It seems obvious that the more we learn about money, the more skilled we'll be at managing it.
But recent research suggests the relationship between financial literacy and personal financial health is more complicated than we’ve been led to believe.
According to a new study conducted by MagnifyMoney and psychologist Philip Zimbardo, financial health has less to do with the money lessons we’ve learned and more to do with how we apply that knowledge. Specifically, our tendency to over- or under-value past experiences can determine how well we handle money in the present.
As part of the study, over 3,000 participants from six different countries, including the U.S., took a quiz that evaluated their perspective on time. Subjects rated how closely they identified with statements like, "Happy memories of good times spring readily to my mind," and "You can't really plan for the future because things change so much." They were also tested on their financial health, as well as their perception of their financial literacy.
Surprisingly, the results suggest that a high degree of financial literacy is not a strong predictor of financial health. A better indicator of good money-management skills? The person’s approach to time: Those who are more past-oriented tend to be the most financially healthy, compared to those focused on the present or future.
The researchers say that’s because people who use their memories to guide their current decisions are generally more conservative and less risky. For example, a past-oriented person who's lost money before will be less likely to take a financial risk in the future.
But while risk consciousness is typically a positive trait, there can be a tendency to go overboard: Being “obsessively tied to the positive memories of the past” can prevent us from believing in new investment strategies or taking any risk at all—which can hurt us in the long run.
On the other hand, people focused on the present tend not to think about how their behaviors will affect their financial future, so they’re more likely to do things like spend money they don’t have. Interestingly, the researchers also found that those focused on the future think they’re highly financially literate, when, in reality, they often end up making poor choices like purchasing unnecessarily expensive insurance.
Perhaps the most important takeaway is that, once we become more aware of our perspective on time, we can modify our behavior accordingly and ensure that we’re making the healthiest financial decisions possible.