Speaking of Psychology - Why it’s important to talk about money, with Wendy De La Rosa, PhD

Episode Date: September 13, 2023

We’ve all heard the advice: Save for retirement, start saving early, don’t spend more than you earn. But rules like these are far easier said than followed, especially when you’re short on time, or money, or both. Wendy De La Rosa, PhD, of The Wharton School at the University of Pennsylvania, talks about why it’s so hard to take financial action, how financial stress affects us and our relationships, and why we need to get rid of ‘financial shame’ and talk more openly about money. For transcripts, links and more information, please visit the Speaking of Psychology Homepage. Learn more about your ad choices. Visit megaphone.fm/adchoices

We've all heard the advice. If you want to secure financial future, save for retirement, and start early, track your spending, don't spend more than you earn. But rules like these are far easier said than followed, especially if you're short on time, money, or both. Knowing this, some behavioral scientists are interested in learning more about how people make financial decisions and then using what they learn to help improve financial well-being, especially for people with low to moderate incomes. So why is it so hard to take the financial actions that we know we ought to be taking? What gets in the way? How do financial stress and anxiety affect us and our relationships? And how am I talking more openly about our finances help? What actions can you take now to set yourself on the best financial path? And what research-based actions could employers and institutions take to improve financial well-being for everyone? Welcome to Speaking of Psychology, the flagship podcast of the American Psychological Association that examines the links between psychological science and everyday life.

I'm Kim Mills. My guest today is Dr. Wendy DeLerosa, an assistant professor at the Wharton School at the University of Pennsylvania. She focuses on using behavioral science to improve consumers' financial well-being. Her award-winning research has been published in many scientific journals and featured in the New York Times. The Wall Street Journal, CNN, and NPR, among other places. Dr. De La Rosa is also the co-creator and host of Ted's Your Money and Your Mind series, the co-founder of the Common Sense Lab, and a Forbes 30 under 30 financial honoree. Before joining Wharton, she helped start Google's first behavioral economics unit,

and she began her career as a private equity investor at Goldman Sachs. Dr. DeLarosa, thank you for joining me. Thank you for having me. It's a pleasure to be here. So I just mentioned that we all know these seemingly simple financial rules, but that knowing them doesn't mean that it's easy to put them into practice. Why is that? What gets in the way of people making the best financial steps for themselves? Oh, Kim, that's a million-dollar question. I think we kind of inherently know that answer because life is hard, because this is hard. one of the things that I tend to tell people is that we infantilize financial behaviors.

You know, none of us think about saving the world from climate change by saying, let's get everybody in a room and teach them how to recycle. And that's how we're going to save the world. But for financial behaviors, for whatever reason, because especially in Western societies, we think about financial success. as a purely individualistic pursuit, we think, hey, let's get people in a room, teach them how to budget, and that will surely fix any financial anxieties. And so what we know from existing research is that that's just not the most effective tool. Because fundamentally, we all know what we need to do. The equation is not that hard. We all have subscriptions that we know we should cancel. we'll know that we should increase our retirement savings, right?

The hard part is that right now is never the right time because right now I have to answer my work email because right now I have to go pick up my kids because right now I just don't have the time and also because I feel a level of shame around not being where I want to be. That's interesting that you talk about shame because a lot of financial advice columns and books have titles like top 10 financial mistakes to avoid. And I know you've said you don't like to frame people's financial behaviors as mistakes or bad decisions. Why do you feel that way? Well, I think it's because we have to be really honest about the world that we're in. Almost every company is getting smarter, more efficient, faster at getting you to part with your mind.

money. It's getting easier to spend not harder, right? The donut is getting tastier, not less tasty. And so we also have to recognize that our brains are not necessarily set up to think about the world and fundamentally understand compound interests. And so you have this world where you have a David versus not just one Goliath, but a David versus thousands of Goliath. And so what I want people to take away is that if you're struggling with your financial situation, you are not the only one. And it's not because you have this like personal failing. It's because it's actually really hard to do. Costs are rising. Wages are barely keeping up. And managing this complex world of finances where, you know, the average person in New York City sees thousands of

ads and thousands of opportunities to spend money is just really difficult. And once we do this thing where we tend to internalize shame, that leads to more negative behavior because that leads us to ignore our problems, to not talk about our problems, to not want to find solutions to our financial well-being. And so I want to get rid of the shame that we feel about the fact that we're losing a battle against thousands of Goliaths. What about the role of financial education in helping to improve people's financial well-being? Are the programs that are taught in schools and workplaces helpful at all? Is there a way to do them better?

That's a great question. So I'll tell you from a study I conducted where I asked roughly about 1,000 households, what are some things that you could do in the next month to improve your financial security? over 94% of the households could list three or more things that they could do in the next month to improve their financial security. So fundamentally people know what they need to do. Like we talked about, it's just hard. And the research on the efficacy of financial education on financial behaviors is mixed at best, right? Why is that, well, you know, you can learn how to budget when you're in school, but ultimately your environment.

is such a bigger predictor about how you spend your money than whatever class you took, you know, X many years ago. That's not to say that financial education doesn't play a role, but we have to recognize that it takes more than just financial education. It's about changing your environment and setting yourself up for success. What about people's basic mindsets? For example, I know you've done research looking at earning versus, is saving, and you found that people seem to be predisposed to favor earning more money as

opposed to putting money away. Why do we think this way? Yeah. And so this is research by Isha Sharma where she has a paper aptly titled, A penny earned is not a penny save. And in her studies, one of the things that she focuses on is let's say you have two jobs. You can choose between them. One, you earn a little bit less money, but your expenses are a lot lower. You don't have to commute as far, so your transportation expenses are going to be lower. The other, you earn a little bit more, but your transportation expenses are going to be higher. So net net, they're the same. And what they found is that people are actively attracted to just earning more money,

which makes sense because on the expense side, we feel like a lot of the expenses, expenses are more on our control, even though sometimes they're not, right? But we just feel a greater level of control. And so we have to recognize that the income piece of it all matters so much more than the expense side, right? Another way of saying this is someone's not going to get out of a financial hole by just cutting out their avocado toast, right? Like fundamentally we have to focus on what people naturally focus on, which is increasing their earnings. And then we can talk about creating a system where you can protect yourself against those Goliaths, meaning that you automatically split your paycheck from your employer so that X percentage of your paycheck goes to a savings account.

That's an environmental change. That's not us pretending that I can just teach you how to budget and have infinite willpower to never spend, right? It's about creating this environmental change so that we stop ourselves from having all this temptation and we create an environment that's setting us up for success. Let's talk for a minute about money and relationships. Finances are often one of the biggest stress points in people's marriage or long-term relationships. How should couples think and talk about finances and their decision-making?

What are the questions that you should be asking your partner to make sure that you're on the same page financially? Oh, this is such an important point because about 40% of couples don't even talk about their finances before they get married. And we know that financial disagreements tends to be one of the leading causes for divorce. It's just so difficult. And I often get some people saying, well, you know what, if we just keep our finances separate, we don't have to talk about it, right? They earn their money, right? They spend their money how they want. I earn my money and I spend my money how I want. And I'm not here to tell people how to split their money, but I will say, well, you think that that doesn't impact you. It does because under, like, U.S. law, if you get married, your spouse's debt is your debt unless you have a pre-up, right? And so you fundamentally have to talk about and discuss your, your finances. One of the things that also happens is that there tends to be one partner that takes on the bulk of the financial management. And there tends to be another partner

that sort of relinquishes or abdicates the financial management responsibilities. And in a study by Adrian Ward and John Lynch, what they found is that this is actually really problematic. it because as couples go through their life, that partner that takes on all their financial management skills, they become more and more adept over time. But that partner that has relinquished their control, it's not that they stay the same. They become less and less adept at managing their finances over time. And why is this problematic? Well, God forbid you break up or you get divorce. Now that partner that has relinquished all of that responsibility is in a worse financial situation because they have less financial management skills than they had when they started the

relationship. And a lot of the time, sadly, that ends up being in heteronormative couples, that ends up being the women. And of course, we've all heard the stories about the couple gets divorced and the woman discovers that her ex has drained the bank accounts, that there's no money left because she paid no attention, right? She left it all up to him. So I can see how that's a big problem in a lot of relationships. But, you know, the other thing is that we've learned that talking about money is impolite, right? And you're a big proponent of talking openly and honestly about money, not just with your partners, but with your friends and family. So why is it important to have those conversations? What should we be talking about that we're not?

Well, it's so important because we know from research that you can get so many better. benefits from talking about your finances with other people. For example, when we think about our relationship with our friends, we're much more likely to know our friends' dating history and all the baggage that comes with that than about their retirement accounts or whether or not they are in debt. And when we think about our relationships with our friends and what we know about their financial situation, we tend to know every time they spend and or get into debt. We know when they buy a new car or they buy a new watch. We know effectively when they go on a large or lavish trip.

But we don't really know whether or not they're saving for retirement. For whatever reason, that becomes taboo. And if we're friends, if we're genuinely friends, I care about your well-being and you care about my well-being. Why not talk about one of the most important parts and predictors of our general well-being, which is our financial security? I might learn something from you, you might learn something from me. And this is not hypothetical.

Our friends can also hold us accountable. One of the lovely studies that I love shows that when friends come together and share their savings goals out loud and hold each other accountable week after week, people end up saving more. So our friends are here to just help us in all sorts of domains, including our financial domain. The other piece I would say is you don't know what you don't know, especially if you don't talk about money. How will you ever know if you're underpaid if you don't ever ask other people what they make? Now, that's something, though, that tends to be highly discouraged in workplaces, people sharing with each other who makes how much money. I mean, how do we overcome that when your employer is telling you, don't talk about this. Don't tell the person in the next cubicle how much money you're making because maybe she's making 10,000.

in a year more than you are and doing the same job? What will you do when you find that out? Well, I think we have to think about who does that help? Silence and lack of transparency tends to help the employer because they can think about different ways in which to pay people differently, especially people who are doing the same job, right? And so once you recognize, like, who is the silence actually helping, then you can empower yourself and say, well, it's not helping me. Right? It's not helping me. And, you know, people think about wages as sort of a zero-sum game. A lot of the times, right, if I learn that I'm getting underpaid, I can now gather the information and come to my employer with a better sense of skills of saying, hey, this is the skill so that I bring

to the table and this is what I know that I'm worth. But let's say it's the other way around where I'm the person that's quote unquote overpaid compared to my colleague. It doesn't hurt me at all if my colleague increases their income. In fact, it now creates an opportunity for me to make more money right now that the baseline has reset. And so I want people to think about this as it's never really a zero. sum game and thinking about finances as a zero-sum game can sometimes lead to really problematic

competitive behaviors in a way that it doesn't have to be. I want to ask about your family background. Was money discussed openly when you were a kid? How did you get interested in studying how people relate to and manage their money? I ran away from this topic for so long. long. This is the last thing I thought I was going to be doing. So I'll give you a little bit of my background. I was born in the Dominican Republic. My family immigrated from the Dominican Republic to the Bronx, like many families in hopes of just a better financial life. And the lack of money, I like to joke and say, was the sixth person at the dinner table. It was constantly a topic of conversation. We were very much aware in my family that we did not have a lot of resources.

And so I took it upon myself at that time to think about, well, how can I try to earn as much as possible in a short time period as possible? And I sort of shied away from my history. I didn't want to tell people that I came from little memes. I pretended for a long time to be somebody that I wasn't. And it wasn't until I realized how much of a burden and weight and shame, how much negativity that was sort of feeding into my life, how exhausting it was to put on this mask every day, that I started to flourish as a person.

Because then I could be authentic. and say, hey, actually, here are all the concerns that I have. How have you dealt with this? And now all of a sudden, people could connect with me in a different way. They gave me tips. They gave me more opportunities because they knew the path that I was on. And it was, again, by talking about money and being open and frank about my history of, you know, financial insecurity, that it led people to become much more interested in me and give me more opportunity.

But I will tell you, because I spent so many years running away from that history, this is the last thing that I thought I would be doing. And now it's the only thing that I wish to be doing. I'm living my dream life. I'm doing things that I are helping people like my family. Speaking of which, I know you've been interested in how money issues affect kids, particularly the children of immigrants, when they have to step into that parental. role and help with family finances. What do you find when you look at that situation? So the first thing we have to recognize is that poverty is trauma. And a lot of times we desensitize children who grew up in poverty. We think that they're more resilient. We think that they're

more resistant to pain. This is research from Elder Shafir and others. And that's not the case. So we have to recognize that poverty is trauma. Now, if you add into that mix, sort of an immigrant family where the family is learning a new language, I'll all speak from my own experience. I had to become the primary translator in a way that I think, you know, my parent, my mom was doing the best she could. but it is hard for a child to be put in that position to translate bills, to be in the middle of negotiations between, you know, ex-bill collector and your parent. And it creates a unique mentality around money.

Now, what we don't know, and this is research that I'm hoping to continue, is people come from that situation and they can either have a spent, thrift mentality towards money, saying, you know what, I didn't have many growing up. So I'm going to, as soon as I get money, I'm going to use it and spend it as much as possible to get what I laughed. And other people come out of that situation and they become tightwads to say, you know, what, I didn't have money growing up. And so now anytime I receive resources, I'm going to hoard it and I have a very hard time spending it, even if I know that it's going to bring me joy. And what determines that king? We still don't know that. But we know that both of those outcomes, right,

are very likely coming from a lack of financial security. Well, let's shift the topic a little bit and talk about some practical advice, which is, I want to know what's the most important things that people can do to set themselves up for financial success, knowing that we're all living in a system that is stacked against us. The million-dollar question. right. So here's what I would say. Everybody's financial situation is different, but you know your financial situation better than anybody else could. So you could be a person that says, man, I really need to call up my credit card company and change my payment date so that it best aligns with how I get paid. Or you could be a person listening to this podcast and say to yourself, man, I really need to sit down and finally open up a college savings account from my kid. Like it's been on my to do for a long time. Again, people fundamentally know what they're lacking, whether that's opening up a savings account, going into your work portal that's so clunky and finally increasing your retirement contribution so that you get your employer match. Or maybe that's, you know what, I just need to sit down and figure out how I'm spending my money. All of that takes time.

And when things take time, you have to love yourself enough to prioritize. you. And what I tell people is the number one thing that you could do to improve your financial security right now is to put time on the calendar and take a financial health day. When you're sick, you take a sick day. When you need a mental break, you take a mental health day. If you need to get your financial house in order, take a financial health day. Take the time, put it on your calendar right now and say, these are the three things that I want to accomplish. You know what? I'm finally going to allocate the time to cut those subscriptions that I don't want, or I'm finally going to allocate the time to set up a will. All of these things that we know we need to do,

they take time and they require us to love ourselves enough to take a financial health day. I know one area that you've been studying is the frequency with which people, get paid, how that can affect how they spend and save. What have you found? So this is an area of research that I have with Steph Tully at USC. And to give everybody context, there's been this proliferation of early wage access apps, meaning that if you get paid every Friday, you don't have to wait until Friday to get paid. You can get paid on a Monday or Tuesday or Wednesday. And if you just think about it on a shallow basis, that seems like a great win for consumers because why should I give a zero percent interest loan to my employer?

Right? If I got paid on, if I work on Monday, I should be able to get paid on Monday. And there is a lot of, you know, that is a valid argument. However, I am always focused on how does the psychology of a consumer change and how do their behavior change as a function of the environment. And what we find is that the more frequently people get paid, the more they end up spending, especially on discretionary items like eating out. And why is that? It's because even though you and I both make $2,000 every two weeks, if you get paid more frequently, you feel like you're a little bit richer. Because you know money's

coming in tomorrow and so that you feel like you're subjectively wealthier. And that feeling of feeling a little bit richer makes you spend more. And that's problematic for a number of different reasons. But one of the things that we find is that higher payment frequency is also associated with higher bank fees and higher likelihood of overdrafting. And so I want people to really think about there is a critical need for access to liquidity, but just like anything that's worth studying in life, right, that we have to set boundaries on it. And so too much liquidity can be a bad thing. Not enough liquidity can be a bad thing. Like think to yourself, do I really need to access my pay early? Especially because a lot of these early wage access apps charge you fees. And when you work out the math,

it ends up being just as bad as a payday loan. And $2.99 doesn't seem that bad or $3.99 doesn't seem that bad. $3.99 every single day. Now, again, you're just eating away at your hard-earned money. What about the movement toward a cashless society? I mean, a lot of us never have any money in our pockets anymore because we don't need to. we live off of credit cards. How is that affecting how people spend and save today?

Well, the first thing I want to say is that, you know, we're just exacerbating inequality. There is a large swath of the population that's unbanked or underbanked, meaning that there's a large part of the population that is being forced into a cashless society. In order to get a bank account in the U.S., you need an address. Like fundamentally, right? And we don't think about that.

But with houselessness being on the rise, in order to get a bank account in the U.S., you need a social security number or a tax ID number. We have millions of people who are relying on the cash economy. And so when you have restaurants that say, no, we only accept debit cards. When you have restaurants or businesses that say, no, we only accept, you know, Apple Pay, it's a form of exacerbating inequality and creating this two-tier system between the halves and the half-nots.

Now, putting that, you know, having said that, what then happens to people when you're constantly having to not to not just take out your credit card anymore? Right, now it's a tap. Well, we distance ourselves from what researchers call the pain of pain, meaning it doesn't feel like you're really wasting any money if you just tap your phone. If when you're at Starbucks, right? And when we disassociate ourselves from the pain of pain because we don't viscerally see the money leaving, because it doesn't feel like we're spending anything, then it increases our likelihood of spending.

And that's something that we have to recognize. Again, going back to the beginning of our conversation, everything is getting, businesses are getting more sophisticated at getting us to spend our money faster. A minute ago, you talked about how we give our employers a 0% interest loan. And that got me thinking about years ago, I had a tax accountant who spent every New Year's day doing his own income taxes because he wanted to get his refund as soon as possible.

And yet we know most people, even those who are going to get refunds, wait until the last minute to do their taxes. You've advocated for moving tax day from April 15th to March 15th. Why do you think that would help? So what we see is a U-shaped pattern. So we see millions of people like her tax accountant who, when they expect a large tax refund, they're waiting for that W-2 to come as quickly as possible,

especially people who are counting on that money, right? What we find is that a lot of the people who get large refunds, especially through the earned income tax credit, they have mentally spent that money a couple times over. Right? I'm going to use this money to pay down debt. I'm also going to use this money to save. I'm also going to use this money to buy XYZ.

and then when you add it up, right, you're spent, you've allocated more than 100% of it. That's, you know, that's not a fault of anybody. That's just how our minds work. I then going to the other part of that U-shaped curve is that you have people who are motivated by deadlines. Like, if you think about your college days, you probably didn't work. The hardest you worked on a college essay was the day before it was due. Right. And I will put myself, I will raise my hand and say that that was me, right? I won't put you on the hot seat. It's the same. And so why drag out this intense period of, you know, constant mental burden of saying, I know I need to do this, I know I need to do this, I know I need to do this. Let's just get the money back to people's hands as quickly as possible. Right. And part of that is recognizing how people react. to deadlines and moving that up, right?

Let's, there's no reason, right? Why it's so cumbersome in the U.S. to file our taxes right now. We are living in a world where our agency, like I would argue our most important agency, the IRS, the agency that's responsible for just running our country, right? Paying, collecting, and ultimately, you know, dispersing our funds. is operating on software that is not even available in the open market. That's how old it is. Right.

That is crazy. And so we have to think about, again, changing the environment so that it's easier for everybody, not just the lower income people. It shouldn't be this difficult to file our taxes. We shouldn't have to wait months and months and months to get our refunds back. and we should recognize that we can use psychology, right? That sort of boost that we get from a pending deadline to our benefit. So I have to ask, are there any money topics or questions that you think are completely taboo?

Oh, man. Completely. I got you. I know. I'm sort of thinking, you know what, I'm going to. here's what I'll say. Every major life moment, whether it's getting divorce, getting married, going to see a mental health professional, money is always in the background. You have to pay for it somehow.

Every sort of kink that we would think is shameful in some way, whether that's a sexual fetish or an addiction. has money related to it in some way, right? If I'm addicted to a certain drug, I still have to pay for it. If I'm addicted to some sort of fetish, right, like people are paying for it in some sort of way. And so things that are just naturally shameful or that people feel shame, whether or not they should or not, right? I think those are things where you may not want to discuss that. But talking about money in general, I don't think that we should feel shame. We should get rid of shame as much as possible.

Well, on that note, I want to thank you, Dr. DeLerosa, for joining me today. This has been really interesting. I really appreciate your insights. Great. Thanks so much. You can read more about Dr. De La Rosa's work in the June issue of APA's magazine Monitor on Psychology. Go to our website at www.org and look at www.combeckof Psychology.org and look at for the related links on this episode's page. You can also find previous episodes of

Speaking of Psychology at the same address, speakingof psychology.org, or on Apple, Spotify, YouTube, or wherever you get your favorite podcasts. If you have comments or ideas for future podcasts, you can email us at speaking of psychology at APA.org. Speaking of psychology is produced by Lee Weinerman. Our sound editor is Chris Condyenne. Thank you for listening. For the American Psychological Association, I'm Kemp. Mills.