Learning Lessons From Other People’s Finances
12 September 2006CNN has just put up a series of profiles of five different families and how they manage their finances. They’re all people who have done the right thing financially, and essentially you should read each of the articles as part of a series, because they note new facts and statistics in each one. There’s the Hartmanns, who excel both at budgeting and at planning for retirement. The lesson there is backed up by this interesting statistic:
Looking at the assets of Vanguard 401(k) plan participants, Ameriks found that those who were saving enough to retire comfortably had a median income of $69,000 and median assets of $200,000.
The group falling behind, with assets of just $38,000, earned more – a median of $83,000. “Clearly this group is spending relatively more of its income,” he says.
So on average, people who make more money are a lot worse at saving for retirement. I’m not sure whether this is from the attitude that they’ll just make more in the future anyway or from how easy it is to keep ramping up your spending as you make more money, but in either event it’s a good cautionary note. Making money won’t make you richer unless you spend some basic time laying out your budget and figuring out your retirement plan.
Then there’s the Shas, who started getting educated about finances a decade ago and are well on track to meet their planned goals. The lesson there?
Analyzing data from a 2004 national survey on the first wave of baby boomers, Lusardi and Mitchell found that those who did “a lot” of retirement preparation had a median net worth of $200,000, compared with $84,000 for those who did the least.
“Even a small amount of planning can make a huge difference,” says Lusardi. Those who did “a little” were also ahead, with a median net worth of $172,000. Planning pays off because it’s a crucial psychological trigger. Studies show that writing a plan down – or even simply thinking about it – greatly increases the likelihood that you will follow through.
That’s a pretty amazing difference. Preparing for retirement increases your net worth. I’ve long had a suspicion that the problem for most people is just that they want to stick their head in the sand – or they suffer from a taboo of not wanting to ever talk about money. It’s pretty clear that the people who are thinking about retirement are following through – largely because you’d have to be nuts not to.
Then you have the Jacobsohns – Jason, the husband, learned about compounding in college and was shocked into saving. The lesson: learning about personal finance leads to improvement in your finances –
The study was done by Annmaria Lusardi, a professor of economics at Dartmouth College, and Olivia Mitchell, a professor of insurance and risk management at the University of Pennsylvania.
The findings: More right answers matched up with greater wealth. Those who grasped compound interest, for example, had a median net worth of $309,000 vs. $116,000 for those who missed the question.
In another study, Lusardi found that those who had attended retirement seminars had a 20% increase in net worth. Those with the least money and education got the most from the events, but even the wealthier profited.
It’s another good point, and it’s proof for the idea that people who learn about financial issues are able to implement that knowledge in ways that actually improve their lives. Anybody can grasp the basics of finance – it’s not very complicated stuff. It’s sort of like the Internet – everyone can figure out how to use it. Not everyone can do the most complicated stuff – but not everyone needs to.
Finally, there’s the Maldonados and the Halls. They teach the lesson that it’s best to save a set amount, every month, regardless of the markets – and that rather than managing your own portfolio, it can be a good idea to buy into funds that automatically reallocate assets based on your age. All good lessons to learn, illustrated by actual families.
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