The year 2008 was marked in our recent history as the beginning of a crisis that impacted globally in a strongly connected world. We had been living beyond our means and it was clear that the years of economic prosperity were over. A crisis of this kind was, perhaps, the opportunity for us to review our experiences and adopt a more responsible stance in relation to our way of consuming.
According to popular culture, “human beings are the only animals that trip over the same stone twice”. If we generalize this expression to the issue of the economy and the way we handle our finances, it seems that we make the same mistakes over and over again.
According to the statistics, far from having learned our lessons, the level of indebtedness of families is still much higher than desirable, showing that there is still a long way to go when it comes to planning expenditures and savings.
According to 2018 data from the Spanish National Institute of Statistics (INE), Spaniards save 4.9% of their income, or in other words, for every 10 euros they earn, barely 50 cents will remain in the home. This is for those who save, which seems that not everyone does, since according to another recent study by the consulting firm McKinsey Global Institute, 32% of the population does not even manage to “save for later”.
According to a study by the savings site COINC only 5% of young people save. This figure has even attracted the attention of the International Monetary Fund. This organization already warned more than a year ago that the millennial generation would be the first to notice the impact of the aging of the population on their pensions and recommended that young people begin to save as soon as possible. Time is a key factor.
Against this backdrop, what happens then when a contingency such as the current pandemic occurs? Well, we find ourselves unprotected and often forced to face great economic difficulties.
Why do we not save?
The reasons are varied and, in general, I would like to highlight the following:
- Optimism and the illusion of economic prosperity.
Consumerism and optimism seem to be very good friends. The action of spending comes with a significant emotional charge . Expending money can give us a sense of freedom and power beyond the convenience of managing our money from a rational position and aligned with our financial reality.
The illusion of economic bonanza or as I would call it “fat cow syndrome”, makes us live in a continuous consumerist block that distracts us from our focus, making conservative behavior difficult or even worse, leading us down the path of debt.
Self-control and discipline are, however, great allies of a healthy financial situation.
- The short term vision.
Sometimes we see ourselves as “too young” to think about retirement or we feel so focused on our day-to-day lives that we don’t stop to plan our next years.
People are generally programmed to seek immediate gratification, carpe diem, which is the complete opposite of the habit of saving. Reality can hit us when we experience an unforeseen event, we have not achieved the necessary solvency to make a large investment (such as buying our own home) or we see the date of retirement near and without savings in sight to ensure a dream retirement against a pension system not free of risks.
- Too protected to save?
Among the reasons or excuses we often give to justify our low savings capacity is that we do not earn enough to be able to save. This may be true in many cases, but it is particularly striking that, in other cultures, such as China, despite having a much lower per capita income than the euro area, their saving capacity is much greater.
Perhaps the main reason is that, in these countries where the welfare state is not as developed as in old Europe, saving is not so much an option as an obligation.
While we in most EU live with a sense of “protection” and still trust that the “daddy state” will be there for us when we need it, in other cultures such as those already mentioned, they are more used to being independent and prepared to meet their individual needs for education, pensions or health care.
Depending on our own funds makes us more aware and encourages a more responsible way of consuming.
- The lack of financial education.
Financial education is, no doubt, a pending subject for our society. I have always been surprised that there is not a subject of money management in school. Sometimes, it even seems to be a taboo subject, something that is not talked about, a subject to be avoided within the code of “good education”. Other times, we perceive the financial world as something too complicated or boring, a subject that is not worth going into in depth since we will never fully understand it.
Sometimes we even feel that a person’s financial situation is determined by luck. The culture of the “long shot” can also give us the impression that our situation is largely a question of being in the right place at the right time and that a business vision is nothing if we do not find the time to carry it out.
Do we rely so heavily on luck when it comes to our personal finances?
According to data from the Spanish National Institute of Statistics, in 2016, the average expenditure on textbooks per person was 24.2 euros. Do you know what the expenditure on gambling was? Well, more than double, exactly 60.6 euros per person.
Although the chances of winning the lottery are very small, it is true that doing so can really make us rich, but what good is it to have a large amount of money if we do not know how to manage it?
When did we start getting financially educated?
It seems that until we earn money we don’t need to be educated in economic matters, but the reality is that we have always been educated financially. Money has been part of our lives practically since we were born and although at first we may not be very aware of what it entails, we all start to build our beliefs based on what we hear around us.
Who hasn’t heard phrases like “money corrupts”, “money only brings misfortune” or “I’m not a bank”?
These types of statements will tend to condition us towards a position of rejection or avoidance, and the less we have been educated about them, the more exposed we will be to basing our behavior on erroneous beliefs. Therefore, I would say that there is no minimum age to start. This process is part of what is known as “financial socialization”.
It is key that children and young people today are aware that today’s financial habits will affect their lives in the future.
Financial education aimed at the youngest should be, in my opinion, a compulsory subject in school. Unfortunately it is not yet, so… How can we encourage children’s interest in the economy?
I would like to highlight the following proposals:
- Include money in the talks.
Introduce concepts in a simple and straightforward way, appropriate to the stage of development they are in. It is important that children understand the different concepts around the economy. For example, the relationship between time and money or asking questions to generate curiosity: Why do we have to pay for certain things? How do we get the money? How many hours of work do we invest in buying a certain product? What determines the cost of the things we find around us?
Using games or stories can be an excellent resource to help develop an age-appropriate message.
- Encourage them to be enterprising, nurture their autonomy and confidence.
Economic management is both emotional management and skill acquisition. It is important that they develop good self-esteem and self-control.
A recent study from the University of Arizona, insists on the importance of giving children first-hand experience in money management. Its conclusions are included in the paper: “Practice Makes Perfect: Experiential Learning as a Method of Financial Socialization,” published in 2018 in the Journal of Family Issues and conducted by PhD student Ashley LeBaron.
There are actions that can be taken regardless of the family’s financial situation. This study cites some of them: giving them a regular pay, rewarding them when they have made an exceptional achievement, or encouraging them to save for a special purchase or make a donation.
Setting clear limits on what they receive and maintaining a balance so that their motivation does not come only from external sources is also necessary for the advancement of their discipline and self-responsibility.
Proposing small savings challenges or encouraging them to undertake, on a small scale and within their possibilities, can be fun and a good opportunity to boost their initiative as well.
- Involve children in the family economy.
How can we make children aware of their expenses and the cost of living?
In my opinion this depends a lot on how accessible the discussions about money are to them within the family. We can count on them to do this in everyday activities, such as visiting the bank or the supermarket.
Going shopping with them, checking the list of products together, sharing with them the budget we have and its relation to the family’s income, etc… are activities within our reach and relatively simple to put into practice in our daily lives.
- Use the example of the reference adults.
We adults, are the examples for the children around us. The type of relationship we have with money and how we keep our education up to date will be key in the development of their beliefs and financial behaviour.
On the other hand, as I repeat throughout this article, financial education and emotions go hand in hand. Educating children in good emotional management by making them aware of how it influences the way they act will be key both to the development of their self-esteem and to good financial habits.
Responsible consumption is also related to the way we earn money. It is important that their learning goes hand in hand with ethical and social values such as solidarity and empathy. It is important to encourage awareness of the unequal distribution of wealth and that money can also be used for the common good.
In short, money is a tool that will accompany us throughout our lives and can take us to many places. Knowing how to use it can be the key to a happier and more fulfilling life.
And what do you think?
What other ways can we promote culture and a good financial culture in our society?