The Best Years for Making Smart Financial Decisions
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Here's your money briefing for Tuesday, August 29th. I'm J.R. Whalen for The Wall Street Journal. We make financial decisions every day, whether we're swiping a credit card at the store, paying the rent, or deciding where to eat dinner. But recent studies have shown that there's a specific age when we're more likely to make the smartest financial decisions.
You know, your ability to understand what's going on in the markets with investments, real basic things like inflation, pricing, savings.
So what's the magic number? And what can people of any age do to make better money decisions? We'll go through the numbers with the WSJ's Claire Ansbury. That's after the break.
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Most adults are faced with making good financial choices almost every day, but it turns out there's a particular age when people tend to make their best financial decisions. Wall Street Journal reporter Claire Ansboury reviewed studies conducted by Australia's Arc Centre of Excellence in Population Aging Research, as well as the National University of Singapore, and she joins me now. So Claire, just to make sure we know what we're talking about, what do we mean when we say good financial decision-making?
Well, that's the million dollar question. But basically, what these two studies are looking at is one of them was looking at what they called financial literacy. And that's basically, you know, your ability to understand what's going on in the markets with investments, real basic things like inflation, pricing, savings. They looked at that and the ability to answer a questions about those areas correctly.
When does this episode introduce the topic of making smarter financial decisions?
An earlier study looked at when people make the fewest, meaning least costly, financial mistakes. And they looked at 10 different credit and borrowing areas like home equity lines of credit, mortgage rates, credit card fees, transfers, the age at which they had the fewest financial mistakes.
All right, Claire, enough suspense. At what age do people make the best financial decisions?
Well, the peak age for this is 53 and 54. The theory is that cognitive ability would deteriorate steadily, actually beginning at age 20. And that decline is offset by what they call experiential capital. which is the savvy that grows with experience. And those two lines sort of cross in middle age. And so the younger ages, the lack of experience offsets the analytical ability, but at older ages, the declining cognitive abilities offset experience. Also, it's really important to remember that these are averages, right? 53 and 54 is an average age because, you know, I get a lot of response about like, what about Warren Buffett? Or, you know, my dad is in his 80s and he's making great financial decisions.
It's important to remember that these are all really averages and that every person is going to be different. And, you know, that it also depends upon, you know, you have young people who are pretty savvy, right? and looking at the markets and making fine decisions. But it really depends on the person.
In your story, you write about fluid intelligence versus crystallized intelligence, and that younger people tend to have fluid intelligence, while older people tend to have crystallized intelligence. What does that mean?
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