Lessons can be learned from financial literacy, but some habits are genetic
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(State of Financial Education: Many of the money problems Americans face could have been avoided if financial literacy had been taught earlier in school. This knowledge helps lay a foundation for students to build strong money habits early on and make many mistakes This story is part of a series that looks at the current financial education landscape in this country.)
Some people are born to spend or to save money. It can actually only be in your genes.
Stephan Siegel, Professor of Finance and Business Administration at the University of Washington, was interested in the behavior of individual investors and learned how people develop their financial habits.
He wondered: what makes one person a spendthrift and another a penny pincher?
“Where do these things come from basically?” Siegel asked.
He suspected that it must be a result of evolution.
In one of the largest research efforts into the causes of our financial behavior, Siegel examined about 30,000 identical and fraternal twins from Sweden and found that the most powerful determinant was our genes. More than differences in parenthood or socio-economic status, our financial habits are shaped by our DNA.
“I never thought of combining finance with biology,” Siegel said, but added that it only made sense. “We’re just a different species.”
Then what does it mean when a large part of our financial behavior is inherited and therefore out of our control? It turns out that financial literacy, as important as it can be, should be combined with tools and structures that help people overcome tendencies such as over-spending or saving, say experts.
Personal finance education has been shown to be positive as its teachings allow people to accumulate more wealth and have better control over their financial lives. In addition to those important hours of money, people should also respond to bad financial habits as we do to poor vision, which is also largely genetic, Siegel said.
It can be helpful to “give people the equivalent of good glasses so they can face whatever challenges they face.”
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Tools at work
One tool that companies offer their employees to help them save is automatic enrollment in retirement plans.
The strategy is powerful, data show.
More than 90% of new hires who are automatically included in a company pension plan participate, compared to just 28% of new hires who have to register themselves, according to a study published by Vanguard in March.
Vanguard also found that 9 out of 10 employees under the age of 25 were Plan Participants with automatic enrollment, while fewer than 2 in 10 were volunteers.
“We know that inertia can be a powerful tool in helping individuals save for retirement. Once employees join their retirement plan, they tend to stay,” said David Stinnett, principal and head of strategic retirement advice at Vanguard.
“This is important as employers are giving their workers a better chance of a successful retirement by automatically adding employees to their retirement plan,” he said.
Unfortunately, while this tool is useful in getting people to prepare for their old age, it won’t reach many people. This is because around half of those employed in the private sector are not covered by an employer-sponsored pension plan.
Your own tools
Fortunately, there are many ways you can take advantage of automated savings for yourself. Most banks and robo-advisors offer the option.
And it still works when people set up these structures for themselves.
With the Betterment robo-advisor, people can save for certain goals, e.g. B. for buying a house or retirement. And those who set up automatic deposits had a 51% chance of reaching their desired savings amount, compared to a 28% chance for those who left it to their own devices.
Dan Egan, vice president of behavioral finance and investments at Betterment, said this is because the strategy is reducing people’s chances of impulsively spending money they hoped to salt away.
“From a behavioral standpoint, you protect automatic deposits from yourself,” Egan said.