Why are many smart people clueless about investing/personal finance?

[FinanceDude]

I am having trouble figuring how to make retirement planning into a HS or college class. First day of class you could spend 5 minutes explaining LBYM, 5 more minutes talking about compounding, 5 more minutes talking about the advantages of tax deferred plans, 5 more minutes talking about the magic of employer match, 5 more minutes talking about dollar cost averaging into an assortmant of funds, 5 more minutes talking about leaving it alone till you have enough to retire. Then a quick five minute review and class dismissed. What else do you need to teach for the rest of the semester? Saving and investing basics which is all you really need for at least the first two decades of the accumulation phase really is dirt simple.

And while you are talking, they are sending texts and updating their Facebook profiles, so they retain less than 1%.............

 

[rbmrtn]

And while you are talking, they are sending texts and updating their Facebook profiles, so they retain less than 1%.............

I think that would be a lot of what has to be overcome... they just aren't interested in it. You can make them take the class but most are going to see it as useless as taking physics, calculus , chemistry etc.

The basics could probably be done in a 1 hour seminar. 1) save 2) debt free 3) LBYM

 

[SumDay]

I can't post the 42-page NBER paper here (but I had to read it for work), but if you're interested, you can buy it for $5 (free if you have a .gov email address) if you're so inclined:

Financial Literacy and High-Cost Borrowing in the United States

Here's a summary, which ties in nicely with this discussion:

Demo Memo: The Borrowers

In this paper, we examine high-cost methods of borrowing in the United States, such as payday loans, pawn shops, auto title loans, refund anticipation loans, and rent-to-own shops, and offer a portrait of borrowers who use these methods.

 

[friar1610]

+2. I'd love to do that too, so if you figure it out...

I considered looking into a career with a local broker, but all of them require disclosing all our holdings and transferring them in house - that ain't happening. I am also concerned about inevitably being blamed by some customers expecting positive returns in down markets, I assume that happens a lot.

Quote:
Originally Posted by brewer12345
When I bail on the day job...I want to figure out how to help with the basics of financial education for kids and adults.
Quote:
Originally Posted by SumDay
Brewer12345, when you figure that out, let me know. I also have dreams of doing this in my retirement years.
+2. I'd love to do that too, so if you figure it out...

I considered looking into a career with a local broker, but all of them require disclosing all our holdings and transferring them in house - that ain't happening. I am also concerned about inevitably being blamed by some customers expecting positive returns in down markets, I assume that happens a lot.


I've had the same inclinations and here has been my experience:

- While I was working in my post-Navy "career" I answered an ad from a major investment/mutual fund company in my geographic area for financial planner trainees. I was eventually put in touch with a retired Navy guy who worked for the firm. I told him that I'd like to get into this field to help people with their finances, help them avoid getting ripped off, etc. He told me in no uncertain terms that if I worked for them, my real job would be to SELL. As if to punctuate the point, once it became apparent that I and the company were not a good fit, he tried to sell me one of their mutual funds.

- Fast forward....I'm retired now and doing volunteer work at an inner city adult education center where I do literacy and basic math tutoring a couple of days a week. From what I pick up in listening to conversations, talking to tutees, etc. I see that these people, poor though they are, are still getting ripped off by payday lenders, high check cashing fees, income tax preparers, etc. I propose developing a financial literacy course and offer to teach it. The Center says great and I get ahold of a canned curriculum from the NCUA and customize it a bit to fit local needs. We hype the course but, in the long run, only a few people sign up and they eventually drop out.

- Fast forward again....I've relocated to VT an read in the paper that high schools in VT are going to be implementing financial literacy classes. State money has been set aside to train teachers how to do this. I track down the name of the guy at the local HS who is supposedly in charge of this. I send emails, leave voice mail messages, etc. offering to help in any way I can: teaching (as an unpaid volunteer), tutoring one-on-one, developing and/or reviewing curriculum or whatever. Never a call back.

So, at least in my own personal experience, getting involved in this sort of thing is easier said than done. I will be relocating to another part of Ne England later this summer and will probably try yet again to see if any one wants my help in this area as I plan to reaffiliate with a volunteer organization I've worked with before. We shall see if I'm any more successful.

 

[Katsmeow]

I think that would be a lot of what has to be overcome... they just aren't interested in it. You can make them take the class but most are going to see it as useless as taking physics, calculus , chemistry etc.

The basics could probably be done in a 1 hour seminar. 1) save 2) debt free 3) LBYM

It depends. We homeschool our daughter who is in 11th grade now. She is not interested in academics at all. She has zero interest in getting a 4 year degree. She finds most academic work incredibly boring because she sees it as having no relationship to her life at all. Yes, yes, I don't necessarily agree with that - but that is how she feels.

So this past fall we did this textbook that was focused on very practical things about living. It taught her about things like: How banks work and how to balance a checkbook, how to buy a car, how to rent an apartment, how credit cards work and how to read a statement, how insurance works, how interest works, etc. She was entirely enthusiastic about this course and loved everything about it. She could see that this was stuff she needed to know and she could see how it has actual near term relevance in her life.

We are doing math online right now - ALEKS -- Assessment and Learning, K-12, Higher Education, Automated Tutor, Math - and she is about to do a short business math course. Some of the topics include:

Interest (17 topics)
Simple Interest (3 topics)
Simple interest and maturity value
◊
Exact and ordinary methods for simple interest and maturity value
◊
Solving for principal, rate, or time in simple interest problems
◊
♦
Promissory Notes, Simple Discount Notes, and the Discount Process (2 topics)
Structure of promissory notes: Effective interest rate and simple discount note
◊
Discounting an interest−bearing note before maturity
◊
♦
Compound Interest and Present Value (5 topics)
Computing compound interest with the simple interest formula
◊
Compound interest for daily compounding
◊
Compound interest for annual, semiannual, and quarterly compounding
◊
Nominal interest rate versus annual percentage yield
◊
Present value tables
◊
♦
Annuities and Sinking Funds (3 topics)
Ordinary annuity
◊

Present value of an ordinary annuity
◊
Sinking funds
◊
Installment Buying, Rule of 78, and Revolving Charge Credit Cards (4 topics)
Amount financed, finance charge, and deferred payment
◊
Cost of installment buying: Computing the APR
◊
Cost of installment buying: Computing the monthly payment
◊
Revolving charge credit cards
◊
♦
Personal Finance (20 topics)
Banking (3 topics)
Checking accounts
◊
Bank statement and reconciliation process: Basic
◊
Bank statement and reconciliation process: Advanced
◊
♦
The Cost of Home Ownership (3 topics)
Monthly mortgage payment tables
◊
Total cost of interest for a mortgage
◊
Amortization schedule: Interest, principal, and new mortgage balance
◊
♦
Life, Fire, and Auto Insurance (6 topics)
Life insurance premiums
◊
Insurance nonforfeiture values
◊
Fire insurance premiums
◊
Canceling fire insurance
◊
Compulsory auto insurance
◊
Optional auto insurance
◊
♦
Stocks, Bonds, and Mutual Funds (8 topics)
Reading stock quotations
◊
Calculating return on stock investment
◊
Stock yield, earnings per share, and price−earnings ratio
◊
Stocks dividends
◊
Reading bond quotations
◊
Calculating bond yields
◊
Net asset value of a mutual fund
◊
Investment in a mutual fund
◊
♦
•
Business Finance (22 topics)
How to Read, Analyze, and Interpret Financial Reports (9 topics)
Balance sheet: Merchandising
◊
Balance sheet: Service
◊
Vertical analysis of a balance sheet
◊
Income statement: Merchandising
◊
Income statement: Service
◊
Vertical analysis of an income statement
◊
Horizontal analysis of financial statements
◊
Financial projections
◊
Financial ratio analysis

She is very excited about doing this course, as she can see clearly how it relates to her life. Anyway all this takes way more than hour. For example, I had her work on a budget for when she is out on her own. This took days for her to figure out how much things cost and then determine how much she could spend based upon expected early work earnings.

It is easy to LBYM, but lots of people have no clue how to do that.

 

[SumDay]

Friar, good on you for trying. Your heart is in the right place.

I've had discussions with a neighbor who volunteers at a battered women's shelter. A program like this is on their wish list, as many of these women have never so much as written a check.

Keep trying! Someone somewhere will appreciate you.

 

[nun]

Smart and dumb people are clueless about saving for retirement because it seems so far off and so hard to do. When confronted by advisers who spew numbers like "25x income" and "replacing 80% of income" people just turn off. In fact if they took time to look at the numbers they would probably have a heart attack.

I ran some numbers for what someone starting on $40k, 40 years ago would need to save to replace 80% of their gross income minus SS. I assumed 3% inflation so that after 40 years ie today the person's income would be $126k and the SSA website estimates they'd get $26.8k a year SS so they would need to replace 0.8*126k - 26.8k = $74k. Using 25x as the multiplier to provide that income in retirement they need $1.85M. Assuming 6% annual return over the 40 years of their working life they would need to save 19% of their gross salary to end up with $1.85M.

Maybe you don't really need to replace 80% of your income. If they saved 10% every year, with SS they'd have 50% of their final income. So anyone saving less that 10% of their gross income will need to be very frugal in retirement and will be highly depended on SS. I think that includes the majority of people. Many on this forum will have investments in the $1M range which is probably a reasonable number to retire on for a frugal, middle class person with SS and no pension. But as I've said many times this board is way way outside the norm and most 401k balances will never approach $1M, so the maths just doesn't work for most people with 401ks.

 

[Free To Canoe]

Was it Dave Ramsey that said that money is 80% emotional? I agree with the statement and it may help explain the OP paradox.
Are smart people emotionally wise? There could be an inverse correlation here. Maybe the "smart" are using their money to meet their emotional needs, like keeping up with the Jones, power issues etcetera. I wonder how you fit this into the money basics course. Dave Ramsey is not without fault but he is one of the few that address the emotional side of the issue well IMHO.

 

[Katsmeow]

Smart and dumb people are clueless about saving for retirement because it seems so far off and so hard to do. When confronted by advisers who spew numbers like "25x income" and "replacing 80% of income" people just turn off. In fact if they took time to look at the numbers they would probably have a heart attack.

I think that is a good point. In this regard I found the following article interesting:

It's a 401(k) world and it sucks.

I particularly appreciated this statement:

We know roughly how much people need to put away in order to retire with a standard of living they'll be comfortable with. And we definitely know what kind of investment vehicles are most appropriate for middle class savers. And we have abundant evidence that, left to their own devices, a very large share of middle class savers will make the wrong choices. What's more, because of the nature of the right choices it's obvious that the dominant business strategy for vendors of middle class investment products is to dedicate your time and energy to developing and marketing inferior products, since the essence of superior products in this field is that they're less remunerative.

I suspect that 401ks or similar vehicles have been very, very good for many of the people on this forum. However, I think we must acknowledge that the people on this forum are outliers compared to the general population. What works very well for the average person here or the average person on the Bogleheads forum, for example, doesn't work at all for the average person.

 

[RenoJay]

I know a number of successful people who have virtually nothing saved, and it stems mostly from their attitudes about money. They consider it evil, the product of exploiting others, etc., so they whisper about it the same way one would about a divorce or a venereal disease. I'm a huge proponent that a long term curriculum should exist in all public schools to teach about personal finance. In K-3, kids should learn about saving, delayed gratification, etc. In 4-8, they should learn about work, taxes, etc. In 9-12 they should learn about investing, credit, debt and the rest.

 

[Free To Canoe]

I know a number of successful people who have virtually nothing saved, and it stems mostly from their attitudes about money. They consider it evil, the product of exploiting others, etc., so they whisper about it the same way one would about a divorce or a venereal disease. I'm a huge proponent that a long term curriculum should exist in all public schools to teach about personal finance. In K-3, kids should learn about saving, delayed gratification, etc. In 4-8, they should learn about work, taxes, etc. In 9-12 they should learn about investing, credit, debt and the rest.

+1

 

[Calico]

I do not feel it has anything to do with taking classes. It has to do with parents exposing to their children the world finite resources and trade offs. They should be showing to their children as early as possible how much they make and how the budget the money. Shielding them from this I feel really prepares another generation of poor financial planning.

The main reason I will be able to retire in good financial shape is because I paid attention to how my parents handled money, and then did the exact opposite of everything they did every time I was presented with a choice having to do with money. My role models were my grandparents, who modeled LBYM, saving for a rainy day, simple living, etc. Both of my parents lived high off the hog, had loads of credit card and other debt, and never saved a dime.

My grandparents' generation could have taught a class in financial wisdom, but not my parents.

 

[AndrewJackson]

Wow...Great thread. Took me over an hour to get through all the comments.

I definitely agree that intelligence and financial acumen doesn't have too much of a correlation other than the obvious increase in income. I think the main reason why this problem is so pervasive, touhough, is that parents do not teach their children this topic. This imho is the main problem. Like you all have said, money is a very emotional beast. It is not something best taught in an academic setting. And unfortunately, the best education is usually painful and emotional experiences with money.


My personal experience with money. My parents are awful managing money. They had 8 kids and I believe used that as their reason for never getting their act together. They often went to their parents for help and drew on future inheritances in order to stay in the house/pay utilities/etc. As a kid, I remember the screaming matches and my mom crying when they would fight. I have memories of my dad (who has an mba from a top 5 school and is very very smart/wise), getting fired/losing confidence/and pretty much dropping out of the labor force at 45. Later on, when my parents received a large inheritance, my dad lost nearly 300k off a 700k investment with a scum broker from new york in 6 months in a rising market (half of the loss was fees alone)! From the very beginning of the experience, I told him the broker was a con man screwing him out of his money. He was to prideful to admit his mistake and just let it keep compounding. All in all, they are probably going to blow a multi million dollar inheritance within 15 years of receiving it. Their failure alone is the single most important reason why I want to attain fire. No amount of learning or education could have affected me like this one experience. Sadly, I am learning at the expense of those I love.

 

[nun]

I know a number of successful people who have virtually nothing saved, and it stems mostly from their attitudes about money. They consider it evil, the product of exploiting others, etc., so they whisper about it the same way one would about a divorce or a venereal disease.

Money isn't necessarily evil, but there is an argument to be made that excessive interest etc and the love of money is evil. Strictly speaking we are all committing a sin by taking interest on our money and being so interested in it, but I'm not a Christian so my conscience is clear. Maybe there should be a Christian equivalent of the Muslim Sharia funds, but for most people capitalism has trumped any injunctions against usury.

 

[deserat]

Interesting thread, although I'll be honest - I didn't read every post.....to the original poster's question - why? I believe it's an emotional issue and not just analytical....money means so many things to so many people. Having material proof of one's accomplishments or expenditure of time around them may be more important than having more free time. For some people being busy all the time allows them to avoid dealing with other issues, as well, so more free time is not what they want. One needs to truly know themselves to 'detach' and understand from an outside perspective what drives them and why. Once there is that understanding, then decisions are more easily made and behavior is more easily controlled. The book "Your Money or Your Life" does a much better job of explaining this....time is the important factor, not necessarily our indirect measures of it. However, few are able to discern this, and deal with indirect measures instead.

Nevertheless, there seems to be a small minority of people who do understand this and they end up being in control of their own destiny - either by limiting their needs and wants or amassing enough money (indirect measure of time) to do as they please.
History shows that people striate based on their ability to produce. I have a quote I keep on my computer that illustrates this:

"Since practical ability differs from person to person, the majority of such abilities in nearly all societies, is gathered in a minority of men. The concentration of wealth is a natural result of this concentration of ability, and regularly recurs in history. The rate of concentration varies (other factors being equal) with the economic freedom permitted by morals and the laws....... We conclude that the concentration of wealth is natural and inevitable, and is periodically alleviated by violent or peaceable partial redistribution. In this view all economic history is the slow heartbeat of the social organism, a vast systole and diastole of concentrating wealth and compulsive redistribution." - Will Durant

Plus ça change, plus c'est la même chose - the more things change, the more they stay the same

 

[FinanceDude]

Was it Dave Ramsey that said that money is 80% emotional? I agree with the statement and it may help explain the OP paradox.
Are smart people emotionally wise? There could be an inverse correlation here. Maybe the "smart" are using their money to meet their emotional needs, like keeping up with the Jones, power issues etcetera. I wonder how you fit this into the money basics course. Dave Ramsey is not without fault but he is one of the few that address the emotional side of the issue well IMHO.

Behavioral finance is a fascinating subject. Societal morality and shfting social norms has an effect on the human brain. I have read a lot on this subject, and it appears for the most part, people are their own worst enemies, and generally do the opposite of what logically they should (this board nontwithstanding).........

 

[Midpack]

Having (started and) read this thread, I'm inclined to believe 'trying to buy happiness' or 'keeping up with the Joneses' is the most common cause for otherwise "smart people" who don't prepare for retirement. While I fully agree that more/better personal finance education at home and in schools is badly needed, I'd think it would occur to "smart people" to look into retirement planning at some point before it's just too late. It would have to dawn on them that they can't work forever and retirement won't just take care of itself. Many of them have been forced to sit through 401k meetings, one of which should have sparked some thought. Even if they were to go the wrong route (full service broker & BIL hot tips), I'd think they'd do something before 50 at least. So I'd chalk it up to the irresistible lure of immediate gratification theough lavish spending more often than not. YMMV