Have You Resolved To Save More This Year? Easier Said Than Done

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The following is a guest post by Barbara Kiviat, a fellow at New York University�s Robert F. Wagner Graduate School of Public Service and a research associate at NYU�s Financial Access Initiative.

By Barbara Kiviat

It�s a new year, and Americans are again resolving to get their finances under control. According to a recent Marist Poll, the resolution to spend less money and save more is the nation�s third most popular, behind only losing weight and exercising.

Of course, as anyone who has ever tried to spend less and save more knows, being financially prudent is easier said than done. Entire industries of self-help books and budgeting software exist to guide people to better financial decisions, and for years policymakers�from local school board officials to Treasury Secretaries and Presidents�have been straining to improve the population�s financial literacy.

Why is it so hard? In a new white paper for The McGraw-Hill Research Foundation, New York University professor Jonathan Morduch and I explore why efforts to enhance sound financial decision-making are so tricky to pull off, and what ordinary people�as well as policymakers, non-profits, and companies�might do better. The bottom line is that the actions of both individuals and institutions matter, and while there�s no one-size-fits-all solution, there are common themes to sound financial decision-making, a number of which are typically overlooked.

Consider, for instance, the role of knowledge. Traditional financial literacy courses, like those taught in high school, present a mixed record of results. Certain facts�what we might call explicit knowledge�clearly matter. Numeracy, for example, is a good indicator of whether or not a homebuyer will wind up in foreclosure. But is it also important to know precisely how interest compounds? The answer to that is a lot less obvious. In fact, in many cases rules of thumb prove to be a more successful way to move people toward solid financial decisions. In investing, the percentage of money you have in bonds should roughly equal your age. That advice is good enough for most folks most of the time�and it nicely prevents people from getting into trouble by pursuing more complicated strategies or from failing to invest at all because the choices are so overwhelming.

Other sorts of knowledge matter, too, particularly self-knowledge. If you�re one of those people vowing to spend less and save more in 2012, a good place to start is by keeping track of every dollar you spend. Seeing patterns on the page quickly makes spending salient and behavioral change easier. But there�s more to understanding oneself than understanding where all the cash goes. Understanding why you spend the way you do matters a great deal, as well. Much spending, especially overspending, is emotional, and in recent years the burgeoning field of financial social work has begun to systematically address that issue. What we might call soft�or socially based�knowledge is another easily ignored but terribly important part of the puzzle. Knowing that a rental agreement is negotiable or that a credit-card charge can be disputed�and feeling empowered to negotiate or to dispute�is sometimes what a person needs to get to a better financial result.

Good decision-making isn�t just about people, though. The structure of financial products plays an often underappreciated role, as do institutional forces. If your job comes with a 401(k), you�re more likely to save for retirement, and your chances go up even more if your company enrolls you automatically. One of the first tasks the new federal Consumer Financial Protection Bureau took on was mortgage disclosure documents, with the understanding that it�s not just about information, but also about how that information is presented, that leads individuals to make one sort of decision over another. How people around you behave can deeply influence your own behavior, as well. Humans are social animals, after all, and the goal of changing financial behavior may involve overcoming competing messages from national consumer culture�from TV, the news media, and the Internet�as well as from smaller social units like workplaces, schools, churches, and families.

What does all that mean for folks looking to make better financial decisions this year�or for groups trying to engender greater financial literacy? The big take-away is that money pervades many aspects of our lives, and having a different relationship with it involves much more than simply deciding to cut back. Changing how people earn and spend often requires broad and holistic thinking about individuals, their motivations, and their financial environments. For a New Year�s resolution, it�s a high bar�but almost certainly a worthwhile one.