It’s financial literacy month, which means everyone’s offering ideas on how to end the dearth of financial knowledge in this country. Mandate personal finance courses in high school. Convince parents to talk about their own budgets with their kids every night. Elect Suze Orman president of the United States. (Okay, no one actually suggested that last one.)
[In Pictures: 10 Smart Ways to Improve Your Budget.]
But what do you really need to know about money? Are the people who manage to save enough for luxurious retirements the ones who understand reverse mortgages and municipal bonds, or are they privy to some other secret? Despite reams of research, the answer is not entirely clear. Some people just get lucky with their money. Some internalize frugal lessons passed on to them by their parents and grandparents. Others master the art of always living well below their means, and saving the rest in an interest-bearing account.
Here’s what we do know: The solutions we’ve tried out so far haven’t worked too well. As promising as high school personal finance classes sound, research shows that the lessons don’t stick with students after graduation. One study followed up with graduates five years after they took a respected personal finance course; it found the course had an insignificant impact on their behavior.
Such findings have led lawmakers and experts to argue that it is public policy, not American consumers, that needs improvement. In their book Nudge: Improving Decisions About Health, Wealth, and Happiness, economics professor Richard Thaler and law professor Cass Sunstein suggest designing financial and other programs to help guide people toward smart choices without limiting their options. They call their approach "libertarian paternalism."
Thaler and Sunstein recommend automatic enrollment in retirement savings plans, which research shows increases and speeds participation in workplace programs. And they advocate allowing consumers to sign up to save more money each time they get a raise, which boosts savings rates. Just by using the term "minimum payment," the authors say, credit card companies suggest that it is an "appropriate" amount to pay, even though it's usually just a fraction of the total bill and paying it maximizes interest payments. Their solution? Companies should allow automatic payment of the full amount due.
Other innovative tools have also tried to fill the need for easy, do-it-yourself financial planning. On Mint.com, you can upload your account information and get immediate insight into where your money is going. You can then use that information to start saving more money. That ease of use makes it one of the top-rated tools. Feed the Pig, which is sponsored by the American Institute of Certified Public Accountants and the Advertising Council, demonstrates how small daily changes that can add up to big savings. And dozens of websites offer beginners finance 101 lessons: Mymoney.gov, AmericaSaves.org, ING Direct’s Planet Orange, and SchwabMoneyWise.com are just a few of the websites designed to help parents educate themselves, and their children, about the ins and out of money.
All of these tools, lesson plans, and tips basically come down to one basic concept: Spend less than you earn. We hear countless iterations of that message, but are we listening? Maybe a little. The latest reports show that personal savings rates continue to climb slowly upwards and currently hover around 6 percent. Still less than the 10 percent averages of the 1970s, but not as bad as the 1 and 2 percent of the mid-2000s.
In the interest in bumping up that rate even higher, here are some basic yet foolproof strategies, culled from the masses of financial tips on display this month:
Automate savings. Online banking makes this technique easy: Sign up for monthly transfers into a brokerage or savings account. You can also transfer funds directly from your paycheck so you never even see the money, which means you won’t miss it. Check in with your human resources department—you might be able to set up an automatic savings account through your paycheck in addition to your automatic retirement savings.
Start slowly. Overcoming the initial inertia that prevents many of us from saving is often the hardest step. That’s why starting by saving just a small amount can get you on the path towards bigger savings. Nicole Mladic, a 31-year-old communications director in Chicago, couldn't afford to put away a big chunk of her salary when she was in her mid-20s, so she started saving 2 percent. A few months later, she raised it to 3 percent, then went to 4 percent, and eventually reached her goal of 10 percent. Today, her net worth is over $90,000.
Stay on top of financial news. A survey by HSBC Direct found that people they call “active savers,” which make up about one in five Americans, tend to pay attention to financial news. That might help them maintain a general awareness and savviness about money, and also teach them about basic principles such the importance of not trying to time the market, and finding accounts that don’t charge hefty fees. Of course, you don’t need to obsess over every bump in the market and can avoid hysterical cable network shows, but you might want to tune in regularly so you understand the major forces at play.
Enjoy every chunk you put away for later. It might sound impossible to enjoy the act of not spending, but some people—especially successful savers—naturally feel more pleasure while socking money away rather than spending it, since they know they are building financial security, and they can spend it one day in the future. If you don’t naturally feel this way about saving, you can teach yourself to, by focusing on how much financial security means to you each time you add to your savings accounts.
In that spirit, why not take a moment to observe financial literacy month. What are you doing to celebrate?
Kimberly Palmer (@alphaconsumer) is the author of the new book Generation Earn: The Young Professional's Guide to Spending, Investing, and Giving Back.