When I was a boy, I was crazy about saving. Entranced by the sight of a growing pot of shiny treasure, I collected coins from whomever I could. As my collection accumulated, I counted, stored and treasured the result of my efforts. Later, when I was 8 years old, something revolutionary happened: I got a bank account.
For many years that followed, I would amuse the cashiers at my local bank, jingling with bags of pennies as I arrived to deposit more treasure to my bank account.
“Can I have an updated balance please?” I’d ask, just about peering over the counter to make eye contact with the cashier. And so they’d scribble down my latest balance on a piece of paper and I’d head home to carefully write it down in a little book.
As I’ve grown up, the methods have become more sophisticated and the numbers have got a little bigger, but my principles haven’t changed much. I still track my money and it still makes me feel good to see my treasure growing.
But recently I’ve started to wonder why I was so crazy about saving all those years ago. I was fastidious with my pennies and fascinated by the idea of money. But why? What guides our attitudes to money during childhood? And why do some of those habits endure through to adulthood?
Social Learning Theory
When it comes to money, our childhoods can be more formative than one might first think. As we observe our parents and other role models, we’re predisposed to imitate and learn from them. Albert Bandura and Richard Walters famously developed a model that encapsulates this idea, known as ‘social learning theory’.
In short, the idea is that children adopt new behaviours by reproducing or imitating what they’ve seen as they’re growing up. This process of observation begins very early on in life for money. As we watch our parents and other people buy things, we begin to understand the transactional purpose of money. And as our parents spend their days somewhere else, we start to observe and understand how they earn money.
But clearly these typical observations aren’t enough on their own to steer us towards thrift. No, it’s the subtle details we observe that form our early basis for understanding how to manage money, for better or worse: what our parents buy, how they earn, how they save.
And the deliberate actions of our parents also make a difference. How would I have revolutionised my approach to saving money at 8 years old if my parents hadn’t opened a children’s savings account on my behalf? How would I have collected all those pennies without friendly family donations and occasional pocket money?
The steps our role models take can be hugely influential, not just through the process of observation and imitation, but also through actions that develop our understanding of the value of money. Pocket money is an excellent case in point here. For example, whether allowances are given unconditionally or have to be earned (at least partly) can make a difference in the learning process.
The parenting effect
Back in 2012, two behavioural finance researchers, Henrik Cronqvist and Stephan Siegel, used a detailed database of twins, the Swedish Twin Registry, to analyse the savings behaviour of identical and non-identical twins. With financial and other data from 14,930 twins, their goal was simple: to better understand the significance of nature and nurture in moulding our future savings behaviour.
First, they looked at how parenting affects future saving behaviour. Their data analysis showed that parenting explained about 30 percent of variation in savings rates for individuals around age 30. But as age increased, they found that the role of parenting in savings rate variation diminished significantly. In fact, by age 40, their data suggested parenting effects had zero influence whatsoever on savings behaviour. It seems at this point, we well and truly find our own financial way.
Interestingly, parenting was found to explain more of the variation in savings behaviour when there were no additional siblings in the family growing up. This supports the idea that parenting effects on savings are smaller when time for parenting and teaching is likely to be scarcer. So it seems parenting has a key role to play in our future savings behaviour, but that role has an expiry as we grow up and develop our own approach to money.
The genetics of saving behaviour
But parenting isn’t everything when it comes to our future savings behaviour. In fact, there may be another factor at play, determined before we are even born.
There is a good reason, of course, why they chose to look at a database of twins. Twins share 100 percent of the same genes if they are identical and 50 percent if they are non-identical. So examining differences in the patterns of saving behaviour between the two groups could provide a glimpse of a genetic role in our personal finances.
The results in this respect were remarkable. The identical twins were significantly more similar in their savings behaviour than the non-identical twins. Across their sample, they found that this genetics effect explained a whopping 33 percent of the variation in savings behaviour. And unlike the effects they observed in parenting, this effect did not disappear with age.
In other words, the research appears to suggest we are born with a genetic predisposition to a specific savings behaviour. Just as our genes play a role in our appearance and aspects of personality, the research suggests there is something in our complex genetic make-up that influences our future financial actions.
The You Effect
The twins study demonstrates two hugely important influencers on our future savings behaviour. First, it reaffirms the idea that parenting has a big influence on our savings approach, particularly early on in adulthood. And second, it suggests we all carry a genetically imprinted money mindset, for better or worse.
But both of these factors are out of our control. So what about the bit youinfluence?
The important point here is that the researchers explained less than half the variation through parenting and genetic factors. The reality is that our individual-specific experiences have the lion’s share of influence on our destiny. So while studies like this suggest some level of pre-determination, you are the one who is really in control.
Our choices, our changes and our destinies are in our own hands. We are not chained to what we’ve learnt and observed during childhood. We are the big influencers when it comes to our financial futures.