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Are Financial Habits Innate?

August 16, 2011 · 55 comments

in Personal Finance

How many people do you know that earn a quarter and spend a dollar?  Do you also know people that find a dollar and place it directly in the bank?

Well, I know one of each, and they both live in my house.

My youngest son and daughter are a year and a half apart.  Given how close they are in age, I am going to assume that they have been raised pretty similarly.

However, you would never know it.

The Impulsive Spender

My youngest child has eyes bigger than his wallet, that is for sure.  If a catalog comes in the mail, he looks through it feverishly and there is always something in it he wants.  (Not a clothes catalog, but more the catalogs that come around Christmas time.)  Just today he was hounding around for ways to make money.  I knew at that point there was some item he had his eye on because he is always looking for ways to earn money when he finds something he ‘must have’. (I still don’t know what the item is, but he was on Amazon yesterday…) It isn’t fad items that catch his eyes either. It is always something that looks fun.  One time it was a car that you would point a laser at and the car could defy gravity and ride along the wall. He ended up getting that for Christmas and I don’t think it came out of his room again once New Years Day passed.  He always burns out on these ‘must haves’, and he is the exact person that impulse purchase shelves are made for. Once he even wanted a lighter, for no apparent reason.  Maybe it was shiny, who knows.  The good thing is, he can’t drive yet so I can still control his spending somewhat. However, once he gets his license, I can just see him offering to run errands for us at Target.  I can only imagine what would end up on my credit card if I was foolish enough to let him use it.

The Compulsive Saver

On the other end of the spectrum, we have my daughter.  You cannot pay this child to spend.  Well, maybe you could, as long as the payment was larger than the amount she had to spend.  She issues loans to her brothers, and I am guessing it is just a matter of time until she charges them interest since she is such a money hoarder.  My daughter is not influenced by the media or anything.  She just wants to have her little stack of money.  Actually, this past weekend, she realized she has $120 in Amazon gift cards accumulated and she could not find a thing she wanted with it.  I am guessing I will end up buying the gift cards from her, although I wish she would spend just a little and get something fun.

Why Do People Spend The Way They Do?

After thinking about how my two children who are so close in age spend entirely differently, I started wondering if spending and saving habits are innate.  I don’t think anyone knows what aspects of our personalities are nature vs. nurture, and I think most personality traits are a combination of the two.  However, when it comes to spending in my family, it appears that nature is winning the battle.  If it was nurture, then I would have 3 solid savers.  Instead I have a Saver, a Spender, and Someone In Between.

What Recent Studies Showed

Since I figured a sample size of 2 was not enough information to determine how much nature affects spending, I did a little research on the subject.   I read about two papers that were recently written based on both twins and non-twins. The first paper was titled “Nature or Nurture: What Determines Investor Behavior?”  by by Amir Barnea, Henrik Cronqvist and Stephan Siegel.   The second paper was titled “The Origins of Saving Behavior” by Cronqvist and Siegel.  The following are highlights from the two papers:

  1. 33 percent of financial portfolio behavior has a ‘nature’ component, and this percentage does not change as the person ages.  The same is true from a saving perspective, where approximately 38 percent of saving behavior was found to have a genetic component when retirees were studied.
  2. Nurture does somewhat dominate portfolio behavior initially, but the ‘nurture’ component decreases over time as the individual gets more experience.  In essence, experience overtakes ‘nurture’ at a certain point, but ‘nature’ stays pretty static.  Same is true for saving behavior.  As a matter of fact, it was found that there was zero parental influence over saving behavior in individuals once they hit middle age.
  3. Since about a third of financial behavior is innate throughout one’s life, the key then is to modify the aspect of financial behavior that can be influenced, which is experiences.  At first, it appears that nurture and then the learned behaviors dominate.  However, over time, experiences start to play a major role.  If a person wants to change their financial behaviors, positive experiences must occur that are meaningful.  Once the positive reinforcement takes over, positive financial behaviors can be developed and enhanced. However, it appears those that are born spenders will always have a tougher battle than the born savers.

In the end, according to my interpretation of the studies, a person’s financial behavior is almost pre-determined IN THE BEGINNING, based on what they were born with and how they were taught to handle finances.  Then, as long as the person develops positive spending and saving habits, even a ‘born spender’ can learn to become a ‘saver’. It takes time and effort though, and apparently, some people are born to spend while others are made to save.

What do you think?  Have you seen either Nature or Nurture dominate when it comes to financial habits?  What do you think of the results of the study that was discussed? Do you think you were born to save or spend?

 

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{ 52 comments… read them below or add one }

Invest It Wisely August 16, 2011 at 7:52 am

Interesting topic, Kris! I remember you mentioned the same on my nature versus nurture post. I do also think that some behavior is pre-determined and that will always stay with us the rest of our lives.

That’s interesting that your son and daughter are so different in their habits. I agree with you with not enabling the spending habits. Your son may always have that impulse, but he will learn that you have to save in order to spend. Of course, a little encouragement in the right direction doesn’t hurt either — by leading by example, you can show both of your children a successful path that they can follow.

Your daughter on the other hand, hmm, maybe time to start getting her into investing. She could be the next global magnate! 😉

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Kris August 16, 2011 at 10:47 pm

If I got my daughter to invest, I would have to pry open those fingers to get the money out of them. I bet she would have been one of those people that didn’t trust banks years and years ago and would have come out just fine!

You do raise a good point though. I need to sit down with her and talk more about investing. Good suggestion.

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Karunagaran August 16, 2011 at 11:27 am

My 2 daughters are the same. Both are compulsive savers. They never use their savings money to spend. My wife & I have to fork it out. My elder daughter will hound my wife to buy books, the only thing she will buy.
My wife & i taught both our daughters to save since starting school. Their rarely use their lunch money but bring home & place it inside their coin box.
Seeing something growing & which has value gives a sense of achievement. This i believe is a contributing factor.

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Kris August 16, 2011 at 10:46 pm

Books are my spending soft spot too, I rarely turn down a request to buy a book.

It is great you have two savers, and that you and your wife encourage that habit.

I love when my piggy bank starts to feel heavier!!

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krantcents August 16, 2011 at 11:50 am

Nature vs. nurture? I do not know, but my children tell me that what my wife and I modeled influenced them more than anything. For sure, lack of parent modeling will materially affect children negatively. I am sure there are exceptions, but those may very few.

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Kris August 16, 2011 at 10:45 pm

Modeling can play an important role and it can go either way. You can model good or bad behavior, or you can try to do the opposite of what you have seen your parents do. Maybe that is somewhat where the innate part comes in.

I can’t imagine you being anything but a good example for your kiddos!

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MoneyCone August 16, 2011 at 2:50 pm

Hard to tell – maybe you are pre-disposed one way or the other, but your environment plays a big part as well and previous habits can be changed. Atleast that’s what I think.

Very good food for thought!

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Kris August 16, 2011 at 10:43 pm

I agree. Environment does seem to play a role, but that role fades over time as your own spending habits and experiences take over. If you live your life charging up your cards and don’t have positive spending habits and you were a ‘born spender’, you will have quite an uphill battle.

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Lindy Mint August 16, 2011 at 3:36 pm

I’ve seen this in myself and my sister. She’s six years older, but we have completely different spending habits. I’ve also seen it with my own kids. Though my youngest is a little too small to tell what he’ll be, he doesn’t seem to have the same interest in owning things that my oldest has.

It is refreshing to know that good habits can be taught, so the race is on for me to instill some good values into my spender before he gets those credit card offers when he’s 18.

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Kris August 16, 2011 at 10:42 pm

I learned from writing that post that teaching good financial habits is so very important, because you need that good influence to override their innate spending/saving habits. I have tried to teach my kids to be financially responsible, but who knows what has sunk and what hasn’t. My husband and I are both frugal, so we do set a good example in life. However, when that first paycheck comes in when they are adults, I am sure it will be tempting to spend.

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retirebyforty August 17, 2011 at 7:05 pm

That’s very interesting. Our family are pretty frugal in general so I don’t see a big difference there. I’ll have to see how our boy turns out. We’ll teach him to save and hopefully it’ll stick. 🙂

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Crystal @ BFS August 17, 2011 at 8:29 pm

This is pretty funny. I don’t know if my younger sisters turned out like me. I think the 21 year old is somewhere in between and the youngest may be a spendthrift, lol.

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Money Reasons August 17, 2011 at 9:12 pm

Very interesting. Based on my Three (Financial) Pigs articles, my friend that is Pig #2 has become more of a saver as he ages. He’s always been a smart guy and I think he’s controlling his own fate with respect to his savings habits. Or perhaps it’s the pressure of his kids getting older and he needs to save up for college costs.

I wonder if those that are born spenders would find the most benefit from using a budget. Then I wonder if such a budget could override their desires?

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First Gen American August 18, 2011 at 2:52 pm

My son loves to buy things as long as it’s with my money. Sometimes I don’t flat out tell him that he can’t have something, but I will give him the option of using his own money from his wallet to buy an item or walk away. 99% of the time, he decides that he doesn’t want it that badly. He would rather have the cash than spend it.

Not sure what the little one will do yet. Too early to tell.

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Kris August 18, 2011 at 5:18 pm

It is funny how kids have no problem spending other people’s money. Unfortunately though, my son has no problem spending his own money either. For bigger purchases, I require a waiting period so he can really think about it.

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Little House August 22, 2011 at 5:59 pm

That’s very interesting and your kids’ behaviors are a great concrete example. I think I’m more of a born saver, though my experiences for a few years made me a spender. My husband is more of a born spender; but he’s gotten much better through experiences and having to “wait” and plan a purchase. Deep down, there really aren’t many things I want, yet my husband on the other hand constantly is thinking of things he wants and “needs.” We don’t have kids yet, so I’ll have to evaluate that when the time comes!

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Financial Samurai September 3, 2011 at 12:40 pm

I really don’t think so. I’d say it’s 85% what you see your parents and friends are doing that influences your financial habits.

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