Moving Upstream on the Savings Dilemma

by Matt Bell

Americans have become legendary for their lack of savings. Neither education nor warnings have moved them off the savings sidelines. After 30 years of steady declines in the percentage of disposable income saved by the average American, the savings rate actually went negative in 2005 – the first time since the Great Depression.

For someone in their 20's, regular warnings about saving too little seem to have all the impact of parents urging their toddlers to eat their vegetables. But years of savings neglect eventually does catch up to a person. The Employee Benefits Research Institute notes that over half of workers age 55 and older has less than $50,000 saved for their retirement. Unfortunately, many of those people will soon discover that Social Security doesn't go very far as one's primary source of retirement income.

Long term underperformance in the savings game seems to have taken the wind out of the sails of policy makers, who have all but given up on motivating people to save more. Today, they are more focused on forcing people to save. At the recent third annual National Summit on Retirement Savings, one of the broad conclusions was that educating people about their need to save isn't working. What does work, it was agreed, is automatically enrolling employees in a 401(k) plan, a process now in place at 19% of companies with 401(K) plans; another 47% plan to offer automatic enrollment plans soon.

Maybe forced savings is the best way to get us adults to save more. But we shouldn't give up on teaching today's youth how to take ownership of their finances. And the key to success is the education that takes place inside the home. While school programs are needed, research from the JumpStart Coalition indicates that most kids get their primary money management education – good or bad – at home. What follows are some guidelines for parents.

Just Say No. Research indicates that early overindulgence is creating unrealistic expectations among today's teens that may lead to a lifelong habit of overspending. In part, researchers at the University of Michigan's Institute for Social Research (ISR) blame parents who overspend on their kids. In one recent poll, two-thirds of parents acknowledged their own kids are spoiled.

Overindulgence hinders more than a child's money management habits. Edward Hallowell, author of The Childhood Roots of Adult Happiness, says, "Providing too much is the single biggest mistake that parents make," helping turn out "people who go through their adult lives chronically dissatisfied."

Teach Delayed Gratification. Psychologist Walter Mischel did one of the most compelling studies about the power of delayed gratification in the 1960s. He discovered that, when given a choice between an immediate reward and a better one a little later, children who could wait grew to be adults who were more confident, personally effective, self-assertive, dependable, and still able to delay gratification in pursuit of their goals than kids who couldn't resist the temptation of the immediate reward. While he didn't study their financial habits specifically, the ability to wait for a future reward is a critical skill related to saving.

His guidance for teaching children delayed gratification, include:

• Suggest things for them to think about while waiting. Teaching your child to distract himself when he has to wait will make the waiting less frustrating.
• The reward for delayed gratification should be something children want, not something parents think they should want.
• Get involved in projects with your children that require you both to be patient. Even baking cookies together can teach the rewards of delayed gratification.

Teach Through Daily Experiences. Weekly shopping trips offer opportunities to teach children about everything from budgeting (less than one-third of teens know how to use a budget) to making trade offs. The key is to involve your kids in the process, helping them distinguish between needs and wants and establishing (and sticking to) a budget.

The National Endowment for Financial Education offers Simple Steps for Raising a Money-Smart Child. You'll learn, for example, that kids as young as two can begin to learn that money is a means of exchange. Simple exercises like allowing them to hand the money to the cashier when making a purchase helps to teach that lesson.

Another helpful site belongs to the Credit Union National Association which has created eight "Thrive by Five" money lessons for preschoolers. The CUNA site also includes lessons about having fun without money and the value of gifts that don't cost anything.

Make it Real. Surprisingly, just 30% of kids get an allowance. If financial lessons are to stick, kids need hands-on experience; so let them manage some real money of their own. Be the Marketing Gatekeeper. In her book Born to Buy, Boston University professor Juliet Schor wrote that marketers have been successful at influencing kids largely because parents are allowing them unfettered access, with TVs and computers now commonplace in children's rooms. According to the Kaiser Family Foundation Report, 26% of 2-4 year olds and 39% of 5-7 year olds have TVs in their bedrooms. Both groups watch nearly 2 hours of TV per day. A positive step parents can take is to keep TV's and computers out of their kids' rooms.

Be Involved. "Successful families," according to Schor, are thoughtful and consistent in their rules and choices. They spend a lot of time with their kids and offer numerous alternatives to the materialistic activities suggested by corporate America. They proactively teach their kids how to handle money, and how to distinguish between needs and wants. They provide allowances, but required that a portion of the money be allocated to savings and charity.

And, of course, Schor says that parents need to walk the talk. Highly materialistic kids are more likely to have highly materialistic parents, she found. Preaching lessons on restraint are unlikely to connect if the parents' closets are stuffed with the latest fashions and a typical family outing involves a trip to the mall.

While it would be easy to conclude that getting us parents to model positive financial behavior is the biggest challenge of all, perhaps more of us would begin using a budget, get out of consumer debt, and generally practice better money management habits if we considered the powerful legacy our productive behaviors can leave.