Thought-Provoking Thursday: How Language Influences Savings
Sprechen Sie Deutsch? (Do you speak German?) If you can answer yes (er, “ja”), you’re not only indicating an ability to avoid another “Ich bin ein Berliner” situation. According to new research out of Yale University, you might be better at saving money than your English-speaking friends.
In a TED Talk posted in February and in an article published in the April edition of the American Economic Review, Yale associate professor of economics Keith Chen argues that the language we speak could be undermining — or, in the more fortunate cases, bolstering — our abilities to save money. The difference in savings behavior, he says, lies in the way certain languages ask us to speak about the future.
“Languages differ in whether or not they require speakers to grammatically mark future events,” Chen writes. “For example, a German speaker predicting rain can naturally do so in the present tense, saying: ‘Morgen regnet es,’ which translates to ‘It rains tomorrow’. In contrast, English would require the use of a future marker like ‘will’ or ‘is going to’, as in: ‘It will rain tomorrow’. In this way, English requires speakers to encode a distinction between present and future events, while German does not.”
This may seem like a simple linguistic quirk, but Chen found that it translates to significant economic differences. In countries with a speaking structure similar to English — that is, where speakers are asked to make a strong distinction between the present and the future — retired households had 39 percent less in savings than households in countries with languages that don’t make such a distinction. What’s more, countries with a speaking structure similar to German (futureless, where the present and future aren’t so distinct) save five percent more of their GDP than countries with a more “futured” language.
“Saving is taxing your current self, for the benefit of your future self,” Chen explained. “I have to drive a slightly less nice car, wear slightly less nice clothes now so that my 80-year-old self is not destitute. All of these decisions we have to make, weigh our current selves versus our future self.” And in a language in which the future is not so distinct from the present, it’s much easier to put our 80-year-old selves first.
Or, as Chen put it, “the less distance you feel, the easier you’re going to find it to save.”
For critics who say that language is just a reflection of what we value (eskimos have many words for snow and all that jazz), Chen also asked families how important it is to teach thrift and savings to kids. He found that even placing a value on savings wasn’t a match for the language spoken at home.
“Saying it’s an important value increases savings by about 11 percent. The language effect increases savings by 31 percent,” he said, explaining that even in families that say saving isn’t important, language still increases savings by 31 percent. “In other words, the effect of language on savings that we’re finding appears to be the exact same size regardless of whether you say savings is an important value.”
As for native English speakers reading this and reaching for a German (or Chinese, or another futureless language) Rosetta Stone… not so fast: Chen’s research doesn’t currently extend to bilingual speakers, though he is working on ways to test people who think and speak in two languages that treat the future in different ways. However, if you’re English-speaking and looking for a way to boost your ability to save, other research has shown that visualizing your goals — literally keeping photographs as reminders — can be a big help.
Besides, a conversational grasp on Mandarin likely wouldn’t affect your ability to save, at least not in the immediate future. “You probably,” Chen said, “wouldn’t use the language enough to think it on a cognitive level.”
Anderson Live: Getting Out of Debt on $10 a Day
Recently, Anderson Cooper invited me on his show, Anderson Live, to talk to one family about how they can scale back their spending and get out of debt. While the examples come directly from their budget, my tips apply to anyone with the same goals — so check it out!
Thought-Provoking Thursday: For Financial Planning, Time Is Everything
When Ben Franklin coined the phrase “time is money” in 1748, he had no idea how precious a commodity time would become. Each new year may bring technological advancements that are supposed to make everyday tasks more efficient, yet Americans are too busy to sleep, too busy to eat dinner together, and according to new research, too busy to make a financial plan.
According to Northwestern Mutual’s 2013 Planning and Progress study, 63 percent of Americans say their financial planning needs some work — yet more than one in four say they’re just too busy to think about long-term goals. And as for all those smartphone apps and websites that are supposed to make financial planning easier? Thirty-one percent of survey respondents say that they find the 24/7 connectivity distracting.
“I think people are overwhelmed,” said Greg Oberland, Northwestern Mutual executive vice president, noting that it’s easy for people to procrastinate if they don’t know where to start. “People see benefit, but they haven’t started developing their own personal plan.”
For those who don’t know where or how to begin getting control of their financial life, Oberland says that people shouldn’t be ashamed to seek help. “I like to analogize it to what’s going on about personal health,” he said. “A lot of people have reached out to personal trainers and nutritionists. If you’re working with someone like that, you feel accountable to follow through. I think working with a financial adviser is a way to get them going [with a financial plan] and feeling accountable to stay on track.”
In an interesting twist, the Northwestern Mutual study found that there is one age group that is particularly disciplined when it comes to financial planning: the struggling-to-build-wealth Generation Y (adults ages 25 to 32). For all the headlines about this group’s burgeoning student debt and slow-building net worth, 24 percent of this age group says that they’re “highly disciplined” financial planners, versus 14 percent of Baby Boomers who say the same thing.
“I think Gen-Ys are seeing the financial problems or challenges that their parents are facing,” Oberland said. “I do think there is a greater awareness on the part of that generation that they’re going to be responsible for their financial future. I think Gen-Ys recognize that if I’m going to have better future, it’s up to me and I have to start now.”
If starting with a financial adviser sounds too overwhelming, Oberland recommends taking baby steps — and above all, not trying to do too much, too soon. “You have to be careful you don’t construct something that’s too big, too grand,” he said. “[Say] ‘I’m going to make a plan that I’m going to save a little bit every month.’ And then as you start that, and as you gain some confidence, then you can expand it more broadly.”
Try-It-Out Tuesday: SavedPlus Helps You Save While Spending
In 2001, much of today’s technology probably seemed more like pipe dreams than realities of the near future: Phones that tell you the weather? Digital books whose pages turn with the swipe of a finger? An invisible “cloud” that can store thousands of documents and photos? Cool, but years — nay, decades — down the road.
Paul Sorokin can empathize with the developers of these phones, books and clouds. In 2001, he too had a crazy idea: what if, every time a person buys something, a percentage of that purchase also goes into a savings account? Again, cool, but something that would require technology that just did not exist.
Twelve years later, the technology finally exists, and thanks to Sorokin and co-founder Nikita Brodskiy’s persistence, so does SavedPlus. It’s an app that — just as Sorokin envisioned in 2001 — helps kick a set percentage of a purchase into that shopper’s savings account.
“We created SavedPlus to help people in a category other than those who were successful [with] savings already,” Sorokin said. “Set it and forget it. SavedPlus creates a mechanism where people save money out of every purchase slip or outgoing transaction they have.”
It works like this: after entering your bank account information and setting your desired savings percentage — for example, 5% of every purchase — SavedPlus captures all your transactions. You put a $5 latte on your debit card? SavePlus kicks $0.25 to savings. You have your $125 cable bill on autopay? SavedPlus sees that, too, and deposits $6.25 into savings. The app is bank-independent, which means you can start using it today with your current savings and checking accounts — you don’t need to set up accounts with a third party.
For those who might be facing very large purchases — maybe a fridge is on the fritz or a child is heading off to a pricey private university — Sorokin has built in safeguards so that these transactions don’t team up with SavedPlus to completely deplete a
checking account. There are ways to set limits on the transactions SavedPlus pulls from (for example, a limit of $1,000 means you won’t see 5% of that fridge, or the tuition check, kicked into savings), as well as limits on your account balance. If you like to keep an account buffer of $750 in checking at all times, a set minimum balance of $750 means SavedPlus will stop working if your balance dips under that amount.
“We realize that there are a large group of people who don’t save because they lack self discipline, they don’t feel they can do this consistently; there are many different reasons,” Sorokin said. “We’ve been using it for a number of months, and we see people excited. It’s like, ‘Wow, I’ve been not noticing, but I saved $800!’”
For the first 90 days of use, SavedPlus is free. After that, the app takes 5% of what users save each month (up to $5) as compensation. Sorokin and co-founder Brodskiy say this fee will help cover the cost of all the transactions SavedPlus is a part of.
“When we get partnerships on board, we’ll definitely change our pricing model,” Brodskiy said. “Our goal is to make it completely free.”
That isn’t their only goal. SavedPlus launched just last week, but Sorokin and Brodskiy already have a list of features they can’t wait to start implementing — including the ability to put savings towards a specific goal or micropayments towards debt.
“Credit card companies and other debtors build interest daily,” Sorokin said, noting the next problem SavedPlus hopes to tackle. “More frequent payouts will minimize interest and help [our users] pay out the debts.”
Mailbag Monday: Paid off Debt; Now What?
My husband and I have recently paid off our credit card debt. So exciting! We set a goal and stuck to it over 24 months and it feels great to be debt free! I went back to work part-time to help with this and really like my job and plan to stay.
My question is about prioritizing our spending. Now that we have an extra $1,200 a month we no longer need to put toward debt, I’d like your advice about how to prioritize. A few considerations:
- We have about $5,000 in home improvements we would like to make.
- We are planning a big trip for our family in the spring. It’s really a trip of a lifetime and have already saved about half what we think we need. Probably need another $4000 to be conservative.
- My husband was transferred to our current city four years ago. We were told we would be here three to five years. We bought a home but financed it with an interest-only loan. Our down payment was 30% of the home’s value. We now think we may be here at least another five years, maybe longer. This is not our “forever” home but we aren’t ready to buy the next step yet. Should we be making principal payments to this loan even though we don’t plan to stay in this house more than 24 more months?
- My husband’s car has over 125,000 miles on it. He needs a new car this year or 2014 at the latest.
- We put 18% of my husband’s salary in a 401K each month. We have used my part-time salary to pay off debt and for extras. Should I be putting part of my income in a Roth IRA?
- We have two children and contribute monthly to their 529 accounts. They are young but I feel good about the balances.
Could you help us? The mortgage concerns me, but I want to use my salary to its potential!
– Laura
Laura, congratulations to your family for paying off that credit card debt — that’s a big accomplishment. Isn’t it great that you now have this extra money to play with? The first thing I always want to note — so you may have heard this from me before — is that I want to see you with an emergency cushion, so you don’t end up back in debt when an unexpected expense pops up. So let’s put three to six months’ worth of expenses aside in a liquid account, if you don’t have an emergency fund already.
Next is retirement, and it sounds like you’re doing really well there. Even so, I’d run your numbers using my retirement calculator to see where you stand — the calculator will tell you how much you should be saving each month to reach your goals. If it tells you you’re behind, then yes, stashing some money in a Roth IRA is a good idea.
I also think it’s okay, at this point, to put some of that cash toward your vacation, so you can pay for that outright instead of using credit cards (though it may be a good idea to use credit cards when traveling to earn rewards, as long as you trust yourselves to pay off the balance in full when you get back). I’d also start saving for that car — in fact, if your emergency fund is set, I would split the difference between those two goals: $600 toward vacation, $600 toward the car. If you are still working on that emergency cushion, you can still put a little toward these goals, putting $600 into the emergency fund and $300 each toward the car and vacation, so you feel you’re making progress on all fronts.
Then let’s talk about that mortgage loan and the home improvements you want to do. Based on the information you’ve given, Whit Douglas, a mortgage lender with Corridor Mortgage Group, says paying toward principal is probably not a priority at this point. “I wouldn’t recommend making extra principal payments with how low interest rates are right now — and even more so in this scenario, when you will only be in the home for two more years.” If it makes you feel better, consider that under a traditional mortgage, payments during the early years primarily go toward interest, anyway. It often makes sense to pre-pay principal under an interest-only loan if you’re planning to stay in the house for a long time — your payments will jump after the initial interest-only period, and this can soften the blow — but in your case, your money could work harder for you elsewhere.
Finally, to address the home improvements: unless these are going to add a great deal of value to your home (in other words, you’ll get a large return on your investment when you sell), you’re likely better off living with your home as is and looking for the qualities you desire in your next home. Remodeling magazine publishes a yearly cost versus value report on common projects, which can help guide you in determining how much of the cost of the project you might recoup when you sell. You’ll note that none of the projects listed are able to recoup 100% of the initial outlay.
Thought-Provoking Thursday: Auto-Sweep Helps Retirement Savings
According to new data out of the Employee Benefit Research Institution’s annual Retirement Confidence Survey, Americans have as much doubt in their ability to retire as ever before. Only 13 percent say they’re “very confident” they will be able to retire, while 28 percent are not confident at all — a figure, EBRI says, is the highest they’ve seen in the 23 years they’ve been doing the survey. However, related research by New York Life reveals that there is hope for better savings habits, and it relies on a new kind of automation: auto-sweeping.
Auto-sweeping is the corollary to auto-enrollment: it’s the act of going back and enrolling employees into the company’s 401(k) plan, even if they’re not new hires, and even if they’ve opted out of participating in the plan in the past.
“Auto-sweeping is something relatively uncommon that’s becoming more common, just as auto-enrollment was uncommon 10 years ago,” said Dave Castellani, CEO of New York Life Retirement Plan Services. Of New York Life’s 500 plan sponsors, 68 percent use auto-enrollment, while only 10 percent are using auto-sweep. Yet, Castellani is convinced it will quickly catch on. The numbers suggest he might be right.
New York Life found that 80 percent of people who were swept back into their company’s plan stayed in; for those who drop out and are swept in again a year later, 70 percent remain in. These figures support EBRI’s research, which found that nine out of ten employees not saving for retirement would in fact do so if their employer were to auto-enroll them.
“What’s interesting to me is number of participants who thank the plan sponsor for doing this,” Castellani said. “Two things happen: they realize the actual payroll deduction is not that punitive, and they see the match. You see a very rapid effect of compound growth.”
These findings come on the heels of new research on auto-escalation – in which plan participants choose to have an automatic, annual increase in the percentage of their pay put towards retirement — that found that people are significantly more likely to increase their contributions if the increase happens automatically. Specifically, T. Rowe Price found that only eight percent of participants who are offered a choice will go for the annual increase, while 65 percent of participants in an auto-increase program will leave that increase in place.
If auto-escalation and auto-sweeping bring new meaning to “set it and forget it,” will they also help move the needle on retirement confidence and give EBRI happier numbers to report in years to come? Castellani says this will largely depend on the age at which employees are auto-swept. “If I’ve never ever participated in an IRA program and I’m 52 years old, that’s a problem,” he said. “However, if I’m 22 years old, and I finally get auto-swept in at 26, now there’s a lot of time for accumulation. Over a long time, the retirement confidence is going to go up. Not a dramatic short-term turnaround, but within more years, there will be more confidence.”
Mailbag Monday: Too late to save?
My husband is working part time driving a school bus. The company is offering a 401(k). My husband is 73 and is in excellent shape so hopefully he could be working there another 5 years or more. What would be safe for him? Conservative investment with part aggressive? We would like to make as much as we can without losing. Also, the company will match a certain percentage.
- Carol
I love this question because it provides a great opportunity for me to point out that it’s never too late to save, or to continue saving. I’m so happy that your husband has decided to participate in this 401(k) because even if he doesn’t earn a penny from his investments, those matching dollars will be a great return. If he contributes 3% of his salary and his company matches 3%, he’s just doubled his investment and that can go quite a way over five years.
That said, we all would like to make as much as we can without losing, and we often can when we have a long time horizon. The risk when you’re very close to retirement is that you won’t have the time to make up any losses, so you really want to stay pretty conservative here. I would invest in a conservative balance fund or a high percentage of balance funds, skewing what he saves heavily in favor of fixed income. You could still have a small stake in equities, but definitely no more than 30% or so if you’re nervous about losing your shirt.
Today’s Money: Withdrawing from a 401(k)
In times of financial trouble, do you ever look at your 401(k) and think, “ah, maybe if I just withdrew a little bit now, it could help me out?” If so, you’re not alone. However, as I told Hoda and Meredith Viera this morning, it’s not such a great idea to take a hardship withdrawal or to cash out before you hit retirement age. To find out why, check out our discussion in the video clip below.
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Beyond Today: Small mindless spending adds up
Today on Wells Fargo’s Beyond Today blog, I discuss how dollars, cents and credit card swipes add up just like calories. Tracking your spending – and your calories, if you’re inclined to lose weight or tend to eat mindlessly – can help you get a grip on negative behaviors and rein in your purchases.
Issue #1: Living paycheck to paycheck
According to a recent Gallup poll, the the economy is the most important issue facing the country. As such, we’ve decided to start a new series at the TODAY show called “Issue #1: The Economy.” Its goal is to examine the economic issues that Americans are struggling with each and every day. In the first installment of Issue #1, we took a look at a family in Arizona who is living paycheck to paycheck and is struggling to make ends meet. To hear their story, plus my tips for getting started on the path to savings, check out the video clip below.
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