Why are people so bad with money?

Posted by on February 22, 2010 in Investment Information

Many of my friends and colleagues have young children. Since the parenting industry looks at all new parents as walking dollar signs, they are often sold the latest magic bullet solution to raise perfectly well-adjusted, intelligent and healthy children; after all, if you buy the wrong thing for junior, he’ll grow up to be a juvenile delinquent or, worst, never move out of your house!

But, instead of buying Baby Einstein DVD’s, how about spending time with the kids? I am not a parent, and do not presume to give parenting advice, but, as a general observation, the most well adjusted people I know did not grow up in the most affluent of households but received the riches of time with family.

A similar argument can be made for personal finance. Personal finance is not a black box where you input magic bullet products and it outputs above market returns. Instead, it is a process of spending time thinking about your life desires and planning your financial decisions accordingly.

In fact, one could argue that the magic bullet product in personal finance is actually spending time on personal finance. Specifically, there appears to be a positive correlation between the amount of time spent on planning personal finance and household net worth.

The time spent is not substantial. Instead, it appears that the bar for what an average investor spends thinking about personal finance is shockingly low. In a 1997 paper, two researchers surveyed the habits of staff employees at the University of Southern California (USC) who were enrolling in its defined pension plan. 75% of employees did NOT answer the background questions. Nearly 60% of the respondents spent less than an hour on picking asset allocations in their plan (their plan allowed participants to allocate funds based on risk tolerance).

One would assume that employees at USC  are moderately well-educated. Thus, you cannot cite lack of education as a factor. Perhaps they are too busy, have too much responsibility or they do not want to think about money because of some negative connotation it provokes.

Whatever the reason, the less time one spends on personal finance, the more likely such indifference will be costly in the long run. The book the Millionaire Next Door found that financially prudent households spend 8.4 hours a month, or 100 hours a year, planning their investment decisions.  The under-achieving households spent only4.6 hours a month planning their investment decisions. As a result, those households that spent more time planning investment decisions had over 5 times the net worth of their under-achieving counterparts.

8.4 hours a month may seem like a lot of time for most young families. However, consider this is 1.2% of the number of hours in a year. Compare 8.4 hours a month with how much time spent watching television, mindlessly surfing the internet or playing video games.

If planning investment decisions is daunting, I would suggest three tips:

  1. Set aside a designated time every week to review your bank statements, portfolio summary etc. with your spouse and kids (if they are old enough to participate).  Decentralized decision making is often a cause for unnecessary spending.
  2. Budget. If you feel you are too busy to budget then I suggest the Seymour Schulich’s approach to budgeting: is there more cash in the bank this month than last? If so, you are on the right track. If not, you best to start making decisions on what to cut back.
  3. If it feels bad emotionally to talk about money, remember that feeling. If you never want to feel that again, then do something about it as opposed to sticking one’s head in the sand.

7 Comments on Why are people so bad with money?

By Prakash Dheeriya PhD on February 22, 2010 at 4:52 pm

One reason is that children were never taught about money very early on, and that continued until adulthood. We need to change the curricula at schools so that children are taught very early on the value of money.
I would suggest that all parents start with reading to their children books about money. A good resource is the Finance for Kidz series.
You can check it out at http://www.finance4kidz.com
Prakash Dheeriya, PhD
Father, Author & Professor of Finance
Finance for Kidz Series
finance4kidz dot com

By Platus Awards, Cheap Acts, Selling Wine and More Links | Million Dollar Journey on February 26, 2010 at 6:47 am

[...] Why are people so bad with money? @ Thicken My Wallet [...]

By jack on February 26, 2010 at 10:23 am

in todays world everything is about material possesions, whether you are a parent trying to raise kids or a boyfriend trying to show your love for your girlfriend..it has become a nasty world as many forgot what the important things are. Everybody trying to keep up with each other based on what and how much they own.

By Future Money-Bags on February 27, 2010 at 5:12 pm

Its funny I used to ask myself this question every day!
I have just recently become a ‘financial planner’, to be vague, and I now I find myself asking myself and everyone else around me the same question multiple times!
(not so straight-forward as ‘why do you suck at life when it comes to money’, but to get the point across).

For me, being raised in the class I was, I took it first nature to be sensible and keep track of my finances in their entirety. I do agree with PHD, that schools DO NEED TO INCORPORATE FINANCE. Math does not cut it anymore, if it ever did?
I have learned so many fundamentals regarding finances recently, that I believe every adult should know (but 80% dont havea clue?) and every teenager should be taught as well. why does it take the average person until they are retired, to realize what they ‘should’ have done?

By 20 Cents from February 2010 | Balance Junkie on March 1, 2010 at 7:02 am

[...] Thicken My Wallet wondered Why Are People So Bad with Money? It seems we need to spend a little more time on personal finance. There are some good suggestions [...]

By Anon on March 1, 2010 at 10:42 am

Positive correlation does not prove causation. The fact that people spend more time on their personal finance does not necessarily mean that they are more successful financially. Perhaps, those that are more successful financially spend more time on personal finance because they have more money!

By KeepItSimple on March 2, 2010 at 6:43 am

Respectfully to Anon,
I’ll speak from a personal perspective on your response.
I’ve been in the same career for the past eleven years. Each year my salary goes up at approx. the rate of inflation. If you examined my finances six years ago, they were horrible. It wasn’t because I didn’t have “more money”, it was because I was making decisions associated with poor money management (read The Millionaire Next Door….I was the “UAW”). Since then, I’ve decided to get a better understanding of my decision making. Reading books like The Millionaire Next Door, learning about the advantages of passive, low-cost investing (example – Index Funds), and most importantly, paying myself first and living below my means, have drastically improved my finances. I sleep much better at night and the quality of life is still there.
There are many people who bring in a great deal of money in salary, yet are close to clueless in personal finance (much like rest of population). A recent survey found that parents actually felt more uncomfortable talking about finances than they did talking about sex. We’ve all got to work on educating ourselves and others, including becoming aware of the fact that the Financial Services Industry’s main focus is on serving their own needs, which is why far too many people are willing to pay outrageous fees to purchase mutual funds, etc., that perform below the index.

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