The Bane of Financial Plans

There’s something about getting a will together, checking in on one’s retirement fund, or finally paying down that credit card that causes the procrastination gene to kick in.

In this recent video on CBS, Harvard behavioral economist David Laibson explains the reason for this tendency: “present bias.” Humans put more weight on the present than on the future, so it’s easier to delay the hard work until later. No surprise that’s true for financial tasks, which can be overwhelming, emotional, complex, or unpleasant.

“We humans have wonderful intentions about what we’re going to do,” he explains in this video. But when the time comes to do it, “We decide once again to push it further into the future.”

Laibson uses a simple example from a well-known 1980s experiment in which researchers asked people at Amsterdam workplaces whether they would want a healthy fruit snack, an indulgent chocolate bar, or potato chips next week. Most chose fruit.

On the day they were to receive the snack, the researchers said they lost the workers’ previous selection and asked them to pick again. The preferences flipped, and most chose chocolate.

Laibson goes on to apply the fruit/chocolate concept to financial decisions. The video was recorded last month, but the topic – human behavior – never gets old for Squared Away.Learn More

How People Think About Credit Cards

The austerity program millions of Americans adopted at the onset of the Great Recession is officially over: consumer debt is on the rise again.

Before we run our personal debt back up to its ceiling, it’s a good time to examine the different ways people think about their credit cards.

First, the economists. They have a clear definition of credit cards. The act of buying something on a card and adding to a balance is known as “dissaving.” The opposite is also true. Americans, for example, cut up their credit cards with a vengeance after the 2008 recession. They paid down some $180 billion in revolving credit card debt between September 2008 and April 2011. This gave a big boost to their savings, as far as economists were concerned.

But regular folks naturally link credit cards to spending. Kim Cooper, a Philadelphia financial consultant, said she used to feel that paying down a credit card meant she could buy more shoes or shop at Lord & Taylor again – with her card. This common mentality indicates just how integral credit has become to our buying habits.

The problem comes when the bill accumulates and becomes a monstrous financial obligation. And according to new data, Americans are piling up debt: in May, revolving credit – primarily credit card debt – grew by $3 billion, or 5 percent, to $793 billion (still far below the August 2008 peak of $974 billion), according to the Federal Reserve.

Overall debt also increased, for the eighth straight month. This includes revolving credit as well as auto, student, boat, and other personal loans.

Cooper eventually paid off her cards, but understands why people get into debt. “When I paid down the bills, it was never part of my thinking that a zero balance was the goal,” she said. The goal for her was being able to afford the minimum payment. “That’s not the way to think about it,” she said. …Learn More

Income Source or Security Blanket?

Americans have squirreled away some $7.1 trillion in their retirement accounts. But once they actually retire, they don’t seem to know what to do with their money.

The U.S. income retirement system is in the throes of a foundational shift from guaranteed employer pensions to a system that puts most of the burden onto employees to make sure they have enough retirement income. I’ve been hearing recently about the heated debate on how Americans who are retiring are handling their finances under the new system.

Some worry that retirees are using up their personal retirement account (PRA) assets too quickly, while others believe they aren’t using the funds as retirement income, as intended when they were working and saving the money. By not spending it, they may be unnecessarily lowering their standard of living. …
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The Big Freeze Immobilizes Boomers

“The Big Chill” was the iconic movie for baby boomers in their prime in 1983.  Perhaps The Big Freeze is the best way to describe where we’ve ended up.

 
Two recent reports based on in-depth interviews with retirees and pre-retirees arrived at the same conclusion about how we are approaching the dreaded retirement: paralysis.

A report commissioned by Boston College’s Financial Security Project, which sponsors the Squared Away blog, found that the baby boomers and pre-retirees felt “immobilized in retirement planning efforts by a combination of practical and emotional factors.”

These emotions include fear and confusion about not having enough money, not knowing how much they’ll need, and not knowing how or where to get information or help.Learn More

A woman sitting on a mountain top bench.

Wives Learn Finances as Husbands Age

A 29-year-old Ph.D. candidate is challenging the belief that elderly women don’t prepare to take over the household finances after their husbands die and leave the task to them.

The stereotype about older women probably springs from pervasive evidence that women generally have lower levels of financial literacy than men.

But Joanne Hsu at the University of Michigan found that women prepare for the high likelihood that their husbands will die first by beginning to acquire financial knowledge.  Some 80 percent of the women in her sample are on track to catch up with their husband’s level of financial knowledge.  Her study controlled for low cognition, so her findings measure the wife’s improvements that are above and beyond her husband’s. …Learn More

Preschool Children Learn about Saving

Paul Solman, a business reporter in Boston for the NewsHour on PBS, put together an excellent piece about educating preschool children about saving. In it, Solman interviews Grover and the children of behavioral economist David Ariely of Duke University, among others.

The piece discusses a research study on self-control among young children, which was covered recently by Squared Away.

The video is worth checking out.

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Two Steps Back for Financial Education

Consider these grim outcomes for financial educators:

  • One study found that the seniors who had the least financial knowledge were most confident about their knowledge;
  • The most successful educational tools – stock market games – send the message it’s okay to gamble;
  • When Illinois required consumers to attend a workshop for certain types of mortgages, homebuyers avoided those mortgages;
  • Scores for national financial literacy tests administered to high schools by the JumpStart program declined between 1997 and 2008;
  • Soldiers exhibited worse budgeting behaviors after taking a financial course than before.

In the past decade, foundations, governments, and non-profits have poured millions into financial literacy efforts in grade schools through college and among low-income neighborhoods and specialized groups, such as homebuyers and the military.Learn More

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