Why do some people make such bad financial decisions? We don't save enough. (A recent BankRate study shows that 36 percent of Americans aren't saving for retirement.) We spend too much. (Consider all the credit card debt). When we invest, we try -- in vain -- to "beat the market," paying silly fees to experts who dangle the prospect in front of us, but rarely deliver. When we borrow, we do so at ridiculously high interest rates.
It may have to do with how people perceive time.
I spent nearly 15 years in banking, and I have often asked people about their biggest financial mistakes. I hear stories like these:
- I was out drinking with my friends. I decided to buy everyone a round. And then another. The next morning I woke up with a headache and a bar bill I couldn't afford. That seemed to happen every weekend, until my credit card was maxed out.
- When I am in a store, I just can't stop myself.
- I knew how much I should have spent on my home. But I saw an amazing house down the street with granite counters. I could just imagine our family living there -- so I bought it.
- I know I should make more time to look at my investment portfolio, but I just don't have the time. And, when I heard that everyone was investing in that fund, I just decided to follow the crowd.
All too often, we have the financial understanding necessary to make the right decisions, but we don't. To understand why this happens, and to see how we can help people make better decisions, I reached out to Dr. Philip Zimbardo, a psychology professor at Stanford University. I was a student of his and felt honored to be able to work with him. He's famous for the Stanford Prison Experiment, but he has also been studying our time personality for more than 40 years.
What is Your Time Personality?
To find out your time personality, you can take a quick quiz.
In an ideal world, we would have good memories of the past. We'd have an ability to enjoy the present. And we'd plan for the future. But, often, our approach to time can get out of balance:
- You can get stuck in the past. If something bad happened to you in the past, you can have an excessively negative view of the past.
- You can get stuck in the present. When we are born, we enter the world perfect little hedonists. We want everything now. We don't care about the consequences of our actions. Over time, most of us learn that there are consequences, but some people don't and just want to enjoy the present. These people are the life of the party, but they tend to have addictive personalities.
- You can have an obsession with the future. Tomorrow is always more important than today. People who are too future-oriented have long to-do lists, are always stressed and never have enough time in the day. They are so goal-oriented, that they let the world pass them by, working for that better tomorrow.
Your time personality becomes the lens through which all decisions are made in the present. A highly negative view of the past makes you skeptical of new opportunities. A hedonistic view of the present means you are ready for anything exciting, so long as it happens now. And being excessively future-oriented means that you will only do something if it fits into your longer-term plan. And, even then, it will just be added to your to-do list.
Time is of the Essence
Zimbardo and MagnifyMoney (the website that I co-founded) sponsored a study in six nations with more than 3,000 people. We gave them each a traditional financial literacy test. We tested them for their time personality. And we assessed their financial health.
The results were clear: Just because you're financially literate doesn't mean you'll be financially healthy. A stronger correlation existed between your time personality and your financial health. In other words, being able to do the math doesn't mean you'll make good financial decisions. But your time personality has a big impact on your financial decisions.
People with highly negative views of the past tended to be risk-averse. The good news: They are more likely to avoid financial ruin, because they won't take massive risk. The bad news: Sometimes a diversified portfolio is better than just cash.
But not everyone needs to follow Ramsey's advice so strictly. Past- and future-oriented people should not feel guilty using credit cards to earn rewards points, for example, because they can control themselves.
People who are are highly future-oriented are exposed to a different type of risk. Because they tend to be career-oriented and always stressed, they don't give themselves enough time to make good decisions. And they really like insurance products. So, if that's your personality, make sure you give yourself time to think about your options and listen to expert advice. Don't just follow the investment tips of other "successful" people. And have a plan for insurance: Don't just respond to it every time it is sold to you.
How Can You Use This Concept?
Find out your time personality. It doesn't take long. And, once you know your time personality, you can better understand where you are most at risk of making bad financial decisions. And, you can try to set up a system that understands your own weaknesses.
So much of the financial advice we see is one-size-fits-all. It shouldn't be. Traditional financial literacy is important. But it is not sufficient.
Your time personality impacts the decisions you make. Understanding the potential weaknesses of your time personality can help you develop a better approach to making financial decisions.
Nick Clements is the co-founder of MagnifyMoney.com, a website that makes it easy to compare and save money on banking products. He spent nearly 15 years in consumer banking, and most recently he ran the largest credit card business in the United Kingdom.