Financial Literacy & “Save More Tomorrow”

“… According to one survey last year, four in ten American credit-card holders do not pay the full amount due every month on the credit card they use most often, despite the punitive interest rates charged by credit-card companies. Nearly one-third said they had no idea what the interest rate on their credit card was.

“There is similar evidence elsewhere. For instance, a survey in 2004 by Cambridge University and Prudential, a big insurer, found that some 9m Britons are “financially phobic”, meaning that “they shy away from anything to do with financial information, from bank statements to savings accounts to life assurance.” Research by the British regulator, the Financial Services Authority, found that one-quarter of adults did not realise that their pensions were invested in the stockmarket.

Recognising that people find it harder to save money they already possess than to promise to put aside what they might have one day, he designed the Save More Tomorrow scheme, which gets people to commit themselves to saving a slice of any future pay increases. Where implemented, the plan has already brought about sharp increases in saving rates.

“… Americans still leave school not knowing much about money. A sample of high-school pupils aged 17 or 18 gave correct answers to barely half of a set of questions about personal finance and economics posed in 2006 by researchers at the State University of New York, Buffalo. Less than one-quarter knew that income tax could be levied on interest earned in a savings account. Three-fifths did not know the difference between a company pension, Social Security and a 401(k) savings account.

“… An important part of the teaching is getting the children to start saving, ideally by opening bank accounts. Typically, they have only tiny amounts, but this is enough to get them used to handling money properly. At first this faced a lot of resistance, as people asked, “How can young children handle money?” recalls Ms Billimoria, but “it soon caught on and parents started giving children money to save.”

“… Mr Thaler deserves to be taken seriously, as one of his earlier attempts to apply behavioural economics to saving has had impressive results. Recognising that people find it harder to save money they already possess than to promise to put aside what they might have one day, he designed the Save More Tomorrow scheme, which gets people to commit themselves to saving a slice of any future pay increases. Where implemented, the plan has already brought about sharp increases in saving rates.”

From Financial literacy: Getting it right on the money | The Economist.

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