Saturday, May 19, 2007

Sunday dollars+sense: Over 50, yet fabulous

If you are over 50, you've probably come to a disquieting realisation: You haven't achieved as much as you thought you would (although there is still some time to catch up).

By your age Peter Costello had become Australia's longest-serving Treasurer, Kevin Rudd had become the most-popular opposition leader since Whitlam, and Tony Blair had committed troops to Iraq.

Footballers do their best work much younger - in their 20s, mathematicians and poets peak at around age 30, chess players in their mid-30s and dictators in their early 40s.

What’s left for you?...

Getting the most out of your bank.

I mean it. The US National Bureau of Economic Research have just published a study entitled The Age of Reason: Financial Decisions over the Lifecycle.

Its finding? Americans keep getting ripped off by their banks until about the age of 53.

Examining 75,000 home loan contracts the researchers found that very young and very old borrowers paid an interest rate as much as one complete percent higher than did borrowers in their early 50s.

For car loans, the young and the old pay a rate one-quarter of a percent higher.

When switching credit cards the trick is to move across your balance to the new card with a low introductory rate and then not use it. That’s because the payments you make go first to paying off the (low interest) transferred balance, and only later to paying off any (high interest) new purchases. The best strategy is to spend with your old card. Americans in their 50s work this out quickly. Younger and older Americans take longer.

It s much the same with credit card late fees, over the limit fees and cash advance fees. Careful planning can avoid the lot. Young Americans and very old Americans don’t do it. Americans in their 50s do, and they are the least likely to pay fees.

It isn’t because Americans in their mid-50s have more time to work these things out. If that was the case, Americans in their 60's and 70's would do even better, and they do worse.

It has to be because the older we get the more wily we get about the way banks try to take our money. When we get too old we probably lose the computational ability to fight them.

So enjoy your 50’s. You are the most financially astute you’ll ever be.

Sumit Agarwal, John C. Driscoll, Xavier Gabaix, David Laibson. The Age of Reason: Financial Decisions Over the Lifecycle. MIT Department of Economics Working Paper No. 07-11, March 15, 2007