Newcomb: Yes, I think what’s powerful about this work is not that people who think further ahead are better savers. That’s almost intuitive. What’s powerful is that the effect of mental time horizon was almost twice as large as the effect of income.
When I broke the results out by income group as well as by people who think less than 10 years ahead versus people who think 10 years or more ahead, it was staggering how much more those who think further ahead had in retirement savings across every income group. Income matters, but your perspective on time matters more to making your paycheck work for you vs. just working for your paycheck. It was a very simple study but the findings were profound.
Ellis: Let’s stop for just a second, because some financial advisors are going to read this and say “OK, show me your metrics.” I want to give people some information on your background. You’re an interdisciplinary Ph.D., so you have a Ph.D. in psychology and economics. You use science to get at these conclusions.
Newcomb: Yep, for the skeptical, and the academics in the group, I can say it was a small study, only 500 people, but the relative effect size was enormous when compared to income. I have replicated this in several other small studies, so this is not a one-off. This isn’t cherry-picking findings, this is real trend. I’ve seen this effect in every study that I’ve done over the last 10 years where I’ve looked at these metrics. In this study I targeted both time horizon and this other factor, locus of financial control, which is what seems to affect emotional well-being. This is more than just correlations. I did standardized regression models with demographics, psychographics and behavioral variables. This is a small but mighty study, put it that way.
Related to the locus of control, my definition of financial health includes emotional well-being as well as economic stability. And when I say emotional well-being, I’m talking about something very specific. It’s the emotions that people are experiencing with respect to their money over the last six months on a scale of “almost never” to “almost always.” We’re not talking about diagnosing mental health factors. We’re talking about understanding the emotional experiences that people are having with their money. Are they usually stressed? Are they at peace?
What I found was that as income increased, the overall emotional experience skewed more positive. But when I broke that down between people who believe that they have financial power moving forward and create their own financial destiny versus people who believe that they have very little power in their lives, you see a really striking difference in every income class. From less than $25,000 a year to well into the six figures the people who believe they create their own financial destiny were experiencing mostly positive emotions. They were experiencing more joy, peace, satisfaction and pride than sadness, anxiety, fear or anger related to their money.