Thinkonomics

Promoting financial literacy together

Today I’m teaming up with AP7, a Swedish state-related retirement fund on a project designed to promote financial literacy. That’s the ability to understand and apply a variety of skills related to financial decision making, including decisions related to consumption and savings.

The initiative is called Tänkonomi – Thinkonomics. It is, for me, another way of solving the last-mile problem.

Financial decisions are hard. And they’re getting harder. Individuals have to shoulder the burden of things like retirement savings to a much greater extent than they did a generation or two ago. The options available to us now are both more numerous and more complex. And in an economic downturn, when people’s financial situation is under pressure, many of us find it harder to make wise decisions. Research suggests hard times limit the bandwidth available for sophisticated cognitive processing.

Meanwhile, a recent survey concludes that our ability to make wise decisions is limited – and getting worse. One in four Swedes lack the most fundamental financial literacy, the authors write. 13% of the population don’t understand interest. 38% don’t understand inflation. And 44% don’t understand diversification.

We should not be surprised that one in three Swedes is worried about making ends meet, according to the survey. Many people simply don’t have the skills required to make the decisions that they must.

We should also not be surprised that many people end up in a bad place. Between 20 and 30 thousand Swedes apply for debt relief every year. As you’d expect, people with low levels of formal education are radically overrepresented among the over-indebted. That’s according to Davor Vuleta at the Swedish Enforcement Agency (Kronofogden).

The good news is that financial literacy can be taught, and that teaching makes a difference. Decades of careful research shows that simple interventions work. And they work not just in the sense that people become better at taking tests, but in the sense that they make better choices, build wealth, and avoid problems.

My goal with the collaboration has been to underscore that it’s possible to live happier, more sustainable lives by making more mindful, reflective decisions – and that this is true even when means are limited.

When it comes to consumption and happiness, I offer five concrete suggestions:

1. Allow yourself occasional rewards to compensate for your sacrifices. By bundling regular, responsible choices with occasional indulgences, responsible behavior becomes more bearable.

2. Buy happiness by anticipating good things. A big part of the satisfaction we derive from our purchases is the joy of having something to look forward to. So it is often smart to save first and buy later, rather than charging it to a card and paying it off afterwards.

3. Spend on others. We often better at promoting other people’s happiness than our own. And doing good for others have the side effect of cheering ourselves up too. Buying coffee or making dinner for a loved one can simultaneously make them happy, make you happy, and strengthen your relationship.

4. Allow yourself smaller but more frequent rewards. Even small things (such as a colorful vintage scarf) can spark a great deal of joy. Diminishing marginal utility means that bigger indulgences risk giving you less bang for the buck – probably less than you think.

5. Buy peace of mind by saving, if you can. Recurring worries about making ends meet can really eat into your happiness. Not everyone is in a position to save, but if you are, consider it! Personal savings are simultaneously a safety net today and a promise of fun tomorrow.

Want to know more about the collaboration? Have a look here (in Swedish). Want to read more about financial decision making and financial literacy? Pick up a copy of my book, How Economics Can Save The World, which covers these themes in greater detail.