A messy desk covered with pens, pencils, paper, and coffee stains.

Are You Conscientious?

In a recent study of five personality traits, conscientiousness was the strongest determinant of an individual’s financial well-being.

Angela Lee Duckworth at the University of Pennsylvania and David Weir at the University of Michigan compared how people did on a personality test with their financial well-being after age 50. They examined the Big Five traits: conscientiousness, emotional stability, agreeableness, extroversion, and openness to experience.

Their finding about the power of conscientiousness adds to a spate of research combining psychology and economics to predict why people earn more, save more, or prepare for retirement. In another study, Australian researchers found that a child’s level of self-control, as early as age 3, can predict whether he or she will experience financial problems later in life.

So, what is conscientiousness and do you have it? I could tell you about it, but watch the video interview of Duckworth instead, on the University of Michigan Center for Retirement Research’s website.

Hint: is your desk clean?

Full disclosure: The research cited in this post was funded by a grant from the U.S. Social Security Administration (SSA) through the Retirement Research Consortium, which also funds this blog. The opinions and conclusions expressed are solely those of the blog’s author and do not represent the opinions or policy of SSA or any agency of the federal government.

Learn More

Credit Card Use Declines Among Students

Average college loans owed by the class of 2010 surged to $25,250 last year, up 5 percent from class of 2009 balances and up 35 percent from 2004, the Project on Student Debt reported today.

But let’s take a moment to thank Congress for doing something well: helping college students ward off another source of debt troubles, credit cards.

Since the federal Credit Card Act of 2009 restricted card issuers’ once-easy access to students, their credit card balances have dropped to $811, on average, from a record $3,173 in 2009, according to student lender Sallie Mae. Forty percent of college students currently have credit cards, down from 84 percent.

Sallie Mae said the 2009 and 2011 surveys were based on slightly different populations and are difficult to compare. But a downward trend is what the undersecretary of the Massachusetts Office of Consumer Affairs, Barbara Anthony, has also observed when she tours college campuses. Three years ago, a roomful of hands would go up when she asked who had a card. Today, it’s “definitely a minority,” she said.

The drop in card use “was absolutely due to the act,” she said. …Learn More

Three cartoon piggy banks.

One Savings Goal Better Than Many

Saving money. No financial behavior is more important in this era of DIY retirement planning. And yet few things are more difficult for more people.

To prod low-income people to save a little, foundations and the government design clever financial products or incentives – some work, some don’t. Academic researchers divine psychological tricks or behavioral mechanisms that might spur saving. Automatic enrollment in employer-supported 401(k)s is one such success story.

A different solution to the savings conundrum comes from two marketing professors at the University of Toronto. Experimenting on subjects around the world – residents of a small town in India, Canadian college students, parents in Hong Kong – they found that individuals are more successful savers if they identify and work toward a single goal. Setting multiple, competing goals – college, retirement, summer vacation, a new kitchen, and the Christmas fund – was less effective and even counterproductive.

“When people have multiple goals, they cannot decide which one is more important,” said author Min Zhao, whose paper with Dilip Soman is forthcoming in December’s Journal of Marketing Research. “They say, ‘I cannot decide. Maybe I’ll just do this later, and I might not do anything.’ ” …Learn More

A giant snowball rolling down a snow covered hill.

Spenders Yield to ‘What the Hell Effect’

We all know the feeling. While mentally savoring the appetizers on the menu, our resolve to diet slips away. That same feeling has already hit by the time we slap our credit card down on the counter at Macy’s.

It’s so common that psychologists have named it the “what the hell effect.” Once poised at the edge, we might as well leap, right? But after the leap, people who usually try to maintain a certain level of self-control in their everyday lives feel awful.

Three marketing professors have now teased out the conditions that trigger this during the act of charging something on a credit card. They have found that people spend more money if they already have a balance on their credit card. But, oddly, a high-dollar credit limit on the card can mitigate that effect and help to restrain the cardholder’s spending.

Their findings are counterintuitive and a bit difficult to grasp. Here’s how Keith Wilcox, a marketing professor at Babson College in Boston, explained them in a recent interview with Squared Away: … Learn More

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. …
Learn More

...10...1718192021