The only thing worse than being broke is being broke and alone. But not being broke is a relatively straight forward endeavor. Spend less than you earn on a consistent basis and you’ll never run out of money.
Personal Capital can’t help too much on the missing soul mate department, although studies have shown that people who are more financially secure have much better success finding love. What Personal Capital can help with is allowing individuals to lead better financial lives through technology and people.
Based on a recent research study conducted by Yaron Levi, Finance PhD at UCLA and Shlomo Benartzi, Co-Chair of the Behavioral Decision-Making Group, spending went down on average by 15.7% for those who download and use our Personal Capital financial app. (See the report: Economic Behavior In The Digital Age)
To put 15.7% into context, a household that makes $50,000 a year will end up saving over $150,000 in a 20 year time frame. Given the overall 401k average balance as of January, 2014 is roughly $101,650 and $150,000 for those 55 and over, if everybody in American downloaded our app, we could theoretically more than double the average 401k balance.
CARRYING A SCALE IN YOUR POCKET
So why is it that users of Personal Capital’s technology are better able to control their spending? Professor Benartzi and CEO Bill Harris highlighted in a presentation that the Personal Capital app is like having a “scale in your pocket.” Anybody who has ever wanted to lose weight knows how difficult it is to do. But imagine if you have a portable scale that shows your weight before consuming every single meal. If your ideal weight is 160 lbs and the scale is blinking 170 lbs, then perhaps you’ll just consume a salad and eat one less cookie instead.
The Personal Capital app is not only a portable scale for your finances, it also provides a picture of your financial health if you continue to save X amount and earn Y return with Z asset allocation through our current Investment Checkup tool. In an upcoming product feature, we plan to revolutionize the way investors decide to asset allocate through a Monte Carlo projection engine. The idea is to give our users more clarity into their financial future through various if/then scenarios.
Can you imagine a weight scale that showed a heavier you if you continued to drink three cans of soda a day over a year time frame? Surely your soda consumption would go down at the margin like we’ve found with spending and using Personal Capital’s app.
The typical affluent household has 15-20 financial accounts on average. Personal Capital enables such a household to see all their accounts in one place and conduct a one click analysis of their finances. Our powerful tool allows households to not only holistically see their finances, but to plan and project accordingly. Where there is a plan, there is a way.
SO WHY DON’T MORE PEOPLE SAVE?
We asked Professor Benartzi why more people don’t save for retirement and he mentioned that for some, savings is akin to giving money away to a stranger. Let’s say we invest in our 401k. We don’t know for sure where our money is going despite the monthly financial statements from our provider. We don’t know whether the markets will be kind to us or make us cry. We don’t know whether the government will allow us to withdraw penalty-free at age 59.5 years from now.
Compare the savings value proposition to buying the latest iPhone, and it’s easy to see why savings takes a back seat to spending. Spending is immediate gratification. Savings is delayed gratification.
Another reason why more people don’t save more is because the pain of paying has declined thanks to credit cards and mobile payments. One study Professor Benartzi shared was that people who were allowed to buy products through touch screen were more likely to pay 40% more for the same product. Just providing the simplicity of touching the buy button created a higher propensity to spend than dragging a mouse and clicking.
LEVERAGE TECHNOLOGY FOR A BETTER FINANCIAL LIFE
Maybe everything will be OK by the time we no longer have the energy to work. There’s the government, a potential inheritance, a wealthy relative, or our extremely talented children who can support us.
But what if the government continues to be mismanaged, our parents don’t leave us anything, our relatives move away, and our children end up being financial burdens who still demand food and shelter as adults? It’s better to save too much, than end up with too little. If a free app can induce positive behavioral change, then surely one must consider taking action. Inaction can cost you a fortune.