Why are people so bad with money?
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:
- 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.
- 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.
- 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.