(State of financial education: Many money problems Americans face could have been avoided if financial literacy was taught earlier in school. That knowledge helps create a foundation for students to build strong money habits early and avoid many mistakes that lead to a lifelong of money struggles. This story is part of a series looking at the current financial education landscape in this country.)
Some people are born to spend or to save. It may actually just be in your genes.
With an interest in individual investor behavior, Stephan Siegel, a professor of finance and business economics at the University of Washington, set out to understand how people develop their financial habits.
He wondered: What makes one person a spendthrift and another a penny-pincher?
"Where do these things fundamentally come from?" Siegel asked.
He had a hunch that it has to be some outcome of evolution.
Indeed, in one of the biggest research endeavors into the causes of our financial behavior, Siegel studied some 30,000 identical and fraternal twins from Sweden, and ultimately found that the most powerful determiner was our genes. More than differences in parenting or socioeconomic status, our financial habits are shaped by our DNA.
"I never thought of connecting finance with biology," Siegel said, but added that it only made sense to do so. "We are just another species."
What does it mean, then, if a large share of our financial behavior is inherited and therefore out of our control? It reveals that as important as financial education can be, it should also be paired with tools and structures that help people overcome their tendencies to, say, overspend or delay saving, experts say.
Personal finance education has proven positive results, with its lessons causing people to accumulate more assets and take better control of their financial lives. But in addition to those important money lessons, people should also respond to poor financial habits like we do to poor vision, which is also largely genetic, Siegel said.
It can be helpful, he said, "to give people the equivalent of good glasses so that they can overcome whatever challenges they have."
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Tools at work
One tool that companies offer their employees to help them save is automatically enrolling them in workplace retirement plans.
The strategy is powerful, data shows.
More than 90% of new hires who are auto-enrolled in a workplace retirement plan participate in it, compared with just 28% of hires who must sign up on their own, according to research by Vanguard published in March.
Vanguard also found that 9 out of 10 employees younger than 25 were plan participants with automatic enrollment, while fewer than 2 in 10 were participants under voluntary enrollment.
"We know that inertia can be a powerful tool in helping individuals save for retirement – once employees are enrolled in their retirement plan, they tend to stay," said David Stinnett, principal and head of strategic retirement consulting at Vanguard.
"This is important because by automatically enrolling employees into their retirement plan, employers are giving their workers a better chance for a successful retirement," he said.
Although this tool is useful in getting people to prepare for their old age, it unfortunately will not reach a lot of people. That's because around half of private sector workers aren't covered by an employer-sponsored retirement plan.
Your own tools
Fortunately, there are many ways to get the benefit of automated savings on your own. Most banks and robo-advisors offer the option.
And it still works when people put these structures in place for themselves.
For example, with robo-advisor Betterment people can save for certain goals, including buying a house or retirement. And those who set up auto-deposits had a 51% chance of eventually reaching their desired savings amount, compared with a 28% chance among those who left it up to themselves.
Dan Egan, vice president of behavioral finance and investing at Betterment, said that's because the strategy reduces people's chances of impulsively spending money they had hoped to salt away.
"From a behavior standpoint, auto-deposits protect you from yourself," Egan said.