What Does It Take To Build Wealth? Planning & Monitoring

Last updated on November 19th, 2022 at 06:36 am

In pop psychology and social media, there seems to be more interest in pop personality than in financial behaviors when it comes to talking about the things that will have the greatest impact on how successful we are at accumulating wealth. Who doesn’t love a one-question quiz that asks you about your favorite color and then gives you a report telling you you’re a terrible investor because you like magenta? Tests like the Myers-Briggs Type Indicator (or “MBTI”; also known as the bain of existence for most industrial psychologists—a topic for another time) make the serious and scientific task of personality assessment seem like a game. You can even “type” yourself into one of sixteen Star Wars or Harry Potter characters. But are these tests useful in practice? The jury is still out for any productive use other than self-exploration, counseling, and team-building.

When it comes to the prediction of financial success, and compared to the fun-and-games of type-indicators and other “Cosmo tests,” it’s easy to forget something as simple as how much time we spend diligently planning and monitoring the money-related aspects of our lives. In other words, the answer to “what does it takes to build wealth?” includes time spent planning and monitoring what’s happening in our financial lives.

Planning and monitoring relates to conscientiousness from the Big 5 (or Big 6) model of personality (one that is much more scientifically rigorous than the model around the MBTI). Conscientiousness is among the best predictors of how well we do on the job, including the job of managing our financial lives. Beyond this, though, measuring past behaviors and experiences related to personal financial planning and how we monitor what’s going on related to our money can help provide us with insights that allow us to improve and also help us understand why we’ve had past successes or failures when it comes to our finances.

In each study examining affluent investors and self-made millionaires that we have conducted over the past 40+ years, individuals who were prodigious accumulators of wealth (those at the top quartile of wealth accumulators) consistently spent more time each week planning for future investments and studying their current investments as compared to those who were categorized as under-accumulators of wealth (those in the bottom quartile). The same has held true for general financial planning within the household: spending time each week planning and monitoring is correlated to financial success. And these findings translate to mass-affluent and emerging-affluent populations as well, not strictly millionaires and beyond. In other words, for all of us, the more time and effort we put into planning our financial affairs, the better our financial results will be. This is obvious, yes, but worth reminding ourselves when it is so easy to be distracted by hype.

Our research indicates that the wealth factor of “Planning & Monitoring,” measured by our experiences and past behaviors, is predictive of financial success (net worth) above and beyond how old we are or how much we make. As an example, take two 30-something attorneys making $160,000 a year: the one who spends more time considering his retirement plan, how he’ll pay for his children’s college education, and how he’ll retire early will most likely have a higher net worth than the attorney who spends little or no time considering and planning for these events. You can translate this concept to monitoring the financial advice each attorney is receiving as well: the attorney who is spending time ensuring the advice he’s receiving is sound and monitoring its implementation will be in a better financial position than the one who simply outsources everything financial and checks in once a year.

This data point is obvious, but certainly not glamorous. And because it seems less-than-glamorous, many financial professionals don’t discuss it, especially with high-income and/or high-net worth clients.

So, if you are considering working with an advisor, planner, or coach, to answer the “what does it takes to build wealth?” question, here’s a tip. If you’re seeking advice from a financial professional or even chatting it up with the benefits/401(k) provider at your company and you don’t hear anything about setting aside time each week for planning and monitoring, it’s time to reconsider the advice you’re getting. Guidance from a financial professional that ignores what we do is likely to become more suspect as we move forward in an age where investment returns are being commoditized.

And if a financial professional wants to give you a quick test to place you in Star Wars category box or other canned profile, remember that those tests are likely designed more for entertainment than for actually helping you improve your financial life.

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