Confronting Financial Stagnation: Out of your comfort zone
As a practicing financial advisors who conduct hundreds of financial review meetings a year, we can say with authority that financial stagnation in some form hinders most people.
Financial stagnation is a state of impaired action – when you are stuck in an inactive state due to some fear, conflict, or mental block. A classic example is avoiding participating in the stock market for fear of losing money while simultaneously feeling stressed about dismal bond or money market returns. Another classic example is delaying to create or update your estate plan, even though you are exposed to more taxation than necessary or have family members who would suffer the consequences of an unoptimized or incomplete plan. Financial stagnation may be isolated to one financial domain, such as investments or estate planning, or may be present across many financial domains.
I have witnessed how exciting it can be when people plagued by inaction for 10 years or more make more progress in one year than they did in the previous decade by confronting the root cause(s) of their stagnation. You will feel tremendous relief and personal satisfaction by identifying and confronting the causes of any financial stagnation you are experiencing.
Your Financial Comfort Zone
Most of the causes of financial stagnation can be demonstrated by thinking of three zones: financial comfort zone, financial stretch zone, and financial panic zone.
Let’s say you are a rookie investor on the verge of making your first investment. Your comfort zone consists of a checking account and money market account. A quick check-in reveals that investing in a well diversified world fund consisting of a moderate mix of stocks and bonds is a healthy stretch you are willing to take, but the thought of being in an aggressive growth small cap stock ETF (which can decline 20% or more in a heartbeat) is in your panic zone.
Your financial comfort zone consists of financial activities you presently undertake with little or no resistance. You have a level of confidence and familiarity with these activities.
Outside of this is your financial stretch zone, consisting of activities you have not engaged in and/or feel mild-to-medium resistance toward. These activities are perhaps unfamiliar to you, but are still within a bearable level of change. All it usually takes to act in this zone is a little courage and persistence to stretch beyond your current level of understanding and experience. With practice you will learn to thrive in this zone, expanding your comfort zone in the process.
Finally we have the financial panic zone, which includes activities that give you great discomfort and you feel tremendous resistance toward them. They involve a level of change, ambiguity and emotional resistance that goes well beyond your current comfort zone. While diving into the panic zone may result in great progress and experiences, the emotional trauma involved is often too great to sustain any consistency. Thus, the preferred place for breaking out of financial stagnation on a consistent basis is the financial stretch zone.
Get out of your comfort zone to confront financial stagnation
Regardless of the size of your comfort zone, financial stagnation occurs when you stay in it – stopping your own evolution while the world around you continues to grow and expand. It does not take long for your expertise to become obsolete when you stay within your comfort zone. On the other hand, financial progress occurs when you enter the stretch zone. In the example above, because the aggressive growth ETF is in the investor’s panic zone, considering it may delay that investor from ever gaining the courage to act. Conversely, the moderate risk world fund would be a good next step because, while it is in that investor’s stretch zone (slight discomfort), it is an action they would take. Consistent baby-steps in the stretch zone is a solid strategy to incorporate into your personal finances and every life domain.
Joseph J. Janiczek is the Founding Partner of Janiczek Wealth Management. This post is adapted from his book, How to Achieve Absolute Financial Freedom.