MONEY Savings

Compare Your Net Worth to the Average American’s

Getty Images/Dimitri Otis

See how you stack up based on your age

It may not be the best way to evaluate your accomplishments, but knowing how your financial situation stacks up against your peers can offer up valuable insight that allows you to make changes to shore up your financial security. In 2011, the U.S. Census Department took its most recent look at wealth by age group, and the findings provide a benchmark that the average American can use to help judge whether or not he or she is on the right track.

What is net worth?
An individual’s net worth is a financial snapshot that offers insight into how much money a person would have leftover if they sold everything they own of value and paid off every debt that they owed.

For the plus side of the column, the Census Department totals up all assets, including equity in a home, savings, investments, and retirement accounts. They even include what equity, if any, people have in their car or truck — but they don’t include things like jewelry or pension plans.

Next, they add up all the secured debt, such as home and auto loans, and unsecured debt, including credit cards, that are owed.

Once assets and and debt is calculated, total debt is subtracted from total assets to come up with net worth. Then that information is broken out across various age groups ranging from people less than 35 years old to people 75 and older. Finally, because averages can be significantly influenced by both those with no assets and those with billionaire status, the median, which separates the top half from the bottom half, is used instead.

What are the numbers?
It’s probably not too surprising to discover that older people entering retirement have more money than those who are just starting out. It may be surprising, however, to learn that the average American’s median net worth peaks in the year just following retirement, and then slides from there.

It may also be surprising to learn how much of a person’s net worth is tied up in his or her home. If you exclude home equity from the net worth calculation, then the median net worth drops significantly across all age groups. For example, the median net worth for a person age 70 to 74 years drops to $31,823 from $181,078 when home equity isn’t included.

Source: U.S. Census Bureau

Are American’s unprepared?
The typical American heading toward retirement may be in for an unwelcome surprise given that these numbers aren’t likely to provide enough income during retirement. Social Security is only supposed to provide a safety net in terms of retirement income, yet a large proportion of retirees rely on it as the major source of their income. They do so in large part because their savings and investment accounts are insufficient to support their monthly living expenses.

Generally, the rule of thumb is that retirees should plan on tapping retirement saving to the tune of 4% annually. However, following that advice means that if you’re retiring with a $100,000 retirement nest egg, you’ll only be taking out $4,000 per year. If you combine that income with Social Security income — the average retiree receives $1,333 per month — then you’re talking about less than $20,000 per year in income. That’s unlikely to be enough to live on.

Getting back on track
If you’re looking at a big shortfall, the best solution is to begin making changes to your financial situation today. Small adjustments in spending can free up hundreds of dollars per month that can be put to work in retirement plans, or set aside in savings, and those additional dollars can really add up.

For example, the median value of stocks, mutual funds, and retirement accounts for a person age 35 to 44 is $61,500. If a 40 year old with that amount already invests an additional $200 per month and earns a hypothetical 6% annualized return, then his or her account would grow to be worth $395,624 at 65. Increase that monthly investment amount from $200 to $500, and the nest egg soars to $593,137! That would go a long way toward maintaining your net worth as you’re living out your golden years.

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MONEY retirement planning

This Popular Financial Advice Could Ruin Your Retirement

two tombstones, one saying $-RIP
iStock

The notion of "dying broke" continues to appeal to many Americans. That's too bad, since the strategy is ridiculously flawed.

You may have heard of the phrase “Die Broke,” made popular by the bestselling personal finance book of the same name published in 1997. The authors, Stephen M. Pollan and Mark Levine, argue that you should basically spend every penny of your wealth because “creating and maintaining an estate does nothing but damage the person doing the hoarding.” Saving is a fool’s game, they claim, while “dying broke offers you a way out of your current misery and into a place of joy and happiness.”

I love a good contrarian argument, but for whom did this plan ever make sense? Perhaps people like Bill Gates who have so much money that they decide to find charitable uses for their vast fortune. But for the rest of us, our end-of-life financial situation isn’t as nearly pretty, and we’re more likely to be in danger of falling short than dying with way too much.

In a recent survey, the Employee Benefit Research Institute found that 20.6% of people who died at ages 85 or older had no non-housing assets and 12.2% had no assets left at all when they passed away. If you are single, your chances of running out of money are even higher—24.6% of those who died at 85 or older had no non-housing assets left and 16.7% had nothing left at all.

Now, perhaps some of those people managed to time their demise perfectly to coincide when their bank balance reached zero, but it’s more likely that many of them ran out of money before they died, perhaps many years before.

And yet the “Die Broke” philosophy seems to have made significant headway in our culture. According to a 2015 HSBC survey of 16,000 people in 15 countries, 30% of American male retirees plan to “spend it all” rather than pass wealth down to future generations. (Interestingly, only 17% of women said that they planned to die broke.)

In terms of balancing spending versus saving, only 61% of men said that it is better to spend some money and save some to pass along, compared to 74% of women. Perhaps that’s why, as a nation, only 59% of working age Americans expect to leave an inheritance, compared to a global average of 74%.

There are so many things wrong with this picture. The first is that Pollan and Levine’s formula of spending for the rest of your life was predicated on working for the rest of your life. “In this new age, retirement is not only not worth striving for, it’s impossible for most and something you should do you best to avoid,” they wrote. Saving for retirement is certainly hard, and I don’t believe that all gratification should be delayed, but working just to spend keeps you on the treadmill in perpetuity.

Besides, even if some of us say we’re going to keep working all our lives, that decision is usually dictated by our employer, our health and the economy. Most of us won’t have the choice to work forever, and the data simply don’t support a huge wave of people delaying retirement into their 70s and 80s. And as I have written before, I don’t buy into the current conventional wisdom that planning for a real retirement is irrational.

But perhaps the most pernicious aspect of the “Die Broke” philosophy is that it takes away the incentive to our working life—to get up in the morning and do your best every day, knowing that it’s getting you closer to financial security—and the satisfaction that goes with it. In the end, I believe what will bring us the most happiness is not to die rich, or die broke, but to die secure.

Konigsberg is the author of The Truth About Grief, a contributor to the anthology Money Changes Everything, and a director at Arden Asset Management. The views expressed are solely her own.

Read next: This Retirement Saving Mistake Could Cost You $43,000

MONEY retirement planning

The 5 Best Free Online Retirement Calculators

Calculator
Charlie Surbey—Gallery Stock

To be sure you'll reach your retirement goals, you've got to run some numbers. These 5 tools can help you get started.

If you want to be serious about retirement, you’ve got to crunch some numbers. Otherwise, you can’t really tell amidst the ups and downs of the economy and the market whether you’re on track toward an acceptable post-career lifestyle. These five tools, all free, can help improve your planning and your prospects. You’ll find links to all five in RDR’s Retirement Toolbox.

1. Retirement Income Calculator This T. Rowe Price tool allows you to provide detailed information about your finances—how your savings are invested, pension and Social Security payments, income from part-time work, if any, etc.—so you can come away with a nuanced sense of your retirement readiness. Once you know where you stand, you can then run alternative scenarios to see how you might improve your prospects. If you’ve already retired, this tool will help you determine whether your current level of spending is sustainable throughout retirement or whether you need to tighten your belt.

Rather than estimating the size nest egg you’ll need in retirement as many calculators do, this tool focuses on sustainable income. Specifically, you enter the amount of income you expect you’ll need in retirement (say, 80% of pre-retirement salary) and the tool uses Monte Carlo simulations to estimate the likelihood that the resources you’re projected to accumulate (or have already accumulated if you’re retired) will generate sufficient income throughout retirement. Generally, you want to see a success rate of at least 80%. If you fall short of that level, you can see how changing different aspects of your finances—saving more, spending less, cutting investment fees, etc.—might improve your chances of success. Revving up this calculator every year or so and making small tweaks as needed can prevent you from falling behind in your planning and help you avoid having to make dramatic and painful adjustments to your lifestyle later in life.

2. Risk Questionnaire—Allocation Tool One of the most important aspects of setting an investing strategy is choosing a stocks-bonds mix that jibes with your appetite for risk. Invest too aggressively, and you may end up selling stocks in a panic when the market dives. Invest too conservatively, and you may not earn the returns you need to achieve your goals. This questionnaire from Vanguard can guide you to an appropriate stocks-bonds allocation. Just answer 11 questions designed to probe, among other things, your investing habits and how you might react to major market setbacks, and you’ll receive a suggested mix of stocks and bonds (and, in some cases, cash). Click on the “other allocations link,” and you’ll get stats showing how your recommended portfolio as well as ones more aggressive and conservative have performed on average and in good and bad markets since 1926.

3. Retirement Income Planner (and Retirement Budget Worksheet) Estimating that you’ll need 80% or so your pre-retirement income after you retire may be okay for establishing a savings target during your career. But once you’re within 10 or so years of retiring, you want to get a better handle on what your actual retirement expenses might be. This interactive retirement budget sheet, which you’ll find within Fidelity’s Retirement Income Planner tool, will help you do just that. It not only has slots for 49 different expense items, ranging from cable and internet fees to health care and travel; it also allows you to check a box next to each expense designating whether it’s essential. The tool then provides a tally of all your expenses, plus a breakdown of essential vs discretionary ones. This can give you a sense of how much wiggle room you have to pare expenses if necessary, plus show you which areas are prime candidates for cuts. Of course, no level of detail will be able to sure 100% accuracy. But that’s not the goal. The point is to make the best estimate you can and then refine your budget (and your actual spending) as needed as you go along.

4. Financial Engines’ Social Security Calculator One of the single most important decisions retirees face is when to claim Social Security. Unfortunately, many retirees don’t give this issue the serious thought it deserves, and just take benefits as soon as they can (age 62) or soon thereafter. That can be a costly mistake. Each year you postpone benefits between age 62 and 70, your payment increases about 7% to 8%, dramatically boosting the amount you may collect during your lifetime. By taking advantage of a number of different claiming strategies, married couples may be able to boost their potential lifetime benefit several hundred thousand dollars.

Which is why in the years leading up to retirement, it’s a good idea to check out Financial Engines’ Social Security calculator. You just enter such information as your age, current income, the age at which you expect to begin collecting Social Security. The tool will then estimate the amount you’ll collect in today’s dollars over your lifetime if you claim benefits as planned—and show how much more you might collect by claiming at a different age. If you’re married, the tool will show how you and your spouse might maximize lifetime benefits by better coordinating when each of you claims. Another nifty feature: you can see how the projections changed depending on whether your life expectancy exceeds or falls short of average.

While this tool is a good way to start thinking about how and when you might claim Social Security benefits, the amount of money at stake is large enough that you may want to hire an adviser to help you with this decision or go to a Social Security claiming service, such as Maximize My Social Security or Social Security Solutions, that, for a fee, will help you devise a strategy.

5. Will You Have Enough To Retire? I know that no matter what I or anyone else says, some people simply aren’t going to spend more than a minute with any tool. If you’re one of those people—or you just want a quick update to see if you’re on the path to a secure retirement—this tool is for you.

Just enter your age, the age you expect to exit your job, the amount, if any, you have saved so far, the percentage of income you’re saving each year and the tool will immediately estimate the amount you’ll need at retirement and the amount you’re projected to have. At a glance, you can quickly see whether you’re likely to have an adequate nest egg if you continue on your current path. If it appears you’re falling short, you can see how your chances improve by, say, saving a higher percentage of pay or delaying retirement a few years (or both). My only gripe about this tool: I wish it couched its estimates in sustainable annual income in retirement rather than giving you your retirement “number.”

Are there other worthwhile free tools that can help you better plan for retirement? Sure, you’ll find at least a dozen more listed in RDR’s Retirement Toolbox, including one that will show you how much guaranteed lifetime income a specific sum of savings might generate, another that can help you decide between a traditional and Roth IRA and one that can help you compare the cost of living in different cities.

But to create an overall retirement strategy and monitor it to make sure you stay on track, you can start with these five.

Walter Updegrave is the editor of RealDealRetirement.com. If you have a question on retirement or investing that you would like Walter to answer online, send it to him at walter@realdealretirement.com.

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MONEY Ask the Expert

How to Save For Retirement When You Don’t Have a 401(k)

Ask the Expert Retirement illustration
Robert A. Di Ieso, Jr.

Q: The company I work for doesn’t offer a 401(k). I am young professional who wants to start saving for retirement but I don’t have a lot of money. Where should I start? – Abraham Weiser, New York City

A: Millions of workers are in the same boat. One-quarter of full-time employees are at companies that don’t offer a retirement plan, according to government data. The situation is most common at small firms: Only 50% of workers at companies with fewer than 100 employees have 401(k)s vs. 82% of workers at medium and large companies.

Certainly, 401(k)s are one of the best ways to save for retirement. These plans let you make contributions directly from your paycheck, and you can put away a large amount ($18,000 in 2015 for those 49 and younger), which can grow tax sheltered.

But there are retirement savings options beyond the 401(k) that also offer attractive tax benefits, says Ryan P. Tuttle, a certified financial planner at Connecticut Wealth Management in Farmington, Ct.

Since you’re just getting started, your first step is to get a handle on your spending and cash flow, which will help you determine how much you can really afford to put away for retirement. If you have a lot of high-rate debt—say, student loans or credit cards—you should also be paying that down. But if you have to divert cash to pay off loans, you won’t be able to put away a lot for savings.

That doesn’t mean you should wait to put money away for retirement. Even if you can only save a small amount, perhaps $50 or $100 a week, do it now. The earlier you get going, the more time that money will have to compound, so even a few dollars here or there can make a big difference in two or three decades.

You can give an even bigger boost to your savings by opting for a tax-sheltered savings plan like an Individual Retirement Account (IRA), which protects your gains from Uncle Sam, at least temporarily.

These come in two flavors: traditional IRAs and Roth IRAs. In a traditional IRA, you pay taxes when you withdraw the money in retirement. Depending on your income, you may also qualify for a tax deduction on your IRA contribution. With a Roth IRA, it’s the opposite. You put in money after paying taxes but you can withdraw it tax free once you retire.

The downside to IRAs is that you can only stash $5,500 away each year, for those 49 and younger. And to make a full contribution to a Roth, your modified adjusted gross income must be less than $131,000 a year if you’re single or $193,000 for those married filing jointly.

If your pay doesn’t exceed the income limit, a Roth IRA is your best option, says Tuttle. When you’re young and your income is low, your tax rate will be lower. So the upfront tax break you get with a traditional IRA isn’t as big of a deal.

Ideally, you’ll contribute the maximum $5,500 to your IRA. But if you don’t have a chunk of money like that, have funds regularly transferred from your bank account to an IRA until you reach the $5,500. You can set up an IRA account easily with a low-fee provider such as Vanguard, Fidelity or T. Rowe Price.

Choose low-cost investments such as index funds and exchange-traded funds (ETFs); you can find choices on our Money 50 list of recommended funds and ETFs. Most younger investors will do best with a heavier concentration in stocks than bonds, since you’ll want growth and you have time to ride out market downturns. Still, your asset allocation should be geared to your individual risk tolerance.

If you end up maxing out your IRA, you can stash more money in a taxable account. Look for tax-efficient investments that generate little or no taxable gains—index funds and ETFs, again, may fill the bill.

Getting an early start in retirement savings is smart. But you should also be investing in your human capital. That means continuing to get education and adding to your skills so your earnings rise over time. Your earnings grow most quickly in those first decades of your career. “The more you earn, the more you can put away for retirement,” says Tuttle. As you move on to better opportunities—with any luck—you’ll land at a company that offers a great 401(k) plan, too.

Do you have a personal finance question for our experts? Write to AskTheExpert@moneymail.com.

Read next: Quick Guide to How Much You Need to Retire

MONEY consumer psychology

The Simple Mind Trick That Will Boost Your Savings in No Time

mirage calendar
Howard Sokol—Getty Images

If you think about how many years you have to reach long-term savings goals, it's easy to procrastinate. A simple tweak to your thinking will get you started saving much sooner.

Human nature being what it is, probably the best strategy to ensure you’ll sock money away and achieve long-term savings goals is to involve your fickle, easily distracted brain as little as possible. As renowned economist Richard Thaler explained in a recent Q&A with MONEY, it’s very difficult for humans to control our impulses, and therefore the wisest approach to saving is to remove it as a choice. Invariably in our lives, stuff comes up, and if it’s an option, we’ll find more pressing and seemingly good uses for money other than incrementally trying to hit goals that won’t be realities for decades.

“Here’s a model of saving for retirement that’s guaranteed to fail: Decide at the end of every month how much you want to save. You’ll have spent a lot of the money by then,” Thaler said. “Instead, the way to really save is to put the money away in a 401(k) even before you get it, via a payroll deduction.”

A new study published by Psychological Science has other insights about how to boost savings. In this instance, the trick isn’t turning your brain off but tweaking the way you think about savings goals. The gist is that you must think about the future as now, rather than, well, way off in the future. And the way to go about this is to consider deadlines for your goals in terms of days rather than years.

“The simplified message that we learned in these studies is if the future doesn’t feel imminent, then, even if it’s important, people won’t start working on their goals,” said Daphna Oyserman, co-author of the study and co-director of the USC Dornsife Mind and Society Center. “If you see it as ‘today’ rather than on your calendar for sometime in the future, you’re not going to put it off.”

In one part of the study, hundreds of participants were asked about when they would start saving for their (theoretical) newborn child’s college education. Some were told they had 18 years to reach this goal, while others heard their deadline would arrive in 6,570 days. These are the exact same amounts of time, yet the people who thought about the deadline in terms of days said they would start saving four times sooner than those who considered the event in years. A similar experiment concerning retirement savings yielded equally compelling results, indicating that thinking in days makes goals seem more imminent—and kicks people into action much, much sooner.

The takeaways don’t apply just to savings, but to sidestepping procrastination in order to reach goals at work or school as well. Tricking yourself into thinking about goals in terms of days rather than years, Oyserman said, “may be useful to anyone needing to save for retirement or their children’s college, to start working on a term paper or dissertation, pretty much anyone with long-term goals or wanting to support someone who has such goals.”

Read next: How a Bowl of Cashews Changed the Way You Save for Retirement

MONEY 401(k)s

This Retirement Saving Mistake Could Cost You $43,000

piggy bank split in half (half pink, half red)
Levi Brown—Trunk Archive

Nothing is free when it comes to investing, but your 401(k) match comes close. Here's how to get the most from it.

People are panicked about having enough money for retirement. Yet millions of workers are leaving thousands of dollars on the table every year because they’re not doing one thing: Contributing enough to receive a full employer matching contribution to their 401(k).

Some 98% of employers with a 401(k) offer some kind of match, according to AonHewitt. Typically, employers contribute a dollar for each dollar you save in your 401(k), up to 6% of your salary. Other 401(k) surveys show that matching 50¢ for each dollar you contribute is more common.

Whatever the match level, it’s free money. And one in four workers miss out on getting the full amount because they’re not saving enough, according to a new research report by Financial Engines, which provides financial advisory services to 401(k) plans.

For the average worker, that means forgoing $1,336 a year or an extra 2.4% of annual income, assuming a dollar for dollar match. Over time with compounding, you could be missing out on as much as $42,855 over 20 years. All told, U.S. workers are passing up about $24 billion a year in matching contributions, according to Financial Engines.

By not taking full advantage of the match, workers are giving up an immediate guaranteed return for every dollar they invest, Financial Engines’ director of financial technology Greg Stein noted in the study.

The people most likely to miss out are the ones who need it the most: Younger workers and those with lower incomes. Among people with 401(k)s who earn less than $40,000 a year, 42% don’t save enough to get the full match, compared with just 10% of workers earning more than $100,000 a year. Workers younger than 30 are twice as likely not to earn a match compared with workers over age 60, 30% vs. 16%.

Though retirement contributions generally increase with age, those amounts tend to flatten out between ages 35 and 45, according to the report. That’s not surprising since that’s the time period when many households incur big-ticket expenses, such as buying a house and raising kids.

If boosting your 401(k) savings rate feels like a stretch, here’s a simple strategy: Increase the amount you contribute gradually, by just 1% a year—perhaps when you get a raise. Since the money comes out of your paycheck pretax, a small savings hike won’t feel like a big pinch.

Here’s an example: If you earn $50,000 a year and are in the 25% tax bracket, boosting your contribution from 3% to 6% will only reduce your weekly paycheck by $24. Over 35 years, that would add more than $320,000 to your retirement savings. Use this calculator to see impact of your retirement contributions on your paycheck.

Even if you contribute enough to get a full 401(k) match, don’t stop there. A 6% or so savings level probably isn’t enough to ensure a comfortable retirement—financial planners recommend that people save 10% to 15% of their income each year. But ensuring that you get all your free match money will make it much easier to reach your goal.

Read next: These 4 Rules of Thumb Can Screw Up Your Retirement

MONEY consumer psychology

How a Bowl of Cashews Changed the Way You Save for Retirement

Matt Furman Richard Thaler

Richard Thaler pioneered behavioral economics, and changed the way companies manage their 401(k)s.

As young academic in the 1970s, the economist Richard Thaler began compiling what he calls “the List,” a collection of the everyday ways in which real people fail to act as economic theory predicts. One item on the List: the puzzling reaction of his friends at a party when Thaler took away a bowl of cashews. The List became the seed of his pioneering work in the new field of behavioral economics, a field that has, among other things, transformed how 401(k) plans are designed. (If you were automatically signed up for your company’s retirement plan, you can thank behavioral research.)

Thaler, 69, is a professor at the University of Chicago Booth School of Business. (He tweets at @R_Thaler.) His new book Misbehaving: The Making of Behavioral Economics was published on May 11. MONEY editor-at-large Penelope Wang interviewed Thaler for the June issue of the magazine. The interview, which was edited, starts with a discussion of what happened with those cashews.

How can I make smarter money choices?
It helps to have what I call nudges. The lesson of my field, behavioral economics, is that we need to understand the ways in which we differ from the rational human assumed in standard economic theory. I call this idealized person the “Econ.”

My classic example of the difference between Econs and actual humans is something that happened years ago. I was having a dinner party for fellow economics grad students. Before dinner I served some cashew nuts along with cocktails, and everyone kept eating them. Soon their appetites were in danger, not to mention their waistlines. I grabbed the bowl and hid it in the kitchen. People were (a) happy, and (b) they realized their reaction conflicted with traditional economic theory. Econs are better off with more choices. We humans actually need help controlling our impulses—nudges.

How would “hiding the cashews” work with money?
Here’s a model of saving for retirement that’s guaranteed to fail: Decide at the end of every month how much you want to save. You’ll have spent a lot of the money by then. Instead, the way to really save is to put the money away in a 401(k) even before you get it, via a payroll deduction. And behavioral economics says a little nudge can help you to do that even better.

In 1994 I wrote an article advising auto-enrollment in 401(k) plans—putting people in the plan by default, while giving them an opportunity to opt out, so you still have a choice. Saving would happen without having to make decisions to do it every week or month. The 2006 Pension Protection Act even encouraged employers to use auto-enrollment, and now more than half of large plans do so. But many people still aren’t saving enough.

In fact, you say many plans are nudging people to save too little.
Most companies using auto-enrollment set the default contribution rate too low. It’s stuck at 3% of salary, which was never intended by the law. Can you get people to save more than the default? Part of the answer is to combine auto-enrollment with auto-escalation. Research I did with Shlomo Benartzi of UCLA showed that even if people think they can save only a little right now, they’re willing to accept future increases in contributions, such as when they get raises. A state-of-the-art 401(k) should start out with auto-enrollment at 6% and escalate to at least 10% or higher. The evidence shows raising the default to 6% won’t lead to a high opt-out rate.

Money

Outside of a 401(k), how can knowing a bit about behavioral economics help me make better decisions? Psychology and economics professor George Loewenstein, at Carnegie Mellon, has a phrase: hot-cold empathy gap. It means you have two kinds of emotional states, hot and cold. So if I’m thinking about what to have for dinner in the morning, when I’m not hungry, I’ll say I’ll have fish and salad. I’m in a cold state. But by the time I go out for dinner, I’ll have a weakness maybe for a cocktail, I’ll see ribs and a big bowl of pasta—I’ll be in a hot state. I’ll order the ribs.

The point George makes is that people overestimate the self-control they’ll have in the hot state. So we need to make concessions to our frailties, such as choosing a restaurant with healthier choices or making a list before you go shopping, to help you buy only what you decided to buy in the cold state. If you’re not putting enough away for emergencies or retirement, making commitments in advance, such as signing up for payroll withholding, can help.

You helped discover something called the endowment effect. It seems like something that would affect investors. Tell us about it.
It was one of the first behaviors I studied, and it shows we demand more to give things up than we would pay to acquire them. We studied this by showing how students valued coffee mugs we handed out. People who got the mugs demanded twice as much to give them up as people who didn’t get the mugs would pay to get one. The endowment effect overlaps with other behavioral phenomena, such as loss aversion—seeking to avoid losses more than we seek gains—and a bias for the status quo. For these reasons, investors tend to hold on too long to stocks that have gone down, hoping they will rebound so they can sell without realizing a loss.

If people aren’t as rational as economists assume, can I take advantage of that as an investor?
That’s exactly what some professional investors are trying to do. Behavioral economics offers a plausible explanation for overreactions by the market. For example, a long period of bad performance can lead to stereotyping. There was a period when Apple was considered an inept company on the road to bankruptcy. That was an opportunity.

But it’s not easy to beat the market. Most professionals fail, and research shows individuals are abysmal market timers, buying high and selling low. I don’t think I can beat the market, but I think my firm can. [Thaler is a co-founder of a money management firm, Fuller & Thaler, but does not choose its investments.] I keep my money professionally managed or in index funds.

Maybe I could at least use behavioral insights to spot times when there’s an irrational bubble.
I don’t think most people can. For example, research shows people buy real estate based on naive extrapolations. “Real estate prices in Scottsdale will never go down.” I think we can make two conclusions: One, we’re really bad at this. Two, with investments like target-date funds, which diversify your assets and rebalance automatically, you can minimize the damage.

It seems so obvious that people make mistakes, but your book has gossipy fun recounting pitched academic battles over the idea. Why do economists resist it?
Some thought human errors were random and so would cancel each other out, which the work of [economics Nobel laureate] Daniel Kahneman and the late Amos Tversky found was not true. Most of the errors go in the same direction. Or they thought that if the stakes are high, people make the right decisions. The mortgage crisis showed that people still make mistakes when stakes are high.

Governments have been getting interested in behavioral economics. What are they doing with the research?
I’ve been working with a group within the United Kingdom’s government called the Behavioural Insights Team. One of the first experiments in the U.K. was to encourage more people to pay their taxes on time. We just changed the letter that was sent out to people who owed money, and added the true fact that 90% of people pay taxes on time. So the only difference was that we were telling people, “You are in the minority.” If you are an Econ, this should be irrelevant. But it brought in millions of pounds in tax revenue a lot faster.

There are all kinds of opportunities. Climate change is a behavioral problem—telling homeowners they use more power than their neighbors tends to reduce consumption. So is obesity. Health care costs are partly behavioral. It makes sense to ask behavioral scientists for their ideas, and then test them rigorously.

What about the worry that nudges can manipulate people? It’s just looking to see how we can help people without forcing them to do anything. We didn’t invent the idea of nudging people toward certain choices—it’s been around throughout human history. When the government employs these strategies, there are important ethical questions, and Cass Sunstein and I wrote about this in our book Nudge. We insist the government has to be transparent. Critics forget you cannot have a world without nudging. If people have to remember to sign up for a 401(k), the employer is effectively nudging them not to enroll. Either way, you have to decide what the default is. We advocate picking the one that makes people better off.

MONEY Kids and Money

Why Mothers Know Best About Money

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Jamie Grill—Getty Images

Eight in 10 Americans say they learned something about money from Mom. That's good, because Dad may have been a tad overconfident.

Moms deserve a lot of credit for the things they teach kids about money, and with Mother’s Day this weekend what better time to celebrate their financial tutelage? More than eight in 10 Americans say they learned something about money from their mother, a new survey shows.

The chief overall lesson: live within your means. That motherly wisdom was cited by 55% in the survey from BeFrugal.com. The same percentage said she taught them the difference between a want and a need. Some 44% said Mom emphasized the importance of being self-sufficient. Mom also taught them how to shop wisely: 67% said she taught them about sales, and 57% said she taught them about coupons.

These findings jibe with other research on the subject. A few years ago, TD Bank found that in many families Dad doles out allowance and oversees big purchases, and that Dad tends to be the most confident about money and most interested in results. Meanwhile, Mom is most interested in the kids’ money learning process and the day-to-day aspects of financial management.

Mom’s softer approach to money lessons probably stems from motherly wisdom in many areas. Life lessons like “don’t be late” and “practice, practice, practice” and “don’t be afraid to ask for help” and many others have direct application to the money world. After all, it’s sage advice indeed to never make a late payment and to seek advice on complicated money matters.

Given the financial mistakes that many parents have made—poorly managing credit cards, for example—some argue that young adults would do better to skip parental advice altogether and find a financial adviser or third-party online advice. But the best advice is probably to listen to both Mom and Dad. They often see financial matters differently. That’s natural—opposites attract. And through discussion and compromise, your parents probably run the household finances better together than either one would alone.

That’s good since kids—and even young adults—seem to depend on both Mom and Dad for financial advice. Two surveys last fall, one by Fidelity Investments and the other by TIAA-CREF, show that Millennials seek out their parents more than anyone else for financial guidance. Fidelity identified parents as their top choice for trusted money advice. TIAA-CREF found that 47% view their parents as especially influential in money matters.

So here’s to all the moms out there, imparting financial wisdom in ways only they seem able—and for being an important counter balance to all the fathers with misplaced confidence in their own money skills. Several studies have shown that women make better investors. But let’s give a nod to dads too. Embracing risk and a focus on results have their place, and the balance that both parents produce may be the best lesson of all.

Read next: What Dads Can Do to Really Help Mom This Mother’s Day

MONEY Financial Planning

10 Ways Our Grandparents Were Smarter About Money

grandfather with son
Sam Edwards—Getty Images

Pay cash, take care of your stuff, and always save for a rainy day.

Depending on your age and circumstances, it’s likely your grandparents’ relationship with money was forged by some different (and probably tougher) financial times. My own grandparents have been gone for decades now, but their lifestyles were studies in frugality and sharp financial management that I remember to this day. In honor of all the grandmas and grandpas out there, here are ten financial lessons we’ve learned from our grandparents:

1. Pay Cash

My grandmother never owned a credit card. She paid cash for everything and tracked every nickel in little paper passbooks. We found dozens of them when she died. She was meticulous. She was frugal. And she was always in the black.

2. Take Care of Your Stuff

Today, we live in a throw-away culture where it’s easy and relatively cheap to replace most things we own. Not so for our grandparents. Every item was considered an investment, and therefore, everything was diligently cleaned, waxed, oiled, painted, patched, and repaired. Their stuff lasted forever — and that saved money.

3. Have Practical Skills

Doesn’t it seem like our grandparents’ generation was filled with renaissance men and women? My grandfather farmed, raised livestock, built his own house, repaired machinery, and — I kid you not — divined for water using the twigs of a willow tree. With that level of skill, I wonder if he ever needed to hire anyone to do anything. Today, developing frugal skills is still a great way to build self-reliance and save money.

4. Get Creative

Folks who grew up during the Great Depression had to channel their inner creativity to survive. Their ingenuity helped them feed their families, earn an income, keep their kids clothed, and maybe stash a few bucks on the side. It’s the same today; discovering ways to boost creativity can still positively impact our budgets and keep us engaged and inspired.

5. It’s Better to Own

With few exceptions, it’s better to own than rent, especially during tough economic times. Access to money-producing assets (land, a house, a paid-off car, and the like) helped many generations survive and build wealth.

6. Save for A Rainy Day

No offense Suze Orman, but our grandparents and great grandparents invented the emergency fund. The idea of saving up for a rainy day is just smart financial strategy. Because our grandparents lived through some very lean years, they never allowed themselves to be lulled into thinking that today’s prosperity guarantees tomorrow’s.

7. Get Dirty

Our grandparents taught us that, if we’re lucky enough to have a little plot of land, we better put it to work by planting a garden. Gardens stretch our grocery budgets, promote healthier eating, and get us moving in the great out-of-doors. Few activities pack such a holistic health punch. (See also: 4 Things a Vegetable Garden Needs)

8. Live Together

No…not in that way. In earlier generations, it was more common for households to include mom and dad, their kids, and grandma and grandpa. More people living under one roof through these multi-generational arrangements meant more child care resources, more household help, and more sources of income.

9. Keep Your Wants Under Control

Slowly creeping wants can easily choke our budgets. Our grandparents were able to afford what they needed by keeping their wants modest and entirely flexible.

10. Small Luxuries Are Still Luxuries

Even our grandparents’ generation knew it: little luxuries now and then are good for the soul. But pampering doesn’t have to cost a fortune. An afternoon off, a leisurely meal out, a mid-day nap all sound quaint by today’s standards. But with the right frame of mind, they can still feel indulgent and be entirely therapeutic.

The weird thing is, we are (or will soon be) the grandparents of tomorrow. The economic times we’ve recently weathered have already left their mark on how we spend, save, and invest.

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