American Dream or Financial Fantasy

Survey shows Americans are fooling themselves about their financial future

February 22, 2001

Americans are living in a financial fantasy—reporting high levels of confidence in their financial future, while confessing that they have very little saved to date and no clear plan for fulfilling their own American Dream. In fact, according to a survey released today by the Northwestern Mutual Financial Network, Americans are suffering from a series of "money maladies" that are growing more acute because of their financial misbehaviors. The survey of more than 1,000 American adults, which was commissioned by Northwestern Mutual and conducted by Harris Interactive (Nasdaq: HPOL), points to a growing disconnect between people's retirement goals and the steps they are taking to achieve them.

"Americans are unrealistically optimistic about where their current financial planning habits are going to take them," explains Meridee Maynard, vice president at Northwestern Mutual. "While Americans realize the importance of planning and maintaining sound money management behaviors, there is a disconnect when it comes to behavior—thus the term money 'maladies.'" She adds: "People need to understand their own financial 'misbehaviors' in order to take the proper corrective action."

Why the disconnect?
Dr. Richard Thaler, the well-known behavioral economist at the University of Chicago, points to basic human nature as the cause of the problem, specifically the problems people have with procrastination and self-control. "Most people realize that they should be saving more, but somehow never get around to it. The press of current bills leaves people feeling that they can't afford to save right now, and they hope to get around to saving sometime soon. Unfortunately, for many that sometime soon never arrives."

For instance, when considering their overall financial preparedness, the overwhelming majority of Americans feel comfortable with where they are—more than three-quarters (79%) are at least somewhat comfortable with the amount of planning and preparation they have done for their futures.

A look at how Americans prioritize their monthly income, however, reveals a glaring contradiction. Fully one-fifth of respondents report than more than 75% of their monthly income is immediately consumed each month, with an additional 10% of the average household monthly income targeted for short-term goals such as new clothes, a TV or a trip. Yet, one-fourth (23%) of Americans do not save anything at all on a monthly basis for long-term goals such as retirement or a child's education.

"This is a dangerous budget cycle because it leaves most families with little or no safety net to cover emergencies, medical disabilities or major future expenses such as college tuition or retirement," says Maynard. "Northwestern Mutual is hoping to persuade consumers that with a few simple steps, they can begin to take control of their financial futures and have more freedom to choose the type of lifestyle we all dream about." As an example of just how painless saving can be, Maynard says that young singles should consider setting up a "Future Fund" direct deposit account that is considered "untouchable" and ultimately can serve as a springboard for long-term investing, along with a "Fun Fund" they can use to reward themselves for good financial behavior. "Adopting more healthy financial behaviors is similar to dieting—you need to reward yourself for being a good manager of your money. Depriving yourself of fun will only lead to financial misbehaving."

Professor Thaler suggests that people can save more by adopting a plan that he calls "Save More Tomorrow." In that plan, individuals are given the option of signing up now to increase their contributions to their savings plan in a few months, when they get their next raise. One company adopted this plan for its employees and found that the participants tripled their saving rates in just 16 months.

Lasting influences
Northwestern Mutual's survey revealed that while family was considered the greatest influence in shaping Americans' financial planning attitudes and behaviors, most people did not discuss money matters with their parents when they were growing up.

This lack of discourse is critical. Americans who do save a significant portion of their annual income are much more likely to have had family conversations about financial matters growing up. In fact, when comparing those who saved more than one-fifth of their gross 1999 salary with those who did not save at all, the survey reveals that the savers are at least twice as likely to have talked with their parents about money issues.

Professor Mark Schug, Director of the University of Wisconsin-Milwaukee Center for Economic Education, says the study is an important wake up call for parents.

"In addition to the ABCs, parents need to teach their kids about basic money management," says Schug. "Economic education has become an essential part of learning, and Northwestern Mutual's findings confirm the critical role of parents in modeling positive behaviors including budgeting, investing and long-term planning."

Given the importance of families in shaping and reinforcing financial habits, Maynard suggests that parents mimic the concept of a 401 [k] plan by matching their children's savings deposits. It could even be called their "401kids" plan.

"Since the survey found such a tremendous correlation between inheriting good money management skills from past generations and current planning, we want to help parents be creative in establishing good money habits at home," Maynard explains.

Consumers should also closely examine their own 401[k] plans. Maynard points to the growing role of the employer in providing financial tools such as 401[k]s, flexible benefits and cafeteria plans. "Working people should optimize their contributions to tax-deferred plans. And, when they change jobs, roll the money into a new plan rather than spend it."

There is no miracle cure for these money maladies, according to Maynard, but there are simple steps to take to improve financial health. "Our 'bottom line' is that it is never too soon to start," she says.

Harris Interactive (Nasdaq: HPOL), the global leader in online market research, uses Internet-based and traditional methodologies to provide its clients with information about the views, experiences, behaviors and attitudes of people worldwide. Known for its Harris Poll, Harris Interactive has 45 years of experience in providing its clients with market research and polling services including custom, multi-client and service bureau research, as well as customer relationship management services. Through its U.S. and Global Network offices, Harris Interactive conducts research around the world, in multiple, localized languages. Harris Interactive uses its proprietary technology to survey its database of more than 7 million online panelists. For more information about Harris Interactive, please visit http://www.harrisinteractive.com. EOE M/F/D/V.

You can learn more about the study by contacting a Northwestern Mutual Financial Network Representative.

Source: The Northwestern Mutual Life Insurance Company