Joshua Nicholls has decided to call his managed fund account his “Financial Freedom Builder”.
Nicholls, of Christchurch, regularly sells money outside of KiwiSaver into funds managed at Kiwi Wealth, which asks each client to give each of their accounts a nickname.
Many savers like Nicholls choose to say something about their motivations for saving and investing.
Some speak of people who care about their future interests. There is the “live well to age 100” fund, the “phew, I got there (retirement)” fund and the “65 years old and still alive” fund.
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Then there are those who are keenly aware that life can be tough, opting for account names like “the fund oh s…” and the “backup plan”.
There are also short term goals cited in names, such as “I would like a house please”, “a place to live” and “the greatest family vacation”.
Compound interest is the “magic” of your savings and investments that earn on the interest they earn. It is a powerful way in which money saved or invested grows in value faster and faster, the longer people leave it invested.
Some account names allude to financial strategies, such as the “ex-ANZ deposit” of someone seeking a better return than they could get with pitiful term deposit rates, or the “anti-mortgage “suggesting that someone is trying to earn more than they are doing. pay on their mortgage.
Born to save
Nicholls’ account name is reminiscent of the philosophy of financial freedom, which is discussed a lot on internet forums.
It’s a philosophy that involves people saving and investing a large portion of their income to build wealth to give them the choice to do things like early retirement.
“I’ve been interested in investing and in business for a long time,” says Nicholls.
Is this interest and the hours he devoted to researching his financial strategies the result of nature or of education?
“I would go with nature,” he says.
“It’s not that my parents didn’t encourage saving for the future, but it’s more of a personal matter than with my parents.
Economists and scientists around the world have addressed the question of the role that nature and education play in shaping saving habits.
The 2013 Born to Save survey on the research conducted on the subject by Mario Belotti, chairman of the finance department at the University of Santa Clara in the United States, concluded that the response to the debate on nature savings versus nurturing savings was: “It’s complicated”.
Neuroscience and savings
Belotti, who works in a country where 60% of households do not have funds for ‘rainy days’, says that “some people are just better than others at self-control, and neuroscientific studies have highlighted why this is the case. ”.
Monitoring brain activity in science experiments indicates that some people’s brains are wired to get more reward for saving and less for spending.
“Recent experimental evidence tells us that nature is certainly important for financial decision making, just as it is important for athletic ability and physical traits,” he says.
Scientists leading the Dunedin Study, which followed the lives of 1,000 people born in Dunedin between 1972 and 1973, found that the level of self-control of children as young as three years old was a predictor of future wealth.
They found that young children’s self-control skills, such as awareness, self-discipline, and persistence, predicted their health, wealth, and criminal history later in life, regardless of their IQ or background. social.
Feed against nature
Nature isn’t the whole story, although it may provide a clue as to why financial education may have a limited impact on some people.
A study in Scandinavia of twins, both identical and fraternal, suggested that genetics explained only about 33% of the sparing behavior of the twins in the study, Belotti says.
Pushpa Wood, director of the Financial Education and Research Center at Massey University, says, “For me, genetics don’t answer everything. I am the oldest of my family. I have five siblings.
“We’ve all had the same upbringing and the same opportunities, but two of the five who have these savings genes didn’t turn them on. “
Scandinavian researchers have found that parenthood is important for the saving behavior of twins aged 20 to 25, but the parenting effect wears off as people reach their 40s.
If nature and education are not responsible for the saving habits of many people, something else has to be, and it seems to be the experience of life, and the opportunities that are presented to people, such as getting a job. employment with an employer that truly supports retirement savings.
Wood says the right environment, the right context, and the right opportunities all play a role in developing savings habits.
Belotti says “smart nurturing” is a philosophy that is tried to help people develop savings habits by creating plans and programs to make it easy for people to develop savings habits.
KiwiSaver is an example of a smart nurturing attempt.
It was configured so that people had to “opt out” rather than “register” to get a KiwiSaver account. The idea was to make it harder not to save than to save.
Opinions on its success are mixed, with over a million people with KiwiSaver accounts making no contributions, and evidence is lacking that KiwiSaver has dramatically increased savings rates.
While some non-contributors will be children, or the unemployed, or staying at home to raise children, by the middle of last year more than 128,000 people had suspended their contributions.
Sometimes the intelligent nurturing is even more intense.
Christians Against Poverty financial mentors work with families overwhelmed by unmanageable debt.
The program involves emotional, spiritual and budgetary support, and from day one clients start saving small amounts each week to build emergency savings funds.
It often takes several years for people to get rid of their debt, but spokesperson John Watson says 90 percent of clients who get rid of their debts remain free from unmanageable debt two years later.
An economy that does not look like an economy
Dr. Michael Fletcher of the University of Victoria’s School of Government has studied family politics for decades, including the wealth impacts of life events like relationship breakdowns.
“Some of the reasons people don’t save, or seem to not save, are very rational,” says Fletcher.
Life is expensive, income not always generous, and in addition some forms of savings do not look like savings in the traditional sense of the term.
This includes people with limited incomes who choose to do things like invest in their children rather than save money in an account, Fletcher says.
“If you don’t have enough to do both things simultaneously, then it will appear that there will be no saving and investing.”
Kiwi Wealth chief executive Rhiannon McKinnon said it was hard to resist pressure to spend.
“There is a lot of pressure to spend with everything from your education to your attitude towards wealth, to social tendencies, to the temptation to play a role. Most people focus on the present, not the future, and going against that trend can be confusing and overwhelming, ”she says.
“[But] the main reason people can’t save is because they just can’t afford it. Living from week to week is a struggle for many and there is not much to put in savings. “
Link between savings and financial literacy
The Financial Capability Commission tested people last year to assess their financial literacy. He also asked people about their habits.
He found that people who knew how compound interest worked were much more likely to save regularly.
The difference in saving behavior was greatest among people with the lowest incomes, which, in conclusion, was an indication that people with less to live on needed greater motivation to save regularly. .
“This motivation is greater at lower income levels where saving requires more sacrifice,” the commission concluded.
The research also contained a tantalizing echo of Belotti’s neuroscientific explanation for thrift.
When the commission asked people to agree or disagree with the statement, “I find it more satisfying to spend money than to save it in the long run,” 45% didn’t disagreed, 24% agreed and the rest were neutral.
Those who felt more satisfied with saving than spending had higher levels of financial literacy.