What if financial planning is not in your genes?
November 6, 2014
"The government is not a luck-making machine". With this statement, the Dutch cabinet embarked on its march towards a "participatiesamenleving", the Dutch word for a society where people are participants in, rather than consumers of, social services.
The government is increasingly withdrawing its influence: from health care, housing, and our pensions. More and more long-term concerns are being put on our plate: the citizens'. Due to low degrees of cover, an indexed pension is no longer the standard, so anyone who desires to retire early and maintain their current spending power, will have to save for the future. The same applies to life-cycle housing and home care services. These too remain a possibility, but these too will require a personal financial contribution, and ditto planning.
But these days, who actually plans for his or her own future? According to the economy, we all do. The so-called life cycle theory assumes that we are continuously planning our financial future, with a complete knowledge and understanding of the facts, in order to maintain the same consumption level throughout our lives. Unfortunately, recent studies show that real people often lack this necessary knowledge and understanding of the facts. Only a minority is working on actual saving schemes.
Personal backgrounds that stimulate financial planning
Within the FinanceLAB of TIAS, we set out to search for personal backgrounds that stimulate our financial planning. To that end, we posed 25 personal and financial questions to 1,438 Dutch citizens from every part of society. Careful analysis of the answer, brought three insights to light.
Firstly, the tendency to save money increases with age, income and the number of children. Logical, and in line with available literature. Income generally increases with age and is a prerequisite for being able to save, and having children is a natural necessity to plan ahead.
Secondly, saving behavior differs from one generation to the next. Not only does our will to save increase as we grow older, but some generations save less than others. In the Netherlands, the baby boom generation in particular gladly saves and saves a lot. More than the generations before and after them. The reason for this may lie in the economic circumstances in which they grew up. These were hard during the years of post-war reconstruction, as a result of frugality became a standard way of life for baby boomers. Previous studies show that these youthful years are a decisive factor in our behavior later in life.
In short, we now face a future where saving for our retirement will become increasingly important, but more and more of us did not grow up in a period in which saving was the normal thing to do. The economic prosperity that we have seen since the sixties, combined with a government that took more and more concerns off our hands, has weakened that generation's inclination towards financial planning. And so it is high time to catch up. Our third insight may prove useful in that respect.
Optimism about the future means: saving money
It was the first time that we examined saving behavior in relation to ‘attitude and belief’. It is evident from the study that self-confidence, neatness and optimism are deciding factors in financial planning with the future in mind. Among the 1,438 Dutch people in our study, those with an optimistic view of the future, save more often. In addition, people with a structured financial administration also plan their future more often.
But perhaps even more surprising, saving is popular with people who believe their own actions will generate result. This belief, the locus of control, ensures that people in a "participation society" also dare to accept the challenge of financial responsibility.
Conclusion? Saving will become increasingly important, but not all generations are inclined to put money aside for later. The baby boomers were spoon-fed the principle of saving and never let it go. But there is hope for the generations that came after. Parents need not raise their children as baby boomers, but they should teach them to keep their financial administration in order, give them hope for a good future and, more than anything, have them feel confident that their efforts will prove useful. Then we will be ready for a "participation society"!