I recently came across a study that was, frankly, rather depressing for anyone over the age of about 20. According to the researchers behind the study, “The Age of Reason: Financial Decisions over the Life-Cycle with Implications for Regulation,” one’s financial decision making abilities peak at age 53. After that, your financial smarts take a dive.
In reaching this conclusion, the researchers studied 10 common financial transactions, including the use of balance transfers for credit cards, home equity loans and lines of credit, auto loans, credit card interest rates and late payment fees, along with a few others. They separated the transactions by the ages of the people involved.
Here’s what they found with credit card balance transfers. If you’ve ever moved your balance from one card to another, you know the usual drill: you get a low teaser rate for a couple of months, but only for the balance you transfer; any new purchases get socked with a higher rate. What’s more, your payments first are allocated to your transferred balance, which is at the lower rate.
So, if you’re really smart, you don’t make any purchases on the new card. Instead, you use it just to pay down your balance, and put any new charges on your old card. Some people recognize this from the get-go; others don’t figure it out until they’ve been dinged by high interest rate fees for a couple of months. And, some just never make the connection.
When sorting the study participants by age, the researchers found that those most likely to, as they say, “experience a Eureka moment,” and forego using the new card for new purchases were between the ages of about 29 and 50.
The researchers also found that 50-somethings paid the lowest interest rates on home equity loans and lines of credit. Rates started creeping up once borrowers hit about age 53. However, it’s worth noting that 20-somethings also paid higher rates. This result illustrates what the study authors note elsewhere: “Experience rises with age, but analytical abilities decline with it.”
The researchers offer a couple of reasons for what appears to be a decline in financial decision-making as you start racking up the decades. First, there’s what’s known as “analytic cognitive function.” This refers to your memory, reasoning, spatial visualization and the speed at which you process information. Data from other research has shown that this declines at about one percent a year after age 20. At 49, I’ve already lost…quite a bit. I suppose I could calculate the drop (maybe with some help from my 12-year old, who’s currently studying rates of decay) but why bother?
On top of that, the authors cheerily note that “the prevalence of dementia doubles with every five additional years of lifecycle age,” hitting about 30 percent of adults over 85. Even if you manage to escape that, another 30 percent of 80-somethings suffer from “cognitive impairment without dementia.” According to the Annals of Internal Medicine, this can affect attention, language, judgment, memory, reading, or writing, but doesn’t severely impair daily living. Well, that’s better than full-blown dementia, of course, but still nothing to look forward to.
If there is a bright spot in the research perhaps it’s this: the study notes that the evidence isn’t conclusive. For instance, older people overall tend to borrow less than younger people. So, it’s possible that the older borrowers in the study aren’t an accurate representation of the entire population of older adults.
In addition, I like to think – fully recognizing that I’m engaging in some rationalizing here – that I can delay or minimize the expected decline in brain activity by staying engaged and active (note to self: renew that subscription to The Economist). Also, I hope that if I make it to my 80s, the experience I’ve gained over a lifetime of making financial decisions – both the smarter ones, and a couple of stupid ones – will compensate for a few slowing brain synapses.
Thanks for reading!
Karen