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How to Think About Self-Control

“Self-control” is a catch-all label for resisting all sorts of temptations, including overspending. According to a new study, controlling overspending can be broken down into three distinct behaviors:

• Setting goals such as buying a house or saving money.
• Monitoring bank statements to systematically track where your money goes.
• Committing to the goal in the face of short-term temptations to spend.

Data for the study came from a nationally representative U.S. survey of households over age 50. The survey has extensive information about the households’ finances and about each individual’s resolve to set goals, track their finances, and carry out their commitments – whether financial or non-financial.

Households lacking self-control disproportionately have lower net worth – no surprise there. The largest effect is on their liquid financial assets, such as checking and savings accounts and IRAs. Impulsive consumption “is more likely to have an immediate impact on liquid holdings than on illiquid assets,” such as property, said the researchers, who are from Goethe University in Frankfurt.

More interesting is their analysis of the role played by self-control’s three individual components.  The study found that the third ingredient – the ability to stick to commitments – draws the darkest line between success and failure in accumulating net worth.

But the researchers also divided net worth into “real wealth” – homes, other property, or vehicles – and financial wealth, which is more easily liquidated than property. Commitment again proved most important in determining whether people own property. But when it comes to accumulating financial wealth, monitoring one’s finances plays the largest role.

Everyone talks about self-control. This study clarifies what it is.
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high wire

Curbing Debt: It’s Not What You Know

The biggest financial hurdle facing workers with low incomes is just that: inadequate income to meet their daily needs.

Low-income households are further tripped up by their greater tendency to borrow at high interest rates – rates they are the least able to afford in the first place.

Some academic research blames this on poor financial literacy.  But a new study out of Northern Ireland examines two separate aspects of financial literacy and finds the problem is not a lack of knowledge but rather an absence of money management skills.

Among “financially vulnerable” people, the study concluded, “money management skills are important determinants of consumer debt behavior” and “numeracy has almost no role to play.”

The study involved researchers conducting one-hour, face-to-face interviews in low-income neighborhoods in Belfast. They interviewed 499 people whose average gross earnings were the equivalent of $567 per week or less. …Learn More

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5 Signs of Financial Impairment

In a videotaped experiment testing her financial cognition, an elderly woman must prepare three utility bills for mailing. She’s seated at a table holding the bills, along with three filled-out checks, and three envelopes – each with one utility’s name on it.  After considerable effort and confusion – checks paired with the wrong bills; bills placed into the wrong envelopes and taken back out – she finally finishes her task.

New difficulty carrying out simple financial tasks or understanding financial concepts that were once familiar can be warning signs of cognitive impairment due to aging, early stage Alzheimer’s or other causes, said Daniel Marson, a neurology professor and director of the Alzheimer’s Disease Center at the University of Alabama, Birmingham.

Financial skills are “the canary in the coal mine from a functional standpoint,” he said. “When you are seeing new problems in the checkbook or arithmetic errors, those are signs of an emerging disability.”

Driving, for example, may not be affected as much early on, because it relies more heavily on motor memory. “You don’t have to think about making a right turn or signaling,” he said.

The chances of having Alzheimer’s disease are slim for most older Americans; only one in nine do. Forgetting to pay a bill is more often just a sign of a bad day, and the inability to balance a checkbook or understand investments is not a warning sign if the person was never able to do so. To gauge whether the cognitive ability of a loved one or client may be in decline, the benchmark should be what he or she was able to do financially in the past – and whether that’s changed over time.

At a recent symposium, “Financial Planning in the Shadows of Dementia,” Marson provided five financial warning signs, developed from his clinical work and research as a neuropsychologist. The warning signs are: …Learn More

How Emotions Meddle with Money

Our 401(k) retirement system requires most workers to save for the future. But it’s difficult to reach this increasingly important goal, because our emotions – overconfidence, pleasure, fear of loss – get in the way.

“We believe our own nonsense,” is how Daylian Cane, a professor in the Yale School of Management, explains financial behavior in a new public television program, “Thinking Money: The Psychology Behind our Best and Worst Financial Decisions.” The short video above is taken from the program.

Further clouding our judgment are a vast array of consumer products, and the stress produced by how easy it is to purchase them with a credit card swipe and how hard it is to pay off the cards.

“Thinking Money,” a production of Maryland Public Television, covers many topics covered by this blog, including help for people trying to overcome their emotional obstacles.

“Thinking Money” is scheduled to air in its entirety on public television stations around the country in coming weeks.  Click on “Learn More” for a list of broadcast dates in major cities. …Learn More

utopia

On Moms, Deadbeat Boomers, and Utopia

This blog has a single writer posting just two articles a week. So it’s impossible to keep up with all the news that crosses the transom.

But perhaps because the work world is gearing back up this fall, there have been a lot of interesting stories lately about financial behavior.  Here are three worth noting:

Fatherhood adds to paychecks – motherhood, not so much. A new study estimates that women actually face about a 7 percent “wage penalty” for each child. So, having two children reduces a woman’s hourly wages by 14 percent, according to a new study out of the University of Massachusetts at Amherst. In contrast, annual earnings for fathers are about 8 percent higher than similarly situated men who have no children. This research sheds more light on the wage gap.

Baby boomers are having to pay off college loans they took out decades ago.  Some 155,000 older Americans are now seeing deductions from their Social Security checks to pay their federal student loans – up from 31,000 a decade ago – according to the U.S. Government Accountability Office.  Parents often co-sign loans for a child’s education, but the GAO report says that about three out of four dollars of boomers’ loan balances are for their “own education.”  Baby boomers never borrowed the large amounts that today’s steep college tuitions demand. But what’s not discussed in the report is that the garnisheeing of Social Security benefits may be due to a cultural artifact of the 1960s and 1970s – when attitudes toward repaying student debt were, well, loose.  Laws requiring repayment have become more stringent. …Learn More

Credit Union Popularity Rises

It’s not hard to find glowing testimonials online about credit unions – friendlier staff, lower fees, and faster processing of loan applications, credit union customers say.

“Way better than a bank!” Dan F. says about his Iowa credit union.

Now this warm, fuzzy feeling among existing credit union members seems to be reaching the general public. The Credit Union National Association (CUNA) reports membership growth exceeded 2 percent annually for the past three years, ending a lull that was taking hold only a decade ago.

In CUNA’s newest count – the year ending 2014 – total membership increased to 100.1 million members. CUNA president Bill Hampel’s theory is the financial crisis of 2008-2009 “soured a lot of people on the big banks.”

People do trust credit unions a lot more than banks, especially large banking companies, according to a “trust index” tracked by the University of Chicago and Northwestern University’s business schools. Two-thirds of Americans trust credit unions, the index showed recently, while only one in four trust a major bank. …Learn More

An Anti-Retirement Advocate

At 89 years old, retirement is one of the few things that has not made it onto Robert E. Levinson’s vita.

Cover of "The Anti-Retirement Book"Levinson almost single-handedly seems to be trying to start an anti-retirement movement. He feels so strongly that he once wrote a book titled, “The Anti-Retirement Book.”

“I just feel very strongly that one should never retire, or if they’re forced to retire they should try to find something productive to do,” he said.

Though not wealthy, Levinson is one of the lucky Americans. The long-time businessman and fund-raiser for a Florida college is college educated and said he is comfortable financially. But when he looks around his luxury senior community in Delray Beach, he sees pain and regret. Many residents seem idle. For example, a retired physician sits in the lobby waiting for people to drop by and consult him on their ailments. …Learn More

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