Journal of Financial Planning: September 2024
Meir Statman is the Glenn Klimek Professor of Finance at Santa Clara University. His research focuses on behavioral finance. He attempts to understand how investors make financial decisions and how these decisions are reflected in financial markets. His most recent book is A Wealth of Well-Being: A Holistic Approach to Behavioral Finance.
NOTE: Please be aware that the audio version, created with Amazon Polly, may contain mispronunciations.
I often note that the biggest risks in life are not in the stock market. If you want real risk, I say, get married. And if you want more risk, have children. People laugh, because the point is obvious. Yet that point is regularly lost when we speak about financial well-being, neglecting life well-being.
Financial well-being comes when we can meet current and future financial obligations, absorb financial setbacks, and keep driving toward financial goals, such as adequate retirement income. Life well-being comes when we live satisfying lives, full of meaning and purpose. We need financial well-being to enjoy life well-being, but it is life well-being that we seek.
Life well-being has many life domains, including that of finances, marriage, parents and children, friends, health, work, education, religion, and society. We can think of life well-being as a portfolio of life domains, resembling the common portfolio of investments. Each domain, like each investment, offers returns, each imposes risks, and each has correlations with other domains, resembling correlations among investments.
The finances domain has a special place among life well-being domains because it is important on its own and because it underlies all other life domains. We need finances to support ourselves and our families, paying for food and shelter. We need finances to maintain our own health and that of our families, paying for the services of physicians and hospitals. We need finances to pay for education that would qualify us for well-paying and satisfying jobs, careers, and vocations. We even need finances to experience and express our religion.
Doug Lynam used to be a monk. Now he is a financial adviser. “For too long,” he writes, “religion and money have been held separate, as if the very existence of one sullies the other. But the cold hard truth of modern life is that we need money . . . even monks. I discovered this fact the hard way when our community went bankrupt.”1
Returns and Risks in Well-Being Portfolios
The well-being return of each domain is the difference between its benefits and costs, and its risk reflects the range of possible returns. The benefits and costs of each domain are utilitarian, expressive, and emotional. For example, the benefits of the work domain include the utilitarian benefits of salary, the expressive benefits of an identity as a lawyer, doctor, or adviser, and the emotional benefits of accomplishments and the joy of coworkers as a happy family. The costs include commuting expenses, time away from family, and possibly the pain of dysfunctional family.
Few investors enjoy superb returns in each of their investments, and few people enjoy superb well-being in all its domains. The return of the marriage domain might be exhilarating, uplifted by love and respect, but the return of the finances domain might be disappointing, diminished by frequent unemployment and high expenses. Yet the overall return of a well-being portfolio, like that of an investment portfolio, reflects the returns of all its domains.
People vary in the importance they assign to the domains in their life well-being portfolios, as investors vary in the allocations to investments in their investment portfolios. Religion is an important domain for some people, whereas others are atheists. Work is a prominent domain for some people, whereas others count the days till retirement. Some sacrifice well-being in the finances domain for well-being in the family domain, choosing flexible work schedules that accommodate family. Others choose the opposite, sacrificing well-being in the domain of family for well-being in the domain of finances, working long hours that keep them away from family.
I use the domain of parents and children to illustrate the returns, risks, and correlations in life well-being portfolios.
Returns, Risks, and Correlations in the Domain of Parents and Children
Children deliver to their parents returns in utilitarian, expressive, and emotional benefits, but they also impose costs. The utilitarian costs of a child born in 2015 to a middle-class family with two children would be $310,605.2 The risk of children to their parents is reflected in the range of returns from love, smiles, and success that bring parents pride, to disability, estrangement, and failure that brings parents shame.
Parents enhance the well-being of children by the utilitarian benefits of food and housing. Children reciprocate with utilitarian support as necessary when parents grow old, providing money and care in their parents’ homes or their own. And parents and children enhance the well-being of one another by the expressive and emotional benefits of security, support, and love.
Sociologists Rachel Margolis and Mikko Myrskylä found that parents’ well-being increases before first birth, likely reflecting the process of formation of partnership and the increase in its quality, but well-being soon decreases to its pre-birth levels.3 Journalist Jason Stanford rejected these findings, based on his experience and that of his friends.4
“Of course, having young children is hard,” admitted Stanford. “Having a newborn in the house feels like a permanent hangover without ever having fun in the first place.” Yet he recalled a friend’s counsel: “Don’t worry, wait till he smiles at you.”
“To this day,” wrote Stanford, “there is nothing that makes me happier when my first son forgets he’s a teenager and smiles, taking me all the way back to when his soft head fit into the palm of my hand and the rest of his body rested along my forearm . . . When I fell, I fell hard.”
Many parents share Stanford’s experience, describing their increased well-being at the birth of their children. “I felt very comfortable and with a strong sense of well-being right after my daughter was born,” said Bill, a 52-year-old American man interviewed by BlackRock.5 “For several weeks after her birth, I stayed home with her and my wife and I felt very comfortable.”
And Xiaoying, a 33-year-old Chinese woman, said: “Having my daughter in my belly for nine months and getting to see her. It was a sense of anticipation and a feeling of responsibility towards her.”6
Others, however, echo the findings of Margolis and Myrskylä. Divya, a 33-year-old American woman, struggled with diminished well-being following the birth of her first child. She never had time for herself, was never able to exercise, didn’t like her appearance, and most of all had a hard time with her daughter always getting sick. “It was a whole new world for me to bring this little human into the world and I was not prepared for it.”7
The sacrifices of parents of disabled children reflect children’s risk. Children’s disabilities can be physical, such as muscular dystrophy or multiple sclerosis; developmental, such as Down syndrome or autism; behavioral, such as attention deficit hyperactivity disorder (ADHD) and bipolar illness; or sensory, such as being blind or deaf.
Parents at wit’s end come to emergency rooms with children who have severe behavioral problems, but the visits offer little long-term benefit. “Their child’s behavior may be a danger to themselves, but also to the parents, to the other children in the home,” said Anna Cushing, a pediatric emergency room physician. “They really don’t have anywhere else to go.”8
Well-being in the parents and children domain is correlated with well-being in the marriage domain. Having a disabled child increases by 10 percentage points the likelihood that parents will separate in the following 12 to 18 months. And if parents continue to live together, it decreases by 6 percentage points the quality of their relationship.9
Well-being in the parents and children domain is also correlated with well-being in the work and finances domains. Parents of disabled children are three times more likely to make job sacrifices than other parents, and their earnings trajectories show a sharp break when a child becomes disabled. Both mothers and fathers make job sacrifices, but the sacrifices of mothers are usually greater because they are usually the primary caregivers.10
Livie, the daughter of James and Lindsay Sulzer, was almost four when a falling tree branch devastated her brain. James devoted his career to repairing damaged nervous systems, and Lindsay once worked on ways to treat traumatic brain injuries. They have access to all possible treatments, yet Livie cannot speak or walk unaided, and her cognitive disabilities are profound.
Lindsay assumed the immense tasks of arranging Livie’s care, hiring nurses and personal attendants, getting equipment such as wheelchairs, and setting a cycle of feedings, medicine, and exercise. At lunch, a nurse put Livie in a stander and set up an iPad for her entertainment while a pouch of chickpea formula was placed into her feeding tube. Watching videos of Livie before the accident, James said, “Now it’s like I have two daughters, in a way. One that passed away, and now this one.”11
Well-Being Advisers
Good financial advisers are well-being advisers, enhancing clients’ life well-being beyond financial well-being. Considering life well-being as a portfolio can help advisers in their well-being role. Clients often dwell on particular investments in their investment portfolios, sometimes on winning investments but more often on losing ones. They struggle to accept that it is the overall portfolio return that matters. Advisers enhance their clients’ financial well-being by pointing to the benefits of diversification among investments in their investment portfolios. Similarly, clients often dwell on particular life domains in their life well-being portfolios, sometimes on winning domains such as professional success in their work domain, but more often on losing domains such as a disabled child in the parents and children domain. Advisers can enhance their clients’ life well-being by helping them accept that it is their overall life well-being in their life well-being portfolios that matters.
Advisers’ task in promoting their clients’ financial well-being by pointing to the benefits of diversification in their investment portfolios is relatively simple, as advisers can easily see the return of each investment and the overall portfolio return and show them to their clients. The task of advisers in promoting clients’ life well-being is more difficult because they must assess their clients’ well-being in each life domain. Cantril’s ladder of well-being offers a good beginning.
“Please imagine a ladder, with steps numbered from zero at the bottom to 10 at the top. The top of the ladder represents the best possible life for you and the bottom of the ladder represents the worst possible life for you. On which step of the ladder would you say you personally stand at this time?”
Cantril’s ladder is commonly used to assess overall life well-being, but it can also be used to assess well-being in each domain. Advisers can use clients’ ladder steps in each domain to begin a conversation. Why is a client standing only on the fifth step in the parents and children domain whereas they stand on the ninth step in the marriage domain? Is there a child living with a physical or mental disability? Is there a child who refuses to attend a community college, let alone attend a four-year college, despite parents’ offer to pay full tuition? Is there an adult child in a difficult marriage, facing divorce and likely needing financial assistance?
Parents of a disabled child might be devastated by their loss, as if it is a loss of their entire life well-being portfolio, as investors might feel devastated by a loss in the stock portion of their investment portfolio. Well-being advisers place well-being of each domain within well-being of the entire life well-being portfolio, as they place the return of each investment within the return of their entire investment portfolio. Well-being advisers note, for example, that parents’ ample finances domain can support their disabled child, lightening parents’ financial burden, and the love and care of a disabled child by the child’s siblings lightens parents’ emotional burden. And advisers can set up trusts and other financial structures to support that child after their parents are gone.
Sometimes prospects and clients are forthcoming, facilitating advisers’ task of assessing well-being in each domain and enhancing overall life well-being. An adviser told me of prospects who began by saying: “We are parents of a disabled child. Please plan for our child’s financial future before you plan for our own.”
I discussed these lessons in a recent presentation to several hundred financial advisers. A woman adviser noted that women find it easier to engage their clients in conversations about life well-being, crossing the boundary from financial well-being. I agreed, but noted that the ability to cross the boundary is a skill that can be learned. I am shy by nature, I said, but I have learned to overcome my shyness in professional settings.
Endnotes
- Lyman, Doug. 2024, February. “The Love of Money.” GreenMoney Journal. https://greenmoney.com/the-love-of-money/.
- Sawhill, Isabel V., Morgan Welch, and Chris Miller. 2022, August 30. “It’s Getting More Expensive to Raise Children. And Government Isn’t Doing Much to Help.” Brookings Institution. www.brookings.edu/blog/up-front/2022/08/30/its-getting-more-expensive-to-raise-children-and-government-isnt-doing-much-to-help/.
- Myrskylä, Mikko, and Rachel Margolis. 2014, August. “Happiness: Before and After the Kids.” Demography 51 (5): 1843–1866.
- Stanford, Jason. 2016, August 14. “Parenting Study Misses the Point.” HuffPost Contributor. www.huffpost.com/entry/parenting-study-misses-th_b_7988462.
- Statman, Meir. 2020. “Well-Being Advisers.” The Journal of Wealth Management Winter 2020, 23 (Supplement 1): 2–44. https://doi.org/10.3905/jwm.23.s1.002.
- Ibid
- Ibid
- Barry, Ellen. 2022, December 27. “Parents Often Bring Children to Psychiatric E.R.s to Subdue Them, Study Finds.” The New York Times. www.nytimes.com/2022/12/27/health/children-emergency-room-mental-health.html
- Reichman, N.E., H. Corman, and K. Noonan. 2004. “Effects of Child Health on Parents’ Relationship Status.” Demography 41: 569–584. https://doi.org/10.1353/dem.2004.0026.
- Novoa, Cristina. 2020, January 29. “The Child Care Crisis Disproportionately Affects Children with Disabilities.” Center for American Progress. www.americanprogress.org/issues/early-childhood/reports/2020/01/29/479802/child-care-crisis-disproportionately-affects-children-disabilities/.
- Engber, Daniel. 2021, October 6. “A Peer-Reviewed Portrait of Suffering.” The Atlantic. www.theatlantic.com/magazine/archive/2021/11/engineers-daughter-tbi-rehab/620172/.