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| Saving: It's All in the Mind | |
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What would you rather have: $10 right now or $11 tomorrow? If you're like most people, you'll take the ten bucks now. But let me ask you another question. What would you rather have: $10 in a year or $11 in a year and day? If you're like most people, you'll take the eleven bucks in 366 days. Why the difference? Because faced with a choice in the far distant future, most of us tend to think that better things come to those who wait. But presented with immediate alternatives, we tend to take the money and run. This, in essence, is why so many of us find it so hard to save. The questions listed above have been asked many times as part of research into how time influences our decision-making processes. The results are consistent. When the time frame is 24 hours, the majority of people opt for the lesser amount of money, even though they could have had more if they waited. But when the time frame is lengthened to a year, the majority think it in their best interest to wait another day and earn another dollar. This is essentially the same dilemma we face when we're walking down the street, glance in a shop window and see a pair of shoes that's to die for. What do you do: buy the shoes on the spot or funnel that money into your 401(k)? The answer depends on which part of your brain you are listening to. "The human brain processes the world via two systems: the reflexive and reflective," says Jason Zweig, an investing columnist with Money Magazine and author of the forthcoming book Your Money and Your Brain: How the New Science of Neuroeconomics Can Make You a Smarter Investor. "The reflexive system is fast and emotional. It doesn't involve conscious thought. The reflective system is slower and more analytical. It's rational." Our brains evolved for immediate gratification. Out on the African savannah, when our ancestors couldn't be sure where their next meal was coming from, they didn't ask themselves: Should I let this antelope live now in the hope that a fatter one will come along tomorrow? In those days, it was eat or be eaten-and to a large extent our brains still function that way. "When faced with the choice between new shoes now or a better funded retirement in 20, 30 or 40 years, the reflexive system wins every time," Zweig says. "The prospect of a better retirement in the distant future just doesn't have the same emotional wallop as a new pair of shoes today." The reflexive and reflective systems are situated in different parts of the brain. Our reflexive responses originate in the limbic system, one of the most ancient parts of the brain and the site that processes basic emotions like fear and anger. The limbic region puts the 'impulse' into impulse purchases. So the next time you see a pair of shoes and think to yourself 'I gotta have it!', that's your limbic system urging you on. Reflective responses originate in the neocortex, the brain region that first deliberates and then decides. If you say to yourself when you see the shoes, 'I'd love to have them but they're out of my price range,' that's your neocortex doing some long-term financial planning. Every time you're confronted with a choice between immediate gratification and long-term satisfaction, a little debate goes on inside your head. Are you going to do the limbo with your limbic system or just say no with your neocortex? "Shopping and spending money makes you feel good now," Zweig says. "It gives an immediate jolt of pleasure. The reason people don't save is that the future is not now. The idea of saving for retirement is too vague and abstract, and too far in the future." So how do you resist the call of the limbic system? Zweig suggests doing a little mental time travel. "Compress the intervening years between the age you are now and the age at which you will retire," he says. "Are you ready? What do the numbers tell you?" It's not really so far to go. Because when it comes to saving for retirement, the future is now. If you don't start saving early, chances are your golden years will lose a lot of their luster. "Making bad financial decisions is like getting sunburn," says Zweig. "There is no precise moment on the beach when you stop getting a tan and start getting sunburn. It's a gradual process, and you only detect it when it's too late. It's the same with saving. There's no precise moment when you start getting into trouble. It's happening all the time." The lesson is clear. Let your neocortex apply some financial sunscreen or risk getting burned. -- James Geary
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| How to Find a Summer Job | |
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When you read one of Janet Bodnar's "Money Smart Kids" columns in Kiplinger's Personal Finance magazine, it is the voice of experience you are listening to. She has three children-one a college graduate, another currently in college, and a third still in high school. She often writes about her own family's experiences to illustrate the points she makes in her columns. So when the topic is summer jobs and Bodnar says, "Kids don't have a clue about how to get into the workforce; they need their parents' help," it's a pretty safe bet that she knows what she's talking about. In addition to being a columnist and deputy editor at Kiplinger's Personal Finance, Bodnar is the author of Raising Money Smart Kids: What They Need to Know About Money and How to Tell Them. She's adamant that paying for higher education is a shared responsibility, and that summer jobs are a great way for young people to make a contribution. "College is a family affair and kids should help pay for it," Bodnar says. "It's best for parents to discuss this with their children early on in high school. Explain the financial realities for the family so that it doesn't come as a surprise further down the road." More and more young people seem to agree with Bodnar. In a poll carried out in May by Junior Achievement, almost 36% of teens surveyed said that saving for college was their primary motivation for getting a summer job. In previous surveys, extra spending money was always the top priority for teens. The shift is no doubt in part due to rising tuition costs. According to the U.S. Department of Education's National Center for Education Statistics, the cost of attending a public college has risen 28% since 1993; the cost for a private college has risen 25% over the same period. Many families are looking to scholarships, financial aid and loans-as well as money from the student him- or herself-to make higher education affordable. So how does a young person take his or her first steps onto the job market? "Use family connections," Bodnar counsels. "Parents can suggest colleagues, friends, family members and neighbors as potential job leads. You shouldn't get the job for them-kids themselves still have to write the cover letter, send the résumé and go to the interview-but you can help get them started." O.K., so you've got a couple of job possibilities, but who would want to hire someone with no experience and no qualifications? Bodnar argues that young people are not as inexperienced and unqualified as they may think. "Kids may think they have no skills or talents, but they really do," she says. "Volunteer work, sports activities, involvement with school plays-these are all things that demonstrate initiative and show you can handle responsibility. Even a job in a fast food restaurant can be impressive, because it shows that you can work under pressure." Bodnar's advice: Put it all on the résumé. If your first priority in getting a summer job is to save for college, then it's not essential for the job to be relevant to your studies or your future career. In the later college years, however, it becomes more important to find employment in what you think might become your chosen field. Bodnar's daughter, for example, loves swimming, and for the past five or six summers has earned money as a swimming instructor. This summer, though, as she prepares to enter her senior year in college as a biochemistry major, she realized she needed some relevant lab experience. So now she spends the mornings teaching kids how to swim and the afternoons poking mould in Petri dishes as a lab volunteer. For Bodnar, the bottom line in getting a summer job is enthusiasm: "Let employers know you are enthusiastic, that you really want the job." Oh, and one more thing: Dress for success. "Don't show up to the interview in flip-flops," she says. Wanna get a job? Here are some Web sites that might help you get started.
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| In Conversation with Robert Duvall, CEO of National Council on Economic Education |
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As CEO of National Council on Economic Education (NCEE), a non-profit organization that promotes economic and financial literacy in schools, Robert Duvall is spokesman for the cause of making economic and financial education a core component of the pre-college curriculum. Duvall will speak at CFP Board's 2006 Annual Meeting on August, 4, 2006 at the Los Angeles Convention Center. General admission to the event is free. If you're in the LA area, we hope you'll join CFP Board for Mr. Duvall's presentation and all of the other financial planning and education events. Read more about the meeting. Below is an excerpt from a recent conversation with Duvall: Sarah Ball Teslik, CFP Board's CEO: Give me a very brief summary of NCEE's mission and the history of how you got that mission, because I think it's very interesting. Robert Duvall: Yes, the NCEE was founded just about 60 years ago by a group of business leaders and educators associated with the Committee on Economic Development. They saw the GIs pouring back into the workforce after the second World War and realized that too many of them didn't have a clue about the American economic system they were going to be working in. So we were founded as a non-profit, non-partisan, independent organization with the mission of getting basic, practical economics into the core curriculum of our nation's schools. That continues to be our mission. Read the complete conversation with Robert Duvall.
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| About This eNewsletter | |
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