This week I am joined by special guest Anne Lester to discuss the importance of educating young individuals about finances. In particular, we discuss Anne’s latest book titled Your Best Financial Life: Save Smart Now for the Future You Want and its focus on individual financial responsibility. We also talk about the shift towards personal financial management, overcoming behavioral biases in saving and investing, the benefits of automated savings, and the significance of educating young individuals about finances.

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Anne and I begin our chat by acknowledging a historical shift in retirement savings. Back in the day (our parents’ generation and even ours, to some extent), companies would take care of their employees with pensions and retirement packages. It was normal for an individual to spend years, decades even, at the same job, or at least employer. The same cannot be said for today’s economy in which most people spend a maximum of five years in any one given position. 

Why does this matter? If your job isn’t actively preparing you for retirement, that responsibility now falls on your shoulders. There is a lack of education and an abundance of complication when it comes to personally managing long-term savings. Let’s break those key issues down to their impact on you:

 

Math in elementary school covers the basics. In high school, it gets more complicated with advanced computations but most public schools do not spend much, if any time on personal finance. It is up to us parents to teach our kids about credit (cards, lending, etc), real estate (purchase, lending), and arguably most important: long-term savings. These concepts are not intuitive and they accompany two significant behavioral biases: loss aversion and present mindset.

 

We’ve talked about loss aversion in the past on this podcast, in particular in the episode Be More Aggressive. Anne revisits this behavioral bias that is well defined by the Decision Lab as a “cognitive bias that describes why, for individuals, the pain of losing is psychologically twice as powerful as the pleasure of gaining. The loss felt from money, or any other valuable object, can feel worse than gaining that same thing.”

How does this impact investing? It explains why so many people are afraid of the stock market. Even if they know that historically speaking, they will always gain money from investing in stocks, watching the tickers and tuning into the day-to-day market volatility wreaks havoc on the psyche and impacts one’s decision making. Putting money in a savings account feels safer than investing, even if we know that it is a financially detrimental decision. We just talked about this last week!

Anne breaks it down further by running some numbers. Investing $5k in the market today will likely grow to $100k in 40 years. So how do we overcome, or teach our kids to defeat that behavioral bias? Well, first we have to acknowledge that living in the moment isn’t always a good thing.

 

Have you ever tried telling your young child that if they eat those chocolate-dipped, deep-fried oreos from the fair they probably won’t feel well in an hour or so? You probably then held their hair or rubbed their back as they made a sacrifice to the porcelain throne. 🤢

Trying to explain to a young person the concept of regret in the face of instant gratification is a lot like banging your head against a wall, repeatedly. We all remember the feeling, and likely still indulge (binge-watched any shows into the wee hours of the morning lately? You know you have!). Ane talks about the challenge we all face when it comes to present self vs. future self. Luckily, she also has some tips for overcoming the tendency to prioritize the now over the later.

 

What’s the easiest way to help your kids achieve success in retirement planning? Automate. Show them how to take the decision and the tendency toward instant gratification out of their hands. You can’t spend money you don’t have, right? So start by saving off the top. Use those employer benefits to contribute to any and all savings vehicles offered to you including (but not limited to): 401k’s, Health Savings Accounts (HSA’s), 403(b), TSP, etc.

Next, automate transfers to those savings vehicles that don’t come directly from your paycheck. Set up an auto-transfer for the day after you get paid to 529’s, IRAs, Brokerage account and more. Sure, your newly minted adult child might not be able to manage a huge contribution if they want to make rent and eat, but they can plan to set-aside a percentage of their yearly raise to savings goals. You can’t miss what you never had, right? The less they have to think about it, the easier it is to let their money grow overtime. Future selves for the win!

 

Anne Lester was a truly delightful guest to have on the Financial Planning podcast. Our conversation shed light on the evolving landscape of personal finance, particularly in terms of retirement savings and the imperative for financial education among young individuals. As we navigate a world where traditional employer-provided pensions are increasingly rare, the responsibility for long-term financial security falls squarely on individuals' shoulders. Anne's insights underscore the importance of equipping the younger generation with the knowledge and tools necessary to navigate complex financial decisions, combatting behavioral biases such as loss aversion and present bias. By emphasizing the benefits of automated savings and instilling the value of long-term financial planning early on, we can empower our kids to take control of their financial futures and strive towards their best financial lives. Anne Lester's expertise serves as a valuable guide in this journey towards financial literacy and security.