Miley Cyrus' cover of "Jolene"? You got it. Want me to wax poetic about "In Living Color" and the sad, slow death of live sketch comedy? No problem. Just help me fix my computer problems and I'll gladly whore out my writing. And...back to the post.
America has a dire need for better financial habits. We don't take advantage of our 401ks and, if we do manage to save a something in our work-sponsored plans, we often borrow against them. Our national savings rate is at its second lowest level since 2008. Household debt is near record highs relative to disposable income. So whatever lessons we were supposed to learn from the last recession, it seems we need to learn them again.
Still, if necessity is the mother of invention, why haven't we invented a way to properly address these financial needs? The need is obviously there. So where's the stinking innovation? Here are a few ideas on why we're not getting better:
Financial Literacy Education Is Not Working
We typically look to education as the answer to our widespread financial problems. We posit that people are bad with money because they haven't ever been taught much about money. After all, we collectively share a poor financial history: our parents' finances were often a mess, and they never had frank discussions with us about debt, or investing, or, well, anything. We were thrown in the deep end of the money pit, and picked up the bad habits of our parents. So lack of knowledge, or bad knowledge, has to be a root cause, right?
So, if we teach teenagers and adults how compound interest and debt works, then they'll be good (or at least better) with money. Improve knowledge, and the behavior will improve, too. Unfortunately, that is not what is happening. Those who receive financial literacy education are no more likely to exhibit better financial behavior, like saving more or avoiding crazy amounts of consumer debt, than people who didn't receive that education. While our intentions are good with financial literacy education, the results simply are not there. Whatever lessons gained by this education are lost before they can have a material impact. Financial education is no silver bullet -- if anything, it seems to be a blank.
Financial Goals are Long Term Goals
Many financial goals are a long way off: saving up for a big down-payment, a comfortable retirement, debt freedom, or financial independence are all fantastic goals, but they take years or decades to achieve. The problem is that long term goals are easy for us to scrap. Procrastination is easier with long term goals, because there are a lot of mañanas between now and the goal. When retirement is thirty years away, it's easy to start saving more...next month.
As Jason Hull tells us, Monkey Brain is concerned with the here and now. Our limbic system is willing to sacrifice a big payoff in the future for a small reward now. So, being debt free in five years only sounds so attractive, especially when I can have a fancy dinner out with my wife tonight, and my new surround sound can be at my door in just two days when I buy it from stackingbenjamins.com/amazon. On an intellectual level, I might know that being debt free is going to be incredible. But, the payoff is so far in the future that I have a hard time resisting the temptation to spend the extra $100 I was going to put towards my student loan debt. All the financial knowledge in the world isn't going to change the fact that we're bad at sacrificing daily for many years straight.
We May Need to Improve with Money...But We Have a Lot of Needs
The rub with addressing our need for better financial behavior is that we have so many other competing needs. If I'm really struggling financially, the need to keep myself housed and fed is going to dwarf my need to pay off credit card debt. But even for those of us with sufficiently high incomes, we have a bunch of complex psychological needs that compete with the need for improved finances. My steady paycheck might already address my basic necessities and even my need for stability. Once those are met, our minds turn to a need for status and esteem. And marketers are all too happy to point out products that give you both.
To combat this, we bloggers who champion frugality are quick to explain why it's foolish to lease a new Audi, for example. And we'll often try to persuade you with a financial analysis that show it's better to buy a used hatchback, or to ride a bike. (If the blogger is especially bright, he might argue the financial merits of a scooter.) The problem with this approach, this singular focus on cost, is that it disregards our psychological needs for status and respect. My Toyota might save me thousands over the Audi, but it does not impress anyone. It is not cool. It doesn't make me feel respected by my coworkers. An Audi might actually address that need...until the new model comes out.
While material goods are poor salves for our inner needs long term, it is folly to disregard these psychological needs entirely. They may lead us to poor financial decisions, sure. But the need to fit into a certain social group, or to feel like you're respected by your peers, is valid. Unless our attempts at improved finances are constructed in a way that acknowledges our need for respect, status, and reputation, then success will be elusive. The ever growing army of savvy marketers are tapping into these needs -- the personal finance community ought to as well.
*Photo is from Tax Credits at Flickr Creative Commons.