Last Updated Jun 27, 2011 9:34 AM EDT
For many adults it is simply too late. Poor practices -- impulse shopping, maxing out credit cards -- do not stop even when they are shown the destructive nature of these practices, according to the New America Foundation study Accelerating Financial Capability Among Youth.
The study notes findings out of India, where following a government mandate to better serve the underclass nearly 16 million new savings accounts were opened. Yet 12 months later only 13% of those accounts showed any saving going on. The dismal results echoed in a similar program in South Africa. The opportunity and the desire (presumably those who opened an account wanted to start saving) to change were not enough for many adults to overcome established bad behavior.
How difficult it is to overcome bad habits is perhaps most conspicuous in areas like diet and exercise. Indeed, the authors note:
"One observes a similar gap across a variety of contexts. Insulin users intend to take their medication but still non-adherence rates of roughly 20%-45% in the U.S. result in thousands of cases of blindness and amputations, with general pharmaceutical non-adherence costing the U.S. economy up to $100 billion each year."
The tendency to not do what is good for you is in play on the personal finance front as well. Which is why a big part of the financial literacy discussion has turned to youth -- not so much as it relates to educating kids about money in a classic sense, but about the value of instilling good money habits much as you would train kids to floss or make their bed. The authors write:
"Theories of habit formation suggest that the strongest predictors of future behaviors can be past behaviors...Lessons from neuroscience and cognitive science suggest that the potential to form adult financial capabilities may be strengthened if the foundation for those capabilities are laid early in life."
How do we do lay those foundations? The authors (who focused on saving) suggest four practical strategies:
Â· Get in your kid's face Humans have natural biases against saving. It requires sacrifice, discipline and long-term thinking. We must be reminded constantly that saving is smart or we will fall off the wagon. Researchers in the Philippines, Bolivia and Peru found that banks reminding clients to save via text message and other means increased the likelihood of reaching a savings goal by 3% and the total amount saved by 6%. Leave your kids notes. Send them texts. Look for any transaction point to talk about setting something aside, and do it regularly.
Â· Leverage peer pressure Studies from Mexico and Colombia show that kids who were offered a cash incentive to attend school went to school more often. But, remarkably, so did students who were not offered the incentive. Those kids wanted to do what the other kids were doing. Peer pressure is a strong force and you can use it get your kids in the habit of saving. If you've got more than one child, get them started at the same time and talk with them about who has saved how much and for what. It's not meant to be a contest. But they may feed off one another. School-based savings programs can be especially effective in generating peer pressure to save. If it's cool, they'll do it.
Â· Make it automatic Savings mechanisms that are automatic are a great way to overcome our natural bias toward inertia. In 401(k) plans where employees are automatically enrolled, but allowed to opt out, participation rates tend to be higher than in plans where employees must choose to enroll. Seeking to instill the habit of saving early, Nigeria recently launched a pilot program opening a savings account (seeded with a lump sum of money) for 1,000 students. Doing it for them rather than identifying eligible students and asking them to enroll is meant to nudge kids to use their account. Their deposits are matched 2 for 1 as an incentive to further save. Why not try the same thing at home? Open an account for your kids without a big discussion. Then show it to them, explain the account and offer to match their contributions from allowance, odd jobs or gifts.
Â· Offer incentives Cash or prizes for saving can have a surprisingly large impact. In the Philippines, one bank has had impressive results from a program offering 4,000 young children pencils and crayons for saving. As these students reach savings goals the prizes become larger. You might consider opening an account and offering similar incentives, including matching contributions.
The idea is to get them started saving and performing other basic money functions in formative years, when good habits take root. That way these practices won't seem so unnatural when they are older.
Photo courtesy Flickr user stevensnodgrass
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