Sept. 21, 2022

How Your Money Anxiety Might Actually Help Build Wealth

How Your Money Anxiety Might Actually Help Build Wealth

Because financial fear isn't all bad.


According to an APA 2022 Stress in America Survey, 87% of respondents listed inflation as a source of significant stress—and the researchers say no other issue has caused this much stress since the survey's launch.

Money anxiety or "financial fear" is common, and to an extent, it can be healthy. If fear about inflation and running out of money prevents you from blowing every dollar on fast casual dining, and instead urges you to save and invest for the future, that fear directly benefits Future You.

But if fear prevents you from investing in the stock market because it feels too risky, well…now we’re letting misplaced, data-refuted concerns interfere with our ability to build wealth over time.

Understanding your own deeply held beliefs and fears about money can help unlock your next-best step, and it’s not one-size-fits-all. We're joined by Mariel Beasley, Principal at the Center for Advanced Hindsight at Duke University and Co-Founder of the Common Cents Lab (https://advanced-hindsight.com/commoncents-lab/) to discuss financial psychology and what behaviors we can unlearn (or double down on) when it comes to money anxiety.

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Transcript

Katie: Have you ever experienced fear around money before? Like the idea that you could lose it all one day—whether due to a lost job, economic downturn, or reckless spending—despite being in a pretty stable place financially? If so, I am here to tell you financial fear can actually be pretty damn useful. It can help us rein in our spending, prioritize saving, and focus on wealth accumulation. But we also need to know when that fear becomes paralyzing or makes us live a smaller life than we could be. And a little hint: My guest today is gonna help us understand just that. 

Welcome back, #RichGirls and Boys, to The Money with Katie Show. I'm your host, Katie Gatti Tassin. And today we are diving into a topic that doesn't get enough attention, in my opinion: financial fear. Financial fear, anxiety around money, is really common. And it can inhibit you from living your life to its fullest. For many of us, we learn these fears and internalize these anxieties early in life. It's like learning to speak when you're a kid. When you're young and impressionable, you soak in the language, the culture, the belief systems of the adults around you. Your attitudes about money are no exception. So combine your own background with legitimate financial concern around things like inflation or the stock market, and you could find yourself in a situation where your financial anxiety manifests itself in avoidant behavior. Here's a quote from a Healthline article in the American Psychological Association's 2022 Stress in America Survey. 87% of people who responded listed inflation as a source of significant stress. The rise in prices from everything from fuel to food has people from all backgrounds worried. The researchers say, in fact, that no other issue has caused this much stress since the survey began in 2007.

Our guest today is Mariel Beasley. She's the principal at the Center for Advanced Hindsight at Duke University that explores how people defy the rational agent model when making decisions around things like money, health, relationships, trust, and more. She is also the cofounder of the Common Cents Lab, which works toward financial well-being solutions for low- to moderate-income people living in the US and abroad. So we will chat with her about financial fear toward the end of the episode. But first, let's dive into why I wanted to focus on this topic today.

Fear is an interesting emotion, and it's often associated with anxiety and the perception of danger. A few months ago, I joined the fabulous Farnoosh Torabi on her show So Money, and she asked me how we, as in my husband and I, think about living beneath our means, and this is what I told her. “I'm always very aware of, like, yes, we have good money coming in right now. We're high earners right now, but we won't always be. We're, you know, one job loss away or one unexpected child away from potentially interrupting and disrupting that income. And so I'm always very cognizant of, like, I don't even wanna live close to the top of our potential means, because I know that nothing is guaranteed and that money might not be there tomorrow. You just never know what's gonna happen. As the pandemic showed us, I think it was a bit of a wake-up call. So that's kind of how I think about it. And I would like to get that number lower, frankly. I would like to spend less than we do.” 

And it got me thinking. We talk a lot (and by we, I mean me) about the importance of embracing an abundance mindset, of moving briskly about your life courageously, and embracing risks and taking chances. But when I reflect on my own financial situation, a large part of my success is derived from fear, the emotion that we often reference as a feeling to stamp out at the first sign of distress. Because while fear is not very helpful in things like your career—after all, accomplishing big things and succeeding gloriously almost always involves courage of some kind—it's decidedly more helpful when it comes to things like your personal financial and investing plan in the financial world. We rebrand fear as something a little sexier and more sophisticated: risk. Risk mitigation, therefore, is a substantial consideration in any well-laid plan. Mitigating risk usually comes down to accepting that things will likely not go according to plan, and then planning accordingly. It's protecting your downside, but protecting your downside must start with acknowledging your potential downside, considering the downside, imagining the downside and how you would respond. This, my friends, is where fear is not only okay, but healthy. Fear can be a very useful tool in setting yourself up for safety and success.

So let's help you visualize this. Imagine you're at a party. [music starts] Uh, Nick, why is the music scary? This is about healthy fear. So we're gonna keep this light. I'm just gonna switch this out. Okay. So everyone is having fun at the party. 

Nick: Until the lights go out. [screaming]

Katie: Because it's time for the dancing to begin. [happy music]

Nick: All fun and games until the ax-wielding psychopath covered in blood shows up. [screaming]

Katie: Because it's a costume party. [happy music] Woo, Dave's here. Great costume. 

Dave: Hey guys, thanks. It's kind of hard to breathe in this mask. 

Nick: A costume party for werewolves, and the full moon just came out. 

Katie: But what luck! Clouds covered up the moon. [happy music]

Nick: It was a dark and stormy night… [screaming]

Katie: It is tempting to dive into the cool and sexy money stuff right away, like making millions and cheating the IRS and finding the next Amazon. There is a reason why so many courses purport to share with you, and only you, the secrets of magical wealth-building through real estate and stock picking and yada yada yada, but here's the actual secret: It does not matter how tax-optimized you are if you are overspending. The number one thing that is going to drive real financial progress…drum roll, please…is how much you have to invest in the first place, and how much time that money has to compound. A solid spending plan is the nonnegotiable foundation here. Because if you don't spend it, you can invest it. I am personally trying to become a multimillionaire ASAP, and my approach to spending helps make that possible. So I'm sharing my specific step-by-step process via my signature take-at-your-own-pace, on-demand course, Budget Like a Millionaire, with over 500 graduates so far. If you would like to get a little taste, you can download my free Money Management Routine at the link in the show notes. 

So yes, fear can be a very useful tool in setting yourself up for safety and success. But first, let's start with a distinction: fear in wealth acquisition versus fear in wealth accumulation. When we're talking about the ways in which we earn money, like pursuing opportunities, getting out of our comfort zones, taking risks, fear can hurt us more than it helps us, because fear is what keeps us stuck in the nine to five that we feel lukewarm about, because the healthcare plan is affordable. It's what stops us from starting our own cookie company, because we are afraid of failure. It's the emotion that keeps us stuck and stagnant. Fear in wealth acquisition is usually not very useful beyond its lowest-level, most practical application, like “Don't quit your job without a plan or any savings.” Fearing the outcome of a rash decision like that one is probably wise. But fear in wealth accumulation looks completely different. When we're in the accumulation phase of our wealth-building journey, we are actively trying to stack our paper as high as possible. And we do this in a few ways: earning more (that is our wealth acquisition part), spending less, and investing the difference. There are countless paths to achieving these things when it comes to spending less and investing the difference, though a healthy level of fear can be extremely useful and lead to better outcomes over time. 

So let's talk about spending less. The fear piece of the spending less equation kind of mirrors what I told Farnoosh. Just because you are earning money today does not necessarily mean that you will be earning money tomorrow. Whether you work for a high-risk startup or a Fortune 100 company, the world can and does change overnight. The pandemic, if nothing else, taught us that risk is what you don't plan for. Even the perception of safety and a stable job can be threatened without warning, and staying grounded in this reality can be very useful. The healthy fear that you could lose your job at any moment for any reason is a powerful motivator for spending less than you could and living beneath your means. As Brad and Jonathan say on ChooseFI, “a 50% save rate cures all.” In other words, if you are saving half of your income, you are probably financially invincible, but that level of margin does not happen overnight. And it usually doesn't happen by accident. If fear is the fuel that drives your desire to plan and live beneath your means, acknowledging that fear is valid, and leaning into it can yield great results.

So let's talk about the practical implications of spending less and living beneath your means. How do we do it? For one thing, we start with the end in mind. We determine how much we want to save to feel secure. And then we work backwards with what's left. The number one risk for any person without a financial plan in this arena is making decisions based on the number in your checking account. I see it all the time, and I used to do it myself. I would make spending decisions based on how much money I literally saw sitting there ready and waiting in my checking account, assuming that it was all fair game. My loosey goosey reactive approach kept me on a treadmill running in place for each paycheck, and then watching it evaporate before my eyes. As long as I had my rent money on the first of the month, and then there was enough left over to pay off my Discover bill at the end of the month, I figured “I'm doing all right.” But this is a trap. This is the lackadaisical “It'll be fine” attitude that I had. And it was one that hinged on trust that there would always be another paycheck coming, meaning I was living dangerously close to the edge. But watching the pandemic wreak havoc on most industries and lead to sudden massive layoffs taught me a very valuable lesson: Living beneath your means gives you a much better chance at weathering financial storms. So if you are in a couple or another dual-income situation, one wise but understandably unpopular goal is to just live on one income—and not just one income, but preferably the lower of your two incomes. That way, even if the higher-paying job disappeared, you're not scrambling to figure out how you're gonna pay your bills. 

This is a goal of ours that's been pretty hard to enact, partially because we just got married and that was expensive. But we're conscious of the fact that at this point we still have a long way to go. Our lower income also happens to be our far stabler one, and the one that would be less likely to go away suddenly. So it's the job that we could more firmly count on. And here's the key: It doesn't have to be forever. You don't have to live seriously beneath your means for your entire life. You just have to do it long enough to amass enough wealth that you feel comfortable loosening the belt a little bit, which usually only takes a few years of discipline and focus. We will come back to that a little bit later in the episode. 

So moving on to healthy fear. In the investing piece, I am guilty of encouraging people to jump into investing with both feet, because I'm aware that many people hold back from doing so out of fear. But that fear of broad-based index fund investing is probably irrational, and just based in a lack of knowledge or awareness. But I think a rational level of fear in investing decisions is actually quite beneficial. Look no further than the slow unraveling of cryptocurrency this year for proof. And I promise, I don't mean to turn this into a dunk contest, but it is a useful personal example so we're gonna go there. In 2020 and 2021, when cryptoheads everywhere were echoing choruses of “To the moon!” and “Have fun staying poor,” I felt very fearful and skeptical because my personal investing philosophy is not to invest in things if I don't understand how they make money. In other words, if there are no underlying cash flows that I can point to, it is too speculative for my risk tolerance. For example, with an index fund comprising a bunch of companies’ stocks, I understand why those shares have value. I can see the underlying fundamentals of the companies, that they are profitable or that they are going to be profitable or that they are underpriced. It intuitively makes sense to me why investing in a wide range of diverse companies over time will provide returns. 

Same with something like real estate. I understand the math of how you can calculate why putting $50,000 down on a certain property that will yield a certain amount per month, as well as the depreciation write-offs and the appreciation of the property and the diversification of your investment income, makes sense. I understand where the return is coming from. I just never felt that way about cryptocurrency or NFTs, and I'm not claiming that I was right or wrong about it. Just that the speculative nature of these assets and the supposed reasons they had or have value did not pass the sniff test of my own investing philosophy. I was fearful. I felt afraid to lose money on something like bitcoin, which, while I could see the technology as impressive, didn't seem to have inherent value. To me, there are no underlying cash flows or profits, and the value is simply contingent upon someone else being willing to pay more for it later. And the mass adoption of the idea. The arguments for why they had value in that particular example, like the limited supply, also didn't make intuitive sense to me. We have had a hard money system in the US before. So think money backed by gold or silver. And we abandoned it, because it was not flexible enough. Hard money systems typically lead to greater wealth inequality, not less. And the point is, I didn't feel at all confident in the facts that I was presented with. I had fear. I did not invest. Now, we've seen this crypto market unravel a little bit. Suppose it's stablecoins like Luna going to zero. Firms like Celsius pausing withdrawals. Coinbase admitting that if they go bankrupt, they can take your crypto. And the value of speculative assets, like an NFT of Jack Dorsey's first tweet, originally purchased for almost $3 million last year, only being able to fetch an auction price of $280 bucks. 

Now this isn't to say that there isn't long-term viability in these things. I am not claiming that it'll never work or that these markets won't come back. I am merely saying that my own risk aversion and fear prevented me from falling prey to FOMO. My fear of losing money was greater than my fear of missing out. And now I have the distinct privilege of being only down 12% year-to-date instead of 50% or more. A healthy fear of losing money may prevent you from striking it mega rich, but it'll also probably prevent you from ever losing your shirt. The boring, diversified, broad-based index funds that stand the test of time are not likely to make you a billionaire, but they are almost guaranteed to make you a multimillionaire if you invest for long enough. The TL;DR is that if it sounds too good to be true, it probably is. And exercising fear and caution can save your ass when it comes to investing your scarce finite resources. 

So how do we prevent fear from going too far? How do we know if our anxiety is justified? I am the first to admit that this fear can be taken too far. It's all contingent upon that earlier note: It's not forever. You don't have to live super below your means or stick to a relatively traditional risk-averse investment strategy forever, just for as long as it takes you to accumulate enough wealth that you begin to feel a little bit more comfortable. I was having a conversation the other day with a friend about this. And she said, you know, “I'm very aware that I'm only one or two major mistakes away from being on the streets.” And her point was that she's making great progress, but she's not in a place yet financially where taking her foot off the gas would make sense. One of the reasons people shy away from making major financial changes, like downsizing their home or car or cutting back on discretionary spending or picking up a little bit of extra work, is because they feel like they're committing to it for life. And fortunately, it doesn't take that long. 18 to 24 months of intense focus and work ethic can change your financial trajectory for the rest of your life. 

For example, if your financial independence goal is a million dollars, or roughly 25 times your annual spending, if your annual spending is around $40,000, maybe you hit the gas really hard until you accumulate $250,000 to $300,000. Because by that point, you have a healthy buffer and you are now well on your way to your goal, and can likely begin to coast just a little bit. So maybe by the time you hit $500,000, you're able to coast even more and begin reintroducing some of the habits that you originally deemed too frivolous in your grind phase. But sleepwalking through the wealth accumulation phase? It's not likely to generate the results you want, and it’ll probably make the entire process take a hell of a lot longer. By the time you've got half a million dollars in the bank in this example, you can realistically check your own fear. You can say things like, all right, even if the stock market experiences a 40% drawdown, which is likely to happen every 20 to 25 years, statistically speaking, I still have $300,000 available to me. So even those big drawdowns would not put you in a state of financial duress. 

To summarize, I would go pedal to the metal for the first 25% of your goal. Spend as little as possible, focus on earning more, invest as much as possible. Then I'd probably lighten up a little bit between 25% and 50%. And then by the time you're hitting 50%, I'd probably recommend a more modest approach. And this works because having 50% of your financial independence number is technically more like 75% of the way to your goal timewise, thanks to compounding. I'll link a blog post about this in the show notes. Before we get to the interview, let's take another break, and... 

Nick: Don't worry, Katie, I got this. I read you loud and clear from the last one. [circus music]

Katie: Why are you like this? 

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Now to our conversation with Mariel. Mariel, thank you so much for joining us today. Welcome to The Money with Katie Show

Mariel Beasley: Thanks for having me. Glad to be here. 

Katie: Absolutely. So today's episode is about financial fear and the bizarre ways in which it can actually be helpful sometimes. How do you think about the role of fear in financial decision-making? 

Mariel Beasley: As you kind of alluded to, it has sort of two sides, right? So there are obviously the ways that fear can be bad. It can add stress, it can put somebody into what we call also a scarcity mindset. There's this great research that has been done that shows that if you're operating under the scarcity mindset, where you really have this intense sort of concern about not being able to make ends meet, essentially it creates a tax on your bandwidth, like your just mental abilities to think creatively, to problem-solve. And that is equivalent on your IQ, actually, to about going a full night without sleep. So if you took an IQ test the day before, and then you didn't sleep at all, and then you took another IQ test the next day, your IQ test, you'd score lower. And it's actually the same thing with if you have extremely high sense of scarcity. So fear can be harmful in that way, because it means you're not gonna be creative. You're not gonna be able to problem-solve, because you're basically just trying to make it through the end of the day. Yeah. 

Katie: Yeah. Wow. Oh my goodness. 

Mariel Beasley: Yeah. So that's sort of the tough stuff, but a little bit of fear in smaller doses can be actually extremely helpful. And in behavioral science, there's actually a scale, the spendthrift/tightwad scale. And it essentially is like, how hard is it for people to part with money, which is, you know, related in part to fear, right? It's fear that you are gonna need this for something else. So why spend it now? And essentially what it shows is that people who are…sort of have a little bit of a higher fear, or a little bit of a higher pain of separating with money, tend to be better savers, they're more prepared for the future, and sort of all of these other things that we associate with being super important to being financially secure. They're less likely to take on risk with big debt and all of those things. 

Katie: So you work with a lot of behavioral science data. What do you think people would be most surprised to learn about their own financial behavior? 

Mariel Beasley: So I think the thing that is probably most surprising is that we like to think that we are in full control of our own financial behavior and our own financial decisions, right? Like we like to think that, like, I made that purchase because I wanted to make that purchase. And I save because saving’s really important to me. And I'm a good saver because it's an important value that I have. But what we actually know from behavioral science is that so much more of your financial behavior is actually driven by the environment you're operating in. Basically like you are all of a sudden much more likely to purchase a pair of jeans if it's on sale. Now, it doesn't matter if it's like…actually you're now, like, oh yeah, of course, it's cheaper. So now I'm more likely to do it. No, no, no. If we said that these jeans cost $75 for half of the people. And then the other half of the people, we said, these jeans normally cost a hundred dollars, but today they cost $75. And it's like the same pair of jeans. People are more likely to buy them if they…because they're anchored on, oh, it's, well, they're really worth a hundred dollars. But that difference shouldn't make any difference in how you feel about whether or not this pair of jeans is worth $75 to you. That's a hard pill for people to swallow who are doing really well financially, because they like to think that like, no, it's because I'm a good person and I’ve got good values…like I'm doing everything right. That's why I'm like, I'm financially secure. It's all me, it's internally me. And it's really actually like, no, you have access to better products and services that are actually helping you build savings automatically. You have a job that maybe automatically puts money into a 401(k) for you. You have like all of these other things around you that make it much easier for you to have these better financial outcomes.

Katie: It kind of reminds me of that book Nudge. You familiar with Nudge

Mariel Beasley: Yeah. 

Katie: Where it's kind of that same concept of these little environmental tweaks can have this outsized impact on both positive and negative behavior. 

Mariel Beasley: Exactly. And that's a lot of behavioral science is, sort of gets characterized as sort of nudges, and thinking about the important ways that small differences in the environment influence outcomes. It's super relevant across lots of domains, but especially finances, when we think about how many decisions people are making every day regarding their finances, right? Every day we're making decisions about to spend, to save, to borrow. And they have huge consequences, which basically means that the small details around those decisions are extremely important.

Katie: So if our environment is so impactful, how do you think about behavior hacking ourselves to do the things that we know are good for us? 

Mariel Beasley: My sort of number one tip for people in like how to behavior hack your way into better finances is to understand your own shortcuts that your brain is going to make. We have these limitations, psychological limitations, that it's hard for anybody to think really concretely about the future. It's hard for anybody to really understand opportunity costs of like, well, if I get this, what am I not getting? What am I giving up? And it's also extremely difficult in moments of temptation to sort of not splurge when you know the money's in your pocket. And knowing that you're gonna fail, that's the important part to behavior hacking, is knowing that you're gonna fail, because then it lets you look for products that will prevent you from failing. And that's I think the secret, and what I mean by that is like, you know it's gonna be hard to plan for your future. So sign up for an automatic retirement savings program so that you don't have to, then, every time think about how to do this. Make sure that, you know, sit down and put a date on your calendar. And you're like, okay, this is the day that I'm gonna do it and set it and forget it. And then don't worry about it. And then similarly, there's tons of products now in the market that are designed to help with short-term savings, knowing that, like, it's really difficult to control your spending. There are new products all the time that are getting added, fintechs that are, you know, coming up with creative ways. So I think about something like Capital, which is a, is a app that we work with sometimes, 

Katie: Oh, I have a friend that loves Capital. 

Mariel Beasley: It's amazing, because you basically in the moment that you feel, okay, I'm really gonna get my savings under control, you could just set up a rule and they have all kinds of different rules to fit your lifestyle. And so you can do a round up rule. You can do a percent of every deposit into your checking account rule. You can do these rules where it's like, every time I shop at this place, I want you to send money into savings. 

Katie: Oh my god, that is amazing. This is not sponsored or an ad for Capital, by the way, in case anyone's like, what's going on here? Not an ad. I didn't know that there were that many unique…particularly like shopping at a certain place. That one would get me. 

Mariel Beasley: Yeah. It's really, really helpful. If you are like, I shop at this place all the time. I either wanna use that to build my savings, or I wanna try to get myself to shop there a little bit less, knowing that money will be taken out, extra money will be taken out of my account every time I do it. Digit is another app that has basically said, “Hey, we know it's difficult to save.” Basically they look at your income and your expenses. And then they have an algorithm that predicts every day how much money they could move without you missing it. Today, they move $2 over in savings. Another day they move $7 over, because they just look at your normal income and spend pattern and figure out like, oh, you're not gonna miss this money today. So I'm gonna move it over and hide it from you. And then all of a sudden you realize, wow, I actually end up having a lot of money and savings. 

Katie: I'm always a big fan of the “you analyzing your own spending and then deciding how much can I afford to set up for an automatic contribution,” but this is even easier because this doesn't require any work from you. So I like that. That’s actually really cool. I like this idea of finding products that are gonna help you kind of trick yourself into making better choices. 

Mariel Beasley: And essentially what you're doing is you're outsourcing your self-control. 

Katie: Oooh. That's a good line. I like that. 

Mariel Beasley: Yeah. It's just, it's super difficult. And everybody fails at times. Outsource that self control, understand your own limitations, and then identify, sign up and use products that address those limitations.

Katie: I love it. So we touched on this in the beginning of the episode, but financial fear usually comes from somewhere. It's not typically innate. It's usually learned. How much do you think people's upbringings create their financial patterns, and how can we notice those patterns more clearly and work to rewire them so we aren't reenacting the stories that we've inherited about money? 

Mariel Beasley: So that's extremely difficult. There's some evidence that does show that things that happen in our formative years that were extra impressionable have outsized impacts on our choices for the rest of our life. And we see this in music choices, actually. Spotify actually has recently looked at this, where your music tastes from when you were like a teenager influence your music taste for the rest of your life. It's the case with sports affiliation teams. There's a study that shows if you are of a certain age when your closest team wins a national championship, you are significantly more likely to be a lifelong sports fan. 

Katie: Wow. Roll Tide. 

Mariel Beasley: Yeah. There's lots of evidence to show that like these major events that happen in people's lives will basically impact far into their adulthood. And when we think about from a financial standpoint, that can be a major event that happened within your family that really sort of has been extremely memorable, that can drive fear, but can also drive hopelessness. It can drive sort of all of these different things that could result in different types of behavior. It can also be a large national event, like, if the great recession is happening or massive inflation is happening at a time where this becomes extremely salient to you, it's going to impact your decisions down the line. So you know, we do see that people who are kind of coming of age during the great recession are making less risky investment choices in their retirement savings. Now this is potentially actually harmful, because these are young people that actually should be doing pretty aggressive retirement saving strategies. And they are not, because they have sort of this major moment that happened at an important time in their life that has sort of caused some fear. You're exactly right, right? We do know that our childhood and these particular moments influence our decisions and our finances, but sometimes it gets expressed in different ways, right? 

So you could look at two kids from the same household and their financial situation growing up. If it's extremely stressful and difficult, you could have one kid that then takes that and internalizes it as in this sort of positive fear, where it's like, I remember that feeling as a child. I remember this was such a stressful thing for my parents. My parents couldn't handle finances at all. And so, like, they've gotten now…their finances are buttoned up and tight. And then you have sort of also somebody else, this is the behavior that I saw around me. And so this is the behavior that I've adopted, which is, you know, spend, spend, spend; don't worry about it. Don't think about it, even though it then causes stress in other ways, right? So the same sort of experience can be sort of expressed in different ways and sort of internalized in different ways. But I think the takeaway from this, or like how to identify if this is something that you're doing, is again, sort of thinking about the role of social norms. So in that latter part, right, it's about, this is what I saw. So this is what I do. And we are all influenced by what we see other people around us doing. We can't help it. That influence could be what we saw our parents doing. It can also be what we see our peers doing.

I would say the way to kind of address it and be like, you know, “I realize that I'm really bad with money and maybe I got this from my parents. Maybe I got this from this other thing” is to try to adjust your reference group and basically say, is there another group of people that I know that I can recognize that I can look to, that can become my new model? Trying to say, this is the peer group that I actually want to mimic and follow, rather than the one that is sort of a little bit more instinctual because of my upbringing? 

Katie: So this is fascinating. There's a podcast called ChooseFI that always references the same idea, where they'll say you are the average of the five people that you hang out with the most. Make us two of those five people. You know, listen to the show, internalize it, and make us part of that reference group. So I love this idea. I hadn't really connected those dots before. That's really interesting. 

Mariel Beasley: Yeah. And I think that that's actually…and there's a brand new study also out that came out by rush Che. And it was just written up in The New York Times as well, that actually shows like a great way to get out of poverty is actually by having friends who are, like, of different income groups than you. 

Katie: Whoa. Okay. 

Mariel Beasley: It's really powerful. And it's part of it is because you have, sort of, your social network is showing you different behaviors. It's providing access to different knowledge sources. You now…all of a sudden you have, if you are growing up in poverty, you might not have a lot of sort of role models of professionals. And you might not know who to talk to about doing a college essay. But if you have friends who are from a more affluent background whose parents are a lawyer or a doctor, now all of a sudden you have sort of a different reference group. And so that social network is extremely important. And I think that's probably one of the best ways to try to break some of these bad habits that maybe you've gotten from a different social upbringing. 

Katie: Super actionable. Thank you for that. So on that note, the Common Cents Lab is aimed at improving financial well-being for low- and middle-income people, and listeners of The Money with Katie Show really run the income gamut. They're all over the place. What's the most important step someone who is lower/middle income can take to improve their financial well-being, particularly in a country like America, where the social safety nets are a little bit lean? Is it this reference group concept? Is there something else that you would add here? 

Mariel Beasley: It's obviously a very complex and tricky issue. I think that there's a couple of things. One is that it's very difficult for an individual to do anything to get themselves out of that situation. It is quite often so complex because of the…it goes back again, right? We are products of our environment. And so the environment that low-income households are operating in. What we tend to do at the Common Cents Lab is we really focus on, how do we make products that are for, you know, specifically, you know, targeted more towards low- to moderate-income households. How do we make those products better, taking into account that people don't have self-control, taking into account that people sort of just struggle to understand opportunity costs, people don't understand…and this is across income levels, right? This is not just a low- to moderate-income household problem, but… 

Katie: It's a human problem. 

Mariel Beasley: Exactly, exactly. And people don't understand what a checking account balance means, even, right? You've got your available balance, your pending, and…but your available balance isn't actually even really available because some of that's already been committed to future bills. Depends on, like, has your rent been taken out or not? And so we work to say, let's design better products that just make this easier for people. And so again, it kind of goes back again to this idea of, look for good products, and not all products are good, and that's really difficult. And to help kind of understand what products are good, that is a part of like going to your social networks and seeing people who you think are doing well and thriving, and basically figuring out, what are the products that they're using, and adopting some of that. I think that's really, really important. There is some nice evidence to show that financial coaching is helpful. So particularly for low- to moderate-income households. Now there's lots of different kind of terms that get thrown out there. There's like financial education, financial counseling, financial coaching. Financial education, basically just like, oh, read everything you can about how to manage your money. Less helpful. 

Katie: Really? 

Mariel Beasley: It's just hard to remember it. It's hard to retain it.

Katie: Well, dang it. That's my whole job. Sorry, everybody. 

Mariel Beasley: Well, so the good news is is that the more you can emphasize actionable tips and rules of thumb, way more effective, right? Teaching somebody about what an interest rate is. They'll remember that for a little bit, but unless they're actually dealing with products that have interest rates, it's not gonna stick. It's not gonna…they're not gonna remember it. And then…and a lot of the research shows that that information just decays so quickly, unless it's paired directly with, “Let me tell you about interest rates. Now let's look at how your loan functions that you currently have. And let's talk about this loan versus that loan.” Oh, that is more effective.

Then there's financial counseling, which is, again, just somebody kind of telling somebody else, “Here's the things that you should do.” And it's a little bit more personalized. It's a little bit more helpful, because it's at least a little bit more personalized to what the person is working on. But financial coaching actually seems to be the most effective. And that is actually a deeper, longer relationship, right? So it's not an hour long where somebody's sort of giving you some ideas on something you can do and sort of multiple meetings with somebody that is highly tailored to your specific goals. So if you are a low to moderate household and your goal is like, I need to buy a reliable vehicle, then it's like, okay, well let's first work on your credit score, 'cause you're gonna need a good credit score. And so let's review your credit together, and it's this much deeper relationship and that's just to be more effective, but it's time consuming. It's hard. The good news, though, is that there's lots of community organizations that do offer financial coaching at no cost, in many cases, to folks who are low to moderate income. 

Katie: Are there any that you would like to plug for someone listening who might be, like… 

Mariel Beasley: Yeah, so there's a whole national network that's under the LISC umbrella. So it's just LISC, and they have these, they call 'em financial opportunity centers, which basically somebody comes in and they get connected to unemployment coach who can help them look at, can we help increase your earnings in any way, right? So are there training programs that we could help to really increase that earning potential? Because it's very difficult to get ahead if you just don't make enough money. So how can we help increase your earning potential through the employment coach? How can we help you with financial management through a financial coach? And then they also have an income supports program that can say what current government benefits? Mentioning that we have a lean social safety net. Not only is it lean, it's extremely complex to navigate. And so it's basically a person who sits down with you and helps you navigate through that. 

Katie: That's amazing. I had never heard of that network before either. Thank you for mentioning that. I'm sure someone listening is gonna now have their eyes open to maybe another opportunity. Mariel, thank you so much for being here today. It was really a pleasure to talk to you. 

Mariel Beasley: Yeah. Thanks for having me, Katie. Enjoyed it.

Katie: All right, everybody, let's dig into another Rich Girl Roundup. As a reminder, we will take listener questions every month. I'll put a call out for questions on Instagram. Follow @MoneywithKatie if you're not already, and we will pick one that feels interesting and widely applicable, and answer it. As my standard disclaimer, I am not a licensed financial professional. This is not financial advice. This is “What would Katie do?” This segment is brought to you by Betterment, giving you the tools, inspiration and support you need to become a better investor. This week's question is from Jake. 

“Regarding your specific beliefs…” Oh boy. “...I'm curious to see where you stand about wealth redistribution and people with hundreds of billions of dollars. You're obviously very passionate about financial freedom and wealth growth.” Yes. “So where does the line sit between striving for a lifetime of wealth and having too much? For you personally, what level of net worth or income do you feel is when we'd say, ‘All right, now this is too much?’ There is a constant debate around the ethics of being a billionaire, but where is the threshold for having too much money?”

So I know you're looking for a specific amount, but I don't know enough here to have a strong, informed opinion on the threshold over which wealth redistribution policy would kick into gear. And I don't think it's a specific limit above which we would suddenly begin taxing you more. I think, instead, it'd be a few surgical changes in our tax code that would shift the balance more toward rewarding hard work and less toward rewarding the accrual of capital itself. Recently I've become very interested in the work of Nick Hanauer, and I'm trying to get him on the show. He was an early investor in Amazon and he's a billionaire himself, turned civic activist. If you see this, Nick, email me back. So I'm gonna lean on his philosophy for my answer here. Everything that we think about economic incentives is wrong. That people don't become billionaires today because they’re thousands of times smarter or harder-working than the people who work in their warehouses. But because our economic system is set up in such a way that it most directly benefits billionaires and corporations. The current economic theory that governs our policy today says that if we just give a bunch of money via tax breaks to extremely wealthy people and corporations, then it'll trickle down to the lowest rungs of society. That capital itself creates innovation. The last 20 years, especially, have proven that that is unequivocally not true. Capital does not create innovation. People create innovation. People with billions of dollars often do not reinvest the majority of it back into society and innovation. They hoard it, unless they're the founder of Patagonia. So I've been very influenced by Nick's perspective on economics and how our current beliefs kind of get it backwards. And I think the proof is in the metaphoric pudding here. The free markets are like a garden, not a jungle. They have to be tended. Otherwise if they're left to grow unchecked, all capital will eventually accrue to one winner, and that's completely antithetical to a prosperous cooperative thriving society. To bring this home, specific tax policies that protect mass accumulation of wealth—say, for example, the estate tax exemption says that a married couple could pass down $24 million completely tax-free. In this way, our system rewards luck more than skill. If I work my ass off and I earn $24 million this year, I am gonna get taxed to the high heavens. But if I'm in the lucky sperm club and inherit it, I don't owe anything. I just get $24 million. Restoring equilibrium is going to come down to reconfiguring what we believe to be worth rewarding in our tax system, in our economy.

All right, y'all, that is all for this week. I will see you next week, same time, same place, on The Money with Katie Show. Our show is a production of Morning Brew and is produced by the talented Nick Torres and me, Katie Gatti Tassin. Sarah Singer is our VP of multimedia, and additional content editing comes from our lovely senior editor, Henah Velez. Sam Cat is our VP of chaos and Jojo is our chief of woof, but they were actually pretty good today. So I'll have to check in on them.