Many of Us Lack the Skills to Plan Our Personal Finances
How well do you handle your money? Many 20-30 year-olds are not saving enough money to avoid poverty in old age. Many people fail even to switch bank accounts when we could get better deals elsewhere.
The conventional assumption has been that money management combines three things: factual knowledge about the available financial options; functional competence in dealing with numbers and transactions; and prudent or rational thinking in working out the best way to get what you want. For example, many overlook bad credit payday and personal loans, which are easy to get and can save a lot on bounced check charges or credit card overdraft charges.
This assumption draws on two flawed approaches. First, it assumes that if you know something in the abstract, you can act on it in practice. Second, it reflects the influence of neoclassical economic thinking, which views people as rational individuals who seek to promote their own well-being by maximizing income and working their assets as hard as possible.
The reality of how people spend, save and give money is rather different. Culture, psychology and social relationships influence our decisions and routines. As V. S. shows in The Social Meaning of Money, we see different kinds of money differently: people gamble, save for specific things such as holidays and allow themselves treats. Short-term pressures — to buy a round in the pub or buy a toy for the kids — push at our longer-term aspirations.
The old routines fit the new complexities of our financial lives less and less well. For a start, most people’s income curve over a lifetime is much more volatile than it was a generation ago — we change jobs more often, take time out for learning or parenting, change relationships more frequently and experience more economic uncertainty. The steady accumulation of savings and spending power is for many no longer a reasonable strategy.
On top of this, the range of choice in financial decisions is too complicated for anyone to cope with unaided — there are thousands of personal financial products and services on the market, often with little to choose between them, or with their significant differences hidden in mind-boggling technical detail. Third, the cultural pressures of capitalism are leaning towards an increase in instant credit spending, particularly on a panoply of personal technology (mobile phones, digital television and so on), along with nearly invisible knock-on costs (text messaging, pay-per-view) and the continuous cycle of updating.
These pressures help to explain why the savings and loans ratio has gone down in the past five years, despite sustained economic growth and increased incomes.
So what do we need to learn to cope? Some basic knowledge, for sure: a fifth of the adult population lacks the functional numeracy even to calculate the right change from an everyday purchase. Learning about the basic concepts of income and investment — rates of return, security, and liquidity — are also necessary.