One of the most important reasons to start saving for retirement as soon as possible is to take advantage of compound interest, which can multiply your investments exponentially over time.
The earlier, the better.
That’s accepted financial wisdom, and reason enough for most of us to crack open an IRA.
But there’s another, scary reason you might want to learn about getting your finances set up early in life: As you get older, you might not be as mentally able to handle your money.
A new study published by Management Science found a connection between your age and how well you manage your money — and it’s not looking good.
In fact, there is an inverse correlation between the two: As you get older, your financial literacy declines. By that logic, the longer you wait to learn about money, the more difficult it could get.
The researchers of the study, John Howe from the University of Missouri, Michael Fink from Texas Tech University, and Sandra Huston from Texas Tech University, asked more than 3,850 individuals 60 and older to participate in a 16-question Financial Literacy Assessment Test.
The mean score amongst all participants in this test was nine out of 16, or 58%.
“That strikes me as surprisingly low,” Howe told Business Insider. “What it suggests is that the overall degree of financial literacy in this country is probably lower than it should be.”
Not great news.
Along with declining financial literacy, as we age, Howe says there is an increased perception of crystallised intelligence — the wisdom that comes with experience, learning, and the feeling of knowing more. Knowing less, but feeling more confident in your knowledge? It’s a recipe for trouble.
In reality, intelligence may not be increasing as we age, but declining. “This disparity between what people think they can do and what they are capable of doing expands over time is a toxic combination,” Howe told Business Insider.
Though most people are aware of the decline, not many are able to see it when they self-reflect. Howe says the cognitive decline falls off by about 1% a year by your 60s or so, but because it varies for each individual, Howe suggests looking for signs as early as 50 years old.
“The danger of this is the increased chances of baby boomers and their elders making huge financial mistakes such as getting conned, making Ponzi-scheme investments, and falling for scams,” Howe told Business Insider.
In an ideal situation, you’ll be responsible for a significant amount of cash once you retire — but even if you’ve taken care of the saving part of things, you may still be prone to this “toxic combination” when it comes to money management. What can you do? Howe says it’s important to review your finances periodically. You may want to work with a financial professional, and he suggests reaching out to your doctor to see how you are doing cognitively, as well as family members to educate them on your finances, so if and when they do take over your money, they will be prepared.