Do financial decisions get better with age?
I just read a fantastic article on the relationship between financial savviness and age. Here are some of the highlights of the article and some of my two cents:
You peak out at 53
Sound financial decisions increase as you get older and peaks in your 50’s. After that, it plateaus and then starts to fall off in your 70’s and 80’s. Basically middle-age people make fewer financial mistakes than both younger and older adults. They call this the inverted “U” curve. The average person’s peak financial decision making age is around 53 years old.
It’s your brain, not age
Later in life, our cognitive abilities rob us of making good financial decisions, not age.
Our cognitive abilities, including attention span, working memory and the ability to quickly process and integrate multiple sources of information, are all very important when making complex financial decisions.
As we get older into our 70’s and 80’s cognitive abilities seem to drop off rapidly. As a result, older people tend to want to simplify financial matters. They tend to rely on financial advisors for help and support. And sometimes their decisions tend to be more emotionally based as opposed to logical.
Older adults also like familiarity and are reluctant to change. I think we can all relate to this since we all get more set in our ways the older we get.
Work on your health
One way to maintain your ability to make sound decisions is to improve and maintain your cognitive ability. In other words, there is another great link between health and the ability to make sound financial decisions.
“Physical exercise, mental stimulation, diet, and social interaction can all help maintain your cognitive abilities,” says Dr. Jeffrey Toth, a psychology professor at the University of North Carolina at Wilmington, “and of these four, physical exercise, especially aerobic exercise, appears to be the most important, with mental stimulation a close second, especially if that stimulation is truly novel and challenging.”
In addition to developing healthy habits, it is also important to avoid some of the bad habits like smoking, heavy drinking, a high-fat diet, and lack of sleep. All of these habits in excess have all been shown to accelerate cognitive decline.
George Burns, the famous entertainer who had a productive acting career well into his 90s, once said: “You can’t help getting older, but you don’t have to get old.”
The bottom line is your financial abilities lie in you. Get started early and develop some sound financial habits. As you get older, stay healthy and keep that brain going.
Other articles on behavioral finance
Investment Decisions Using Behavioral Finance