WHICH SIDE OF YOUR BRAIN IS MANAGING YOUR MONEY?

 Here’s a quick question for you:
A notepad and pen together cost £1.10.
The notepad costs £1.00 more than the pen.

How much does the pen cost?

Sixty-four percent of people say 10p. That’s the wrong answer.

The right answer is 5p. The notepad costs £1.00 more than the pen. So the notepad costs £1.05 and the pen 5p, together they cost £1.10.

‘But I can do simple maths’, I hear you cry. Of course you can but sometimes we don’t bother to stop and work things out. And in the case of the notepad and pen question the brain thinks it can take a short-cut. After all, £1.10 and £1 carve up nicely into a difference of 10p, so that’s the answer we give.

The brain is a clever, complex piece of kit. But it also doesn’t like to do more work than necessary. So it automatises lots of its processing, and relegates all kinds of decisions to the unconscious, intuitive part of the mind. That’s good most of the time. If it didn’t you’d have to work out every morning whether your socks go on before or after your shoes and whether that arrangement of features on a human head represents your partner’s face! But automatising some things gets us into trouble.

Aside from being a quirky bit of fun to catch out your mates with, this question also reveals something deeper about people. It can also tell us how good they are with money.

In a recent study I did, in conjunction with first direct, almost two-thirds of the sample got the question wrong. Those people were also more lax with their money. They had more credit card debt and fewer savings.

This study is the first to show a link between a person’s style of thinking and their personal finances. The notepad and pen question is adapted from a test of Cognitive Reflection (Frederick, 2005, Journal of Economic Perspectives). I’ve called people who give the right answer  ‘reflectors’. They use careful, logical thinking; a style linked to left-brain processes.

Those who get it wrong are ‘intuitors’ and more right-brained. They are more impulsive and go along with their gut instinct, even though it’s wrong.

Someone who  is more left-brained and able to stop and reflect can also suppress the need for immediate reward (buy now, pay later with credit) and will give more consideration to the long-term (invest now, benefit later).

Intuitive people can’t suppress the first answer that springs to mind. They’re the kind of people who live for the moment and avoid putting effort into anything that doesn’t bring short-term gain. This was linked to poor money management, such as only making the minimum repayment on a credit card.

Economists have only just begun to analyse how a person’s cognitive skills relate to their financial decisions. Irrational financial decision-making is the subject of a fascinating field of study called behavioural economics. 

This examines why people often act against self-interest. Examples might include:

• -       having both money in savings and credit card debt (where saving get a paltry return and credit card interest rates are mammoth)
• -       Or the strange fact that people are willing to pay more for something when buying with credit card than they would pay if they had to hand over the cash.
• -       Or people who stay loyal to a bank yet moan about the service they receive

Right-brained people might feel dissatisfied with their bank but because they don’t stop and reflect and they’re not great at decisions involving effort, they don’t change it.

In the study 43% of intuitors had been with same bank since leaving school (for some this was thirty years or more)! This is irrational given how much choice there is now and the cash incentives for switching. For example, first direct gives a satisfaction guarantee. They’ll pay people to switch and if they’re not completely satisfied, they can leave the bank and receive a further £100 for their trouble. 
It seems a no-brainer to me.

Here are some other stats from the survey, carried out with over 500 participants:

• ·       66% of reflectors pay off their credit card in full every month (43% of intuitors do)
• ·       Twice as many intuitors than reflectors pay off only the minimum on their credit cards
• ·       Almost one in four reflectors have changed where they bank at least twice (43% of intuitors have never changed bank)
• ·       87% of reflectors have money in savings (70% of intuitors do)

When looking overall at people’s money behaviour the survey also revealed that:

• ·       1 in 3 people over the age of 55 have always been with the same bank.
• ·       Only 1 in 5 young people (18-25) pay off their credit card balance in full every month.
• ·       Men are more likely than women to pay off their credit card in full each month (63% vs 48%)
• ·       1 in 3 young people (18-25) have no savings (i.e. for non-retirement or emergency purposes)
• ·       1 in 4 people aged 25 to 55 have no savings
• ·       Most (92%) over 55s have savings

More info from first direct's newsroom

Free financial advice (paid by the financial services industry)

SIMONNE UPDATES US ON THE GOVERNMENT'S PLANS FOR FUNDING FREE FINANCIAL ADVICE:

Great news that the new coalition agreement published today (20 May) confirms the Con/Lib’s commitment to introduce a new service where you’ll be able to get free impartial advice on money matters via face-to-face, telephone and online sessions. While this was the plan under the Labour government too, it’s reassuring that they haven’t pulled the plug on this idea. The only difference is that instead of the cost being shared between the government and the financial services industry, it’s now going to be totally funded through a social responsibility levy on the financial services sector. Another spending cut that’ll be hidden to most of us, although you bet the industry won’t like it!

Don't make an issue out of giving!

A funny thing happened to me as I walked to a meeting in London this week, across Covent Garden and Leicester Square. 

A Big Issue seller caught my eye around Cambridge Circus (I’ll leave you to ponder that image) and, as there was no-one else around (to diffuse my responsibility) I gave in and bought a copy from him.

He had no change. 

I only had a fiver.

So I gave him the fiver and he gave me the BI.

I tucked it under my arm and, spotting it there, the next three BI sellers I passed on my walk all chirped up with happy greetings, like ‘God Bless Ya Luv’. Each one made me smile and feel warm inside. Not like the shifting discomfort I usually feel as I try to sneak past them and not buy. 

It was the best fiver I’ve spent in ages.

Yet the cover price of the BI is £1.70 and, I confess, there was a bit of me that said ‘I’ve just paid £5.00 for something that costs £1.70. That’s generous.’

Not generous. Pretty mean actually.

What I’d done was give just one measly fiver to charity. 
That’s actually a mean-spirited, less-than-the-price-of-a-glass-of-wine, stingy amount to give. And I’d got so much more than a fiver’s worth back! 
Those friendly guys were brimming with appreciation and had brightened up my morning - plus I didn't have to skulk across town avoiding their eyes.

Talking to a lovely friend about this recently told me that whenever he gives money away he ends up having more. He sets up an annual pledge to give and pointed me in the direction of this website

http://www.thelifeyoucansave.com/pledge/pledge.php

I was also reminded of the US research study into the link between money and happiness. Students were given $10 to spend, either on themselves or another. When their happiness levels were measured after the study, those who had spent the money on another were twice as happy as those who’d spent it on themselves.

In Sheconomics we stress the do something different approach to giving our money mindset a makeover. So perhaps if we want more money we should  start by giving some away?

Nifty bit of tax advice for high earners.

Simonne says:

High earners can avoid a 60% tax rate

There was a change in the Budget which some may not have noticed. Anyone earning more than £100,000 may effectively pay as much as 60% in tax because the personal allowance (the amount you can earn without paying any tax) is now gradually being snatched away for earnings in excess of that sum. Those earning £112,950 or more will lose their personal allowance completely, otherwise £1 is knocked off for every £2 earned between £100,000 and £112,950.

But the good news is that this can be avoided by making additional pension contributions. For example, if your taxable income is £105,000, by making a £5,000 pension contribution your taxable income would fall to the £100,000 threshold. At £100,000, your take home pay would be around £65,000 after tax and national insurance, compared to £67,000 with a £105,000 income. This  means that the £5,000 pension contribution would only have ended up costing you £2,000 -  in other words, worth 2.5 times more than the amount you invested. Pretty cool way to avoid extra tax!

Anyone who can work that out deserves to be paid at least £100k to my mind - Karen :o)

New Sheconomics research on asking for money

In the past 6 months, more men than women have asked for a pay rise. 
What's the psychology behind women's reluctance to be paid what they're worth?

We've just released the results of our survey about asking for money, conducted on 250 men and women. Here are some of the key findings:

•  Men are twice as likely as women to feel happy about asking for money
•  More than eight out of ten women don’t like asking for money
•  Nine out of ten women find asking for money embarrassing (compared to 6 out of 10 men)
• Women are two and a half times more likely than men to find pay negotiating humiliating
• More men than women think the best strategy is to ‘demand firmly’
• Twice as many men than women would threaten to resign in order to get more money
• More women prefer to ask ‘in a polite and friendly way’
• Men would rather ask another male for money – so would women
• 60% of men approach pay negotiations ‘with confidence’ compared to just 38% of women
• In the past 6 months a third of all the men we surveyed had asked for a pay rise/rate increase, compared to fewer than a quarter of all women

We concluded that the aspects of the female psyche likely to lead to self-sabotage in the pay stakes include:

• ·      An overwhelming need to be liked
• ·      A dislike of, even fear of, confrontation
• ·      Being uncomfortable with the concepts of wealth/success
• ·      A sense of false pride that we can manage on less
• ·      A tendency to allow our value to be determined by others

Our Sheconomics view is that when women (employed or in business) set a true value on themselves the world will meet it.

In the book we unravel the emotional barriers and self-limiting beliefs that might stand between you and your true value.

We also have a Sheconomics tip sheet on How To Ask for Money on our website, www.sheconomics.com

Financial education begins at home

Students are looking different lately. They’re not only getting younger (or is it me?) but at this time of year their usual youthful carefree smiles have been replaced by grimaces of worry. Stress. Terror even. They’re twisting their iPod wires like worry beads and chewing their nails more than gum it seems.

Yes. The end of term exams are approaching and the pressure’s on. You can almost smell their fear (or at least I hope that’s what it is).

Added to the academic pressure lots of them are going to leave Uni clutching not just a degree certificate but a whopping IOU as well.

US research carried out last year showed that the students who’ll manage their debt the best aren’t the brightest ones. Or the ones who had good financial education. They’re the ones whose parents have tip-top financial habits.

The authors of the study conclude: "Parents who intentionally teach their children about financial management may exert a greater influence on children's financial knowledge than do lessons learned in high school and those learned in the workplace combined. Given the importance of financial well-being to many indicators of college student success, such parental investment in the financial skills and knowledge of their adolescents may pay substantial dividends in terms of youth health, adjustment, and academic success."

Some education, it seems, really does begin at home.

How satisfied with life are you?

A recent study showed that more women are highly satisfied with life in general than men. Modern life is complicated for everybody, but women tend to have better coping strategies than men. For example, women are more likely than men to go to their GP if life gets them down. They are also better at getting connected to people and seeking support from family and friends. Being more optimistic and less competitive, women are better able to restore themselves to a happy state.

The study also showed that, of all the things in life that women would like to improve,  a healthy level of savings, clearing debts and paying off the mortgage ranked highly. Men also placed importance on such financial improvements, indicating that both men and women want more control over their money and that today’s life aspirations focus on better financial planning and preparation for the future.  

The strong link between financial health and mental well-being revealed by the survey is really important. Our sense of well-being is closely tied to our financial stability and if this is threatened we suffer feelings of insecurity. Women rate their financial aspirations highly because being debt-free and financially stable makes them feel secure and more in control.

The research was commissioned by first direct  because, “As a bank that has customer satisfaction at its heart, we wanted to understand the level of satisfaction and happiness across the UK." Nice to know a bank cares about its customers' satisfaction.

Kids and money

I had quite a reaction to my last post about why delaying gratification is the most important lesson to teach your kids. 


The whole issue of how we cultivate the right 'mini' money-mindsets definitely hit a rather frazzled financial nerve for lots of you.

Don't forget there are lots of tips about this in Sheconomics.


The chapter on Sharing Financial Intimacies is a life-line for every pestered parent.


It deals with pocket money, how to give kids a sense of value,  handing down good strategies but NOT your neuroses, the use of financial 'rewards' and saving.


So, if you're a parent, do consult the book and start nurturing those young money minds today!


I do also love the save-spend-share idea behind the moonjar - a three sectioned moneybox that teaches  children that money isn't just for spending, it's for saving and sharing too!
A lovely way to build your kids' financial literacy skills.

The one thing you need to teach your kids

As a child psychologist, I meet mums who tell me their kids have all the latest toys and gadgets yet never seem satisfied.

I also see worn-down teachers in despair at the rising number of pupils with attention problems.

And when I look at the psychology of money, impulsivity and short-termism seem to underpin most financial disasters.

So here’s the one thing you need to teach your kids.

Teach them to wait. To delay gratification. To resist impulse.

Mimic the marshmallow-waving psychologist Mischel - tell them they can have one sweet now, or two if they wait five minutes. Or the whole packet if they wait a week.

Buy now, pay later. Click to purchase. Surf 120 channels. Express delivery. Free upgrade. Loans by phone.

The wholesale commercialization of our society has seduced us into gratifying our impulses immediately. With easy credit, being skint needn’t stop us having what we want now.

And the 24/7 internet means we don’t even have to wait for the shops to open to feed our greed.

Research shows that adults who can transcend impulsive urges are more likely to be high achievers. They’re the ones who’ll ride the ups and downs of the stock market instead of over-reacting to every blip. They’ll be the slow-burners, the savers with long-term plans and flourishing investments, quietly gloating over the live-it-up splurgers. And with kids, as Mischel found, those who can sit it out for the two sweets turn out to have higher IQs.

So I’m convinced that if you nurture children’s ability to delay gratification, they’ll do better in all walks of life.

Budget 2010: Simonne's summary

Why does the Budget have to be as dull as dishwater?

One twitterer (is that a word?!) captured my sentiment in the following tweet:

"Alistair Darling has made as much of an impact as farting at thunder!".

There was lots to grab the headlines to keep most of the electorate sweet, unless you’re a cider drinking, chain- smoker buying a property worth over £1m!

From what I can see he played it really safe, not giving the Opposition any ammunition in the run-up to the election.

Anyhow, here’s a brief summary of some of the highlights:

· ISA allowances to increase in line with inflation from 2011 (maximum £10,200 from 6 April).

· 0% stamp duty threshold to rise from £125K to £250K for first time buyers.

· Stamp duty to rise from 4% to 5% for properties above £1m.

· Child tax credit to rise by £4 per week for one and two year olds from 2012.

· Cider duty to increase by 10% above inflation, compared to 2% for other alcohol and 1% on tobacco.

· A £2.5bn one-off growth package for small businesses, paid for from existing spending and banker bonus tax.

· No change on the amount you can inherit without paying inheritance tax.

· No change to capital gains tax other than reducing the tax rate to 10% for the first £2m of gains for entrepreneurs.

· Aiming to improve financial inclusion, by making sure everyone can have a basic bank account.

· Support for under 24s out of work for more than six months.

• Mortgage support for the unemployed for six more months.

Hope that was fun reading! Lots more available from the BBC website.

Thanks, Simonne, for summing up for us.

I'm off for some strong cider now...