Having right mind-set can boost your finances
Lack of confidence holding us back, new survey says
Too little cash. Don’t know what I’m doing. Not the right time.
These often-cited excuses for postponing key financial decisions — such as saving for retirement — may be more myth than fact, according to new research from Principal Financial Group and behavioral economist Dan Goldstein and obtained exclusively by USA TODAY.
Putting off action that will boost your financial well-being is not about a shortage of money or having too much debt. It’s more about a lack of confidence in money matters and not having the right mind-set, the study found.
Seven in 10 Americans postpone making financial decisions at least some of the time, the study found. Perhaps more startling is that more than half (56%) of the 1,400 adults surveyed had not made a big money-related decision, such as making a large purchase (a home), opening an investment account or moving money around in a 401(k) account, in the past three years.
But what’s behind the inaction — the “I’ll get to it another day mentality” — may surprise you.
“The only thing holding you back is you,” said Jerry Patterson, senior vice president of retirement and income solutions at Principal Financial Group.
More specifically, how your brain is wired — or miswired — when it comes to money is a major obstacle.
What makes Principal’s research different than other surveys that address retirement-savings readiness is that it views investors’ decision-making through the prism of behavioral finance. In other words, it takes into consideration how emotions, psychology and behavioral biases can impede or advance a person’s savings goals.
The study asked respondents questions that explored behavioral finance concepts such as recency effect, a bias in which people tend to extrapolate recent events, such as a big upward move in stock prices, into the future indefinitely. It also posed queries related to loss aversion, or the idea that losses generally have a much larger psychological impact than gains of the same size.
“People have their reasons for postponing saving for retirement,” Patterson explained. “Unfortunately, some of those reasons are not as valid as they think. Some of the circumstances peo- ple think are barriers are actually just challenges that can be overcome with the right mind-set.”
For example, while 60% of the respondents said their current income is the biggest reason why they don’t pull the trigger on financial decisions, Principal’s research showed that current finances or lack of money do not play a significant role in procrastination.
“If it’s true that lack of income or debt is getting in the way of making decisions, then debt levels and income levels should explain who is and who isn’t postponing decisions; but those factors didn’t explain the behavior,” said Goldstein, an expert in decision-making and former professor at London Business School who now works as principal researcher at Microsoft Research.
Indeed, even one in four (23%) of high-income households (those earning more than $150,000 per year) were part of the group that postponed financial decisions. And only about half (55%) said they would feel confident planning for their retirement.
What’s more, the research noted that it only takes a modest income — say $40,000 — for people to begin to feel comfortable enough to make decisions that will affect their long-term savings.
So what, then, exactly is to blame for the inaction?
“A lack of knowledge and confidence related to investing,” Patterson said.
Those who do not feel confident about their finances are two times more likely to postpone making major decisions than those who are confident, regardless of their income, the research found. And people who don’t trust themselves are 1.7 times more likely not to act, the study found.
The study found that less than a third
(30%) of Americans felt comfortable with their knowledge level needed to manage their finances. Similarly, just
35% were comfortable planning for retirement, only 23% said they’re equipped to start a new investment and a mere 22% think they have enough knowledge to make a change to (their) investments, the survey found.
So what can be done about this lack of savvy that is so detrimental to one’s financial success?
“Investing the time and developing the knowledge that creates confidence and drives actions,” Patterson added.
New features such as 401(k)s with automatic enrollment or robots that build low-cost diversified portfolios for people online have helped investors who are now mostly responsible for their own retirement nest egg. But it doesn’t solve the problem of lack of financial literacy.
Boosting your confidence and getting over the intimidation of investing isn’t as hard as it sounds. Seek help from a financial adviser. Think twice about blowing things off. Seek knowledge on the Internet.
“You can get answers to your questions with one or two clicks of a mouse,” Patterson said.
One more tip: Make sure your present self doesn’t put your future self in a financial bind, Goldstein said.