Sarah Asebedo’s Secret Ingredient For A Successful Retirement
Saving enough for retirement may seem like an impossible goal.
The standard advice—save at least 10% of your pay—makes sense on paper, but it’s really hard in practice. Perhaps you bounced around between jobs in your 20’s before finding a career. Maybe your job didn’t offer a 401(k) and you never got around to setting up your own investment retirement account (IRA). You might have stopped working to take care of a loved one. There are a million similar scenarios behind the sobering fact that half of Americans will struggle to pay for retirement.
While building enough savings for a secure retirement may seem like an insurmountable task, recent research has shown that success in meeting your retirement goals might lie in whether or not you believe you can meet them.
Researchers call this theory “financial self-efficacy,” and developing true money grit may be the key to retirement savings success. Forbes Advisor talked to Sarah Asebedo, assistant professor at Texas Tech University and a Certified Financial Planner (CFP), to better understand why money grit is so important.
The following interview has been edited for clarity and length.
What is financial self-efficacy? I like to call it money grit.
It’s the perception or belief that you are in control of your financial situation. You believe that your behavior with regard to your finances matters, and what you do will lead to productive future outcomes.
It’s not that those outcomes are guaranteed, but it’s your belief that you are in control and what you do matters. This creates a resilience to failure and stress, and the confidence to use the knowledge that you acquired.
So let’s say there are two people with the same net worth. Can one person have plenty of money grit and the other person lack it?
Yes, absolutely. I had married clients who shared the same balance sheet. She saw it as, “Wow we’ve got a lot. We can do all these things.” He saw it as, “Not enough. We got to sell the house and cut expenses. We’re not going to make it.” Same exact economic scenario, but two very different perspectives on it.
What are characteristics of a high financial self-efficacy?
People who tend to set ambitious goals have high financial self-efficacy. They’re in constant pursuit of their goals. They know that their behavior matters. They persist even when they fail. They might say, “That didn’t go okay, I’m going to pick myself up and keep on going.” That persistence that leads to success.
Can financial self-efficacy be taught?
Self-efficacy can be taught, and it can be cultivated. But it’s different for the different domains in your life.
So it’s not just financial?
No, there’s relationship self-efficacy, for instance. You could have high relationship self-efficacy but low financial self-efficacy. And your methods for boosting one area—like relationships—is different than boosting it for health or finances.
How does this relate to financial literacy? Does financial literacy matter?
Let’s take a step back and talk about what financial literacy is in the first place. There’s a misconception that financial literacy is just knowledge, but work by Sandra J. Huston shows there’s a knowledge dimension and an application dimension. Both knowledge and application make up financial literacy.
You need the ability to acquire knowledge, and then you require confidence in your ability to use it, to translate that knowledge into behavior.
But other stuff can get in the way, right?
Once you have knowledge and the ability to apply it, then you need to consider other external and internal influences—like your own personal biases.
If you’re overly optimistic, for instance, it doesn’t matter if you have the knowledge and the confidence to use it. You might not actually save because you’ll think, “Oh I’ve got time. Things will work themselves out, so I’m not going to save yet.”
It can also be social. Let’s say you’re in a relationship, and maybe you have financial knowledge and the confidence to use it, but your spouse disagrees with the goal you want to pursue. You’re probably not going to pursue that goal like you would have if you were single because you have a spouse that’s influencing your behavior.
Transfer that to health. You could implement a health goal even if your spouse wasn’t on board. But there are different influences, like if you have kids and they’re eating mac-and-cheese, and you snack on that. Things that are surrounding you, that are influencing your environment and then affect your decision.
That includes economic conditions, like having enough money to save in the first place. Also, self control: Can you regulate your emotions around money so you can resist impulse buys?
How does someone gauge their own financial self-efficacy?
The easiest way is to ask yourself, “What level of control do I feel over my financial situation?” Zero means I have no control, 10 being absolute control.
That’s a very simplified approach. Control is only one aspect of financial self-efficacy, though. Jean Lown has produced a multiple item scale that’s more robust.
But control is essential. Have some introspection into you and your money. Ask yourself: even though I can’t control the outcome, do I feel in control of my situation?
Even if you have high credit card debt and you’re not saving, you can still look at the scenario and say, “I feel like I know where I’m at, I feel like I can control it, and I feel like I can change it.” That would be someone with a high financial self-efficacy compared to someone who says, “Oh my gosh. I don’t know what to do, I’m completely buried and I don’t see a way out.”
What accounts for someone having lower financial self-efficacy?
Albert Bandura’s research on self-efficacy showed that it’s cultivated based on a few different things.
There are experiences. Have I had successful experiences in the past that help me see how I can be successful in the future? If you look at the past and see a bunch of failures and that brings you down, you may think you can’t do this. That’s something that informs a lower level of financial self-efficacy.
There are emotions. The more positive emotions you feel, the more that helps boost your sense of confidence and ability to use knowledge. If you’re feeling a high level of stress, fear and worry, they can undercut your ability to feel in control.
There’s your social situation. If you have verbal support that you can do this, you got this, that helps build self-efficacy.
Seeing other people succeed also helps. If you know someone or see someone overcome a high level of credit debt, you think, “They did it. Surely I can give it a try.”
The reason you want a higher level of financial grit is because it’s associated with better financial outcomes, right?
Right. My own work has shown that, and others have looked at that. Self-efficacy is fundamental to executing behavior, especially behavior that requires self-regulation or control.
One of your papers looked at the savings behavior in people right before their retirement and their financial grit or self-efficacy. What was the point of that paper and what did you learn?
The point was to look at savings behavior in an older population, nearing retirement. The population had a short time horizon to save, and typically made more money than they had before, so they had more able to save. But when you make more money, you’re also tempted to spend it.
When you’re in this position, with impending retirement and higher income, I wanted to see what are the psychological characteristics that relate to an increased change in net worth versus a lower change in net worth.
I did find that a higher financial self-efficacy level was linked to a greater change in net worth over time. Also linked were the positive and negative emotions. So those with higher positive emotions, had a higher financial self-efficacy and a greater change in net worth. Those with more negative emotions, had lower financial self-efficacy, and lower change in net worth.
I also connected personality to a change in net worth. So traits like conscientiousness and extraversion, they were associated with a greater change in net worth.
If you were the retirement czar for a day, what’s one thing you would change about people to help them get ready for retirement?
Well, if I could boost everyone’s financial self-efficacy with a shake of a wand, that would be one.
But, one of the hardest things to overcome is this tug-of-war between today and tomorrow. I’d encourage the idea that saving isn’t a destination; it’s a way of being. It’s a habit. It’s a perspective on life. I’m not going to use my money, I’m going to put some aside. Why? It’s just what I do. It’s how I function It’s this way of behaving that’s normal, that’s what I do.
Now, we need goals and a purpose for money, but I’d point out that saving is a way of approaching life, in and of itself.
It’s more a perspective and habit that used to be a bit more popular, and I think that would help a lot.
I can see someone reading this and thinking, “I don’t feel like I have control over my finances because there’s income inequality and all these forces making it harder to get by.” What do you say to those people?
That’s something that you try to fix through your vote.
But after that, it’s about not giving up. There may be some policy changes that if enacted would help you. But first, ask yourself, “What can I do? What decisions can I make where I’m at today to make me better than where I was yesterday.”
It may seem small, but start by saving a dollar. It helps develop the right habits and perspective. If your income rises in the future, you’ll have a mindset that will allow you to apply your habits and behavior to a situation where you have more money.
You can always look at your own psychology, habits and perspective, and work on those. That doesn’t fix income inequality, but it’s something you can do to improve yourself.