bigger problem. The problem is you might be right. And I say that's the problem because now you think because of these two variables, that's why I was right. And unfortunately, the more times you're right in a row, the bigger the fall later. In order to make better decisions, we have to accept the fact that nobody can predict the future. And when we're looking at any given asset, whether it's a stock, an index fund, a house, the price only means one thing, which is the agreed upon value of this particular item at this particular point in time.

That's all we know. We know the present. We know the past. And we know that nobody can predict the future. And those who claim they can are often the ones who are set up for the biggest fall. So that is key takeaway number two. Key takeaway number three. We are rationalizing beings.

We're influenced by outside forces in many small invisible ways, ways that we are not consciously aware of. And when everyone around us is doing something that we're not, it's natural for us to go, wait a minute, why am I being left behind? What's wrong with me? It's very tempting to follow the herd. It's hard to fight this instinct. It's the way we're wired. And oftentimes, if we follow the herd, we don't think to ourselves, like I am following the herd right now, we rationalize our decisions. Anytime that we make a choice, whether it's emotionally charged or whether it's through social pressure, we often rationalize those decisions. We think that those decisions are coming from a place of logic and reason. But we are, as Dr. Klont says, we are not rational beings. We are

rationalizing beings. You know, we like to think that we're rationalizing beings, but we really are rationalizing beings, essentially. It's critical, like, around all these things is just having this self-awareness, not trusting your instincts, having always just second guess these impulses you have. So what can we do? First, accept the fact that we're wired to do it wrong. That's natural. And when you want to make a decision about something, be curious about your own motivations. Just ask yourself, isn't that curious so that you can dig into your motivations, your choices, your impulses, your responses, your reactions, beware of confirmation bias, and don't hold to any of your ideas too tightly. Stay open-minded and approach everything with a spirit

of curiosity. That is key takeaway number three. Key takeaway number four, your financial stress could be more dangerous than your financial reality. As Dr. Clance describes, financial stress is a mortality risk factor. Chronic financial stress joins the ranks of smoking or diabetes or hypertension in terms of being a mortality risk factor. While that chronic stress could kill you, most likely the reality of your financial situation, for most of the people who are listening to this, the reality of your situation is not the thing that's going to kill you. The stress will. Financial stress can absolutely kill you. However, your financial life is probably not going to kill you. There's probably a very low risk that your financial life is going to actually

lead to your death, especially if you live in the United States. So how do we cope with this stress and anxiety? Well, as Dr. Klons describes, the best way to treat anxiety is to embrace exposure to the thing that makes you anxious. Use the exposure technique. And in the case of financial stress, you can do this through the worst case scenario exercise. So sit down and really think through the worst case scenario. All right, if you lose your job, what would happen? If you can't pay your mortgage or rent, what would happen? If you can't buy groceries, what would happen? All right, think of what would happen next, what would be the next step, and then what? And then what? And then what after that? And as you envision the worst-case scenario, more times than not, you'll realize it's not that bad.

If you would like to hear more about this, in episode 198, we interviewed Ken Honda. He's known as the Zen Millionaire of Japan. And he describes a similar exercise. He describes thinking through the worst-case scenario so that you can have a more Zen attitude towards your finances. So if you want to listen to that to get some more follow-up information, You can access that at affordanything.com slash episode 198. Going back to this conversation about financial stress, as Dr. Clantz pointed out, the average millionaire has endured three major financial catastrophes or financial failures,

while the average non-millionaire has endured slightly less than one. So if you do find yourself regretting decisions of the past or facing a financial catastrophe, remember, you're in good company. And now you have the opportunity to deconstruct your failures and learn from them. So that is key takeaway number four. Finally, key takeaway number five. Adopt healthy coping mechanisms. The events of 2020 have taken a huge emotional and psychological toll on everyone.

Catastrophizing doesn't help, despite the fact that it can be a natural inclination. Rather than panicking about the world ending, look for the opportunities even in, these tough times. We're in the midst of a crisis. People are losing their jobs. Incomes are going down. Where is the opportunity? How can you make the most of this time? Do you get to spend more time with your family right now? Are you becoming a better parent? Are you using this time to figure out what your next step in life is going to be? Are you developing new skills? Are you becoming better at self-care? There are opportunities everywhere if you look for them. And if you're having a hard time thinking of something, try this technique.

Picture your future self five years from now. That future self, looking back to today, what do you wish you would have done? What sort of attitude do you wish you would have had? What sort of things do you wish you would have taken advantage of during this time? You will be on the other side of this, and forward thinking can help you overcome doubts about the uncertainty of the present. Those are five key takeaways from this conversation with Dr. Brad Clantz about how to develop financial resilience through the events of 2020. If you enjoy today's episode and you want to chat about it with other members of the Afford Anything community, head toafordanithing.com slash community.

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