Freedom

Don’t Let Circumstance Or Statistics Dictate Your Financial Destiny

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Imagine someone telling you that no matter what you do, you cannot change your financial destiny. If you are born a male, you are destined to blow yourself up in the stock market because you think you know more than you really do. If you are born to poor parents, you are destined to never go to college and earn a six figure income. Or if you so happen to graduate from college during a recession, how statistics say you’ll permanently make less than someone who graduated in a bull market. How depressing is that?

While many may differ on how to manage their personal finances, one thing that’s proven to reign true amongst most American investors: a little financial hardship comes with the territory.

Almost three-quarters of Americans believe they are either about the same or worse off financially now than they were one year ago, yet their stress levels haven’t increased. In short, Americans have learned to adopt a c’est la vie disposition towards their perceived misfortunes and are, by default, redefining the American Dream into one marked with persistent financial pains. Still, while maintaining a healthy financial attitude continues to elude most, factors like age, gender, and even the way you were raised can be effective predictors of financial behavior.

MEN AND WOMEN THINK DIFFERENTLY

A number of studies have already suggested that gender plays an enormous role in determining how one makes important financial decisions. The genders differ on financial decisions in three distinct ways. For one, women tend to place more importance on long-term, non-monetary goals, and view money as a means to financial independence rather than simply a vehicle for making purchases. Second, women are also more likely than men to seek the aid of a financial advisor, with some 44% indicating they tend to rely on input from financial advisors, while men largely make these decisions on their own. Finally, women also overwhelmingly tend to take more time to research before jumping into an investment than men before adjusting their portfolios and, as a result, trade less than men.

The extra legwork women put in when considering shifts it their portfolios seems to pay off: men, who trade 45 percent more than women, experience an annual loss of 2.65 percent loss to their net returns as opposed to the 1.72 percentage points for women. Women-owned or managed hedge funds also continue to outperform benchmarks in a climate which has been difficult for other alternative funds.

Finances has become the most widely discussed topic amongst mothers and daughters according to a recent Citigroup survey, beating out discussions related to politics, relationships and substance abuse.

HOW WEALTHY ARE YOUR PARENTS?

Were you raised by struggling artists or affluent doctors? The answer could shed some light into your own financial circumstances. A survey that followed more than 12,000 people over the course of several decades — conducted by the Bureau of Labor Statistics and analyzed by NPR staff — indicated that the lower one’s household income during childhood, the lower his or her income will be as an adult.

Childcare workers, food services employees and others on the lower end of the income spectrum tended to have been raised in households earning between $35,000 to $39,000, while lawyers and judges generally grew up in households earning between $85,000 to $89,000. Those in higher-paying fields in general also tended to have higher household incomes than their parents; conversely, those at the lower end of the earning spectrum tended to have lower household incomes than their parents.

The BLS’s survey followed thousands of individuals born between 1957 and 1964, aged between 14 to 22 and concluded in 2010 when these individuals were between the ages of 45 to 53. At the onset of the survey, the sample was split evenly between male and female respondents, while about 59 percent were classified as “non-black/non-hispanic,” 25 percent were black and 16 percent were Hispanic or Latino. Surveys were conducted annually for 31 years, and retention rates for respondents ranged anywhere from an all-time high of 95.7 percent in 1979 to 75.9 percent in 2010.

Household income during childhood and adulthood correlation

MILLENNIALS: AMBITIOUS AND BROKE

If you’re a member of Generation Y, then congratulations: you are apart of the largest, most diverse and most educated generation to date. Defined as those born between the late 1970s and mid-1990s, this generation — between 70 million to 80 million strong — is on track to compose 75 percent of the global workforce by 2025 according to a recent TIAA-CREF study.

But, there’s a dark side to the ambition and potential economic influence Gen Yers yield. Generation Yers, also referred to as Millennials, have an average level of wealth that is about 7 percent below the levels of wealth recorded for those the same age in 1983. Despite reporting significantly higher levels of income and asset ownership than previous generations, college-educated Millennials struggle to make debt payments, particularly student loan payments, and are overall worried about their ability to repay their debt obligations.

Perhaps most telling about Millennials as a whole is their saving habits — both short and long-term. In TIAA-CREF’s study, about 9 percent of men said they wouldn’t be able to come up with $2,000 in one month; 19 percent of women said the same. Household earnings was the most important determinate in this scenario, with 60 percent of those earning about $75,000 per year, 36 percent earning between $35,000 and $75,000 per year, and 22 percent earning below $35,000 per years indicated they could come up with the funds.

As far as long-term retirement saving is concerned, just less than half of all college-educated Millennials surveyed have actually tried to determine how much they will need to save for retirement.

WITH EVERY RULE THERE IS AN EXCEPTION

There, of course, exist exceptions to every rule. A woman in her early 30s may have a more aggressive investment strategy than a man twice her age. Meanwhile, the risk-prone investment style that men generally tend to exhibit also has its benefits: an overly cautious investor risks missing out on opportunities to maximize their returns.

Parents also need not define the economic outcomes of their children. Myriad examples also exist of individuals born into humble beginnings that eventually go on to surpass the earnings of their parents tenfold; conversely, many individuals raised in high income households eventually enter professions with earning potentials significantly lower than their parents.

With respect to Millennials, TIAA-CREFF’s survey highlights an interesting trend with respect to the way this group perceives its knowledge about personal finances: “Millennials don’t know what they don’t know.” As a whole, young people think they have a handle on their financial circumstances and trust their decision-making. And, the more one earns, the higher their financial self-confidence rose. But when objective measurements were used to test this group’s knowledge of basic financial and economic principles, the gaps in knowledge became markedly more evident.

Still, not all Millennials are made equal: as we’ve said before, Millennials are the most fiscally conservative generation since those born during the Great Depression, holding over 50 percent of their assets in cash as compared to the 23 percent held by other investors.

ALTER YOUR OWN DESTINY

Real impediments to social mobility in the United States exist, no one denies this. Over one third of children being raised today live in households with lower incomes than comparable children thirty-five years ago and that is a problem. Lower incomes overall means less access to instruments, like higher education, that can bolster one’s earning potential. And, that’s not even touching on the implications this poses for our economy as a whole.

But, regardless of age, gender or any other demographic characterization, the biggest favors one can do for themselves is to take a careful, holistic and accurate assessment of his or her personal finances. Even better, get a mentor or hire a financial professional to help guide you through the financial battlefield.

Don’t settle for whatever statistics or circumstances have to say about your financial destiny. So much about becoming financially independent is having the proper mindset. If you do not believe you will ever become wealthy, then how will you ever take the appropriate steps to get there? Take advantage of our free financial tools and the abundance of free literature online to help you achieve your financial goals.

Choose your destiny.

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Financial Samurai

Sam is the former Managing Editor of the Daily Capital blog. He worked in finance from 1999-2012 before deciding to focus full-time on his online endeavors - FinancialSamurai.com and the Yakezie Network. Sam is an avid tennis fan who loves to travel. He received his BA from William & Mary and his MBA from UC Berkeley.

One Response

  1. joseph

    great investment advice, sound financial practices will tend to become less of a commodity than it was fifty years ago. I cant imagine having to wake up and milk the cow fifty years ago knowing the types of investments we have nowadays.

    Reply

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