Tag archive: personal finance

Why you shouldn’t fear your finances (you’re probably richer than you think)

Jay L. Zagorsky, The Ohio State University

Do you procrastinate about taking care of financial matters in your life? Recently a fascinating article about financial procrastination appeared online.

The author publicly admitted that “after years of procrastinating,” he finally logged on to his retirement account. It took him years to get around to dealing with it because the entire task made him anxious.

Moreover, he stated he didn’t remember his password, and his account choices were a mess.

For many of us there is nothing special about any of this. Most people dread and put off dealing with financial matters.

However, what was astonishing about this story is that the writer is an eminent economist who does research in personal financial matters such as savings, annuities and mortgages. If this man has trouble dealing with his retirement accounts, is there any hope for the rest of us?

Do you have to be smart to be rich?

There are many reasons people procrastinate on dealing with financial matters. There is even a new special field in psychiatry that deals with the issues people have surrounding money, spending and saving. Unfortunately, while many of us have issues about money, the specialized help that is available is primarily useful for people with lots of wealth or income.

Some of my research can help people who procrastinate about dealing with their finances. One reason many people don’t want to deal with money issues is because they think they are not smart enough. However, when I looked into this, the results were very clear: there is no relationship between intelligence, measured by IQ, and a person’s wealth. It’s generally true that the smarter you are, the more income you earn. However, earning more doesn’t give you any special advantage in saving or building wealth.

Sendhil Mullainathan, the economist who wrote the column on procrastinating, appears to be a poster child for the lack of a relationship between IQ and wealth. He is clearly very smart: he won a MacArthur genius award and is a full professor at Harvard.

But he probably doesn’t have much wealth since he states in the article, “I want to reach my retirement with a nest egg that allows me to maintain my current lifestyle and to travel a bit.” Rich people don’t dream of retiring with just enough money to take a few trips.

If you are putting off dealing with money issues because you don’t think you are smart enough, don’t wait any longer. Being smart isn’t going to make you rich. Whether you are dumb or smart you can save. The secret is simple: just spend less than you earn.

Are you richer than you think?

Many people don’t want to deal with their financial issues because they expect the news to be depressing. Most of us are experts at avoiding bad news. However, another research paper I wrote shows that for most people, the financial news is actually much better than expected, which is perhaps another reason not to procrastinate.

The National Longitudinal Surveys, a long-running research project sponsored by the Bureau of Labor Statistics, asked people to estimate their net worth. Then the survey took them step by step through the value of all of their assets and the value of all their debts. From this information I was able to calculate their actual net worth. The result for most people was much better than they feared. For every dollar of wealth actually held, the typical individual believed they only had 62 cents.

In simple terms, the research showed that the typical person underestimates their financial position by more than a third. The financial unknown is scary but the actuality for most people is not as frightening as they fear.

I encourage all of you to sit down, close your eyes and ask yourself: are we in debt, break even or do we have money? Write down your best guess for how much you are in debt or how wealthy you are. Then add up all of your assets and subtract all of your debts (an easy online calculator is available here). The results will pleasantly surprise most of you.

Why should you avoid procrastination?

Research suggests people who avoid procrastinating do financially better. A recent working paper by two economists Jeffrey Brown and Alessandro Previtero shows that people who procrastinate are less likely to participate in savings plans, take longer to sign up when they do decide to participate, and contribute less money to their retirement plans than non procrastinators.

You will not become rich or suddenly have enough money to retire by reading just one article. However, know that lots of people procrastinate about financial matters. If you have been procrastinating because you don’t think you are smart enough or because you fear the results, research suggests you will find the news is not bad.

So make that first step and try to deal with that financial task you have been putting off. It is like jumping into a pool, lake or ocean; the water is really not as bad as you fear, and taking the jump will likely make you (feel) richer.

The Conversation

Jay L. Zagorsky, Economist and Research Scientist, The Ohio State University

This article was originally published on The Conversation. Read the original article.

Personal Finance: The Best Way To Save Up Your Money

Dinners on a budget, using no-frills home brand products and skipping small little splurges here and there may seem like the only real way to save money. But there are more refined tricks and life hacks that could easily save you a buck or two. Here are a few tips from The Simple Dollar that could help you sustain your finances and give you a lot more security.

Give yourself a goal

Setting yourself a goal can be the most challenging and rewarding ways to save money. Identify your purpose, why do you want to save money? What are you working towards? Are you saving up for a goal, a house, a holiday trip or an expensive pair of shoes? Give yourself a number and calculate between your salary and how much you’ll need to divide and set aside in order for you to reach your goal.

Keep track of your spendings

It’s not always easy to remember where all of your money is going. Keeping record of your spendings can help you track your patterns and bad habits in order for you to reduce excess costs and keep you spending on the right things.


Move bank accounts to take advantage of perks and earn more interest

According to The Simple Dollar, “if you’re paying a monthly fee for your checking or savings account, you would benefit from researching some of newest banking offers out there. Not only do some banks offer sign-up bonuses simply for opening an account and setting up direct deposit, but some offer attractive interest rates to new customers as well.

It’s true that interest rates are not what they once were, but it’s still worth a look. Some of the best free checking accounts and best savings accounts can be found online. Here’s a guide on how to make that switch.”

 Sell your goods

If you own any high quality products that are of value and not in use, it’s always a good idea to sell it to someone in need. This rewarding trade can help you earn a few extra dollars whilst also freeing up your home space for more important things. Consider selling your items on online platforms such as gumtree.com.au

Sign up for every free customer rewards program you can.

The Simple Dollar suggests that, “no matter where you live, you’ll find plenty of retailers who are willing to reward you for shopping at their store. Here’s the basic game plan for maximizing these programs: create a Gmail or Yahoo address just for these mailings, collect every card you can, and then check that account for extra coupons whenever you’re ready to shop. You can add to those rewards and discounts by using rewards credit cards to earn points on purchases at a wide range of stores that can be redeemed for cash back or other benefits.”

The 30-day rule.

The most important rules of personal finance is waiting 30 days before deciding to make a purchase. According to The Simple Dollar, “After a month has passed, you’ll find that the urge to buy has passed as well, and you’ll have saved yourself some money simply by waiting. If you’re on the fence about a purchase anyway, waiting a while can give you a better perspective on whether it’s truly worth the money.”

Avoid convenience foods and fast food.

 

As well as eating healthier, avoiding packaged frozen foods, takeaway or fast food can save you a lot of money as fast food items tend to cost a lot more whilst feeding you less.