What’s the perfect 'age of reason' to make financial decisions?

Factors like education, parental guidance and personal circumstances play a key role in driving money choices

People aged above 50 usually focus on maxing out savings ahead of retirement, reviewing healthcare considerations and putting in place a clear retirement plan. Photo: moodboard/Corbis

Is there a right age to make the best financial decisions? Financial wisdom does not always strictly correlate with age, experts believe.

Other factors such as education, personal experiences, parental guidance, personality and emotional maturity can also influence a person’s ability to make sound choices regarding money, they say.

“The best age for making financial decisions can vary greatly from person to person,” says Carol Glynn, founder of Conscious Finance Coaching.

“While age can offer some general insights, it is far from the only factor. Financial literacy, emotional maturity and personal circumstances also play pivotal roles in how well one navigates their financial life.”

Marilyn Pinto, founder of KFI Global, believes that making smart financial decisions has nothing to do with age.

“I’ve met young people who’ve made some terrible financial decisions and I’ve also met much older people who’ve done the same thing,” she says.

“Making smart financial decisions is knowledge-related and experience-related. It has no bearing to age.”

Financial literacy peaks at about the age of 54 and then declines, according to a study last year by Australia's ARC Centre of Excellence in Population Ageing Research.

It found that the perfect age for making financial decisions hovers between 53 and 54.

This is when workers tend to have gathered enough experience of spending and saving money but, crucially, have not started to lose key cognitive skills.

It also marks the age when adults have fewer interest payments and fees to pay off from credit cards and other loans.

Financial literacy is low among the young and declines after 64, the study’s results showed.

“Research often points to the age range of 30 to 45 as a period when people tend to make fewer financial mistakes,” says Ms Glynn.

“By this age, individuals have usually garnered some level of financial literacy, either through education or experience. They are often more established in their careers and have a clearer sense of their long-term financial goals.”

This age range is also a time when people are less likely to make impulsive decisions that they might regret later, compared with their younger years, she says.

Often when individuals approach their forties, they start focusing more on retirement and making intentional long-term financial plans, Ms Glynn adds.

The age of 53 is called the “age of reason”, or the age at which financial mistakes are minimised, according to a 2009 study in the Brookings Papers on Economic Activity.

Money decisions that correlate to age

There is no “best” age to make financial decisions because people have thousands of such decisions to make throughout their lives, says Adam Dalby, chartered financial planner at Abacus Financial Consultants.

Most life decisions are related to money in some way and the type of decision tends to vary according to age, he explains.

“For example, in early adulthood [late teens/early twenties], people are most commonly learning how to budget for the first time, learning the basics of personal finance, building an emergency fund, or first being introduced to things like company pensions [or employer end-of-service savings schemes like Dews in the UAE],” Mr Dalby says.

“In their mid to late twenties, people are often dealing with things like high-interest debt they may have accumulated [for example, credit cards], expanding their investment knowledge, thinking more about the future and starting to set specific goals which need to be planned for financially [travelling, buying their first home, or starting a family].

“In their thirties and forties, people tend to be settled in their careers and focused on increasing retirement and long-term savings, more focused on things like life and critical illness insurance [especially if they have dependents] and establishing an estate plan now that they have accumulated more wealth [for example, wills, powers of attorney].”

People aged above 50 usually focus on maxing out savings ahead of retirement (particularly given they are likely in their peak earning years with only a short window to go before retirement), reviewing healthcare considerations and entitlements to state benefits (for instance, state pension), and putting in place a clear retirement plan and decumulation strategy, Mr Dalby says.

It’s also usually a time to start thinking about reducing risk within investment portfolios, he adds.

Older adults may make fewer risky investments because they are focused on retirement, while younger adults might have the advantage of time to recover from any financial setbacks, Ms Glynn reckons.

“In my experience, individuals in the 20 to 35 age bracket are more likely to take out loans for short-term cash flow such as going on holiday,” she says.

“As we get older, there is a tendency to be more wary of debt as we become more aware of our approaching retirement age and often have family responsibilities that take priority.”

Value of early financial lessons

Building financial acumen should be encouraged and supported from a very young age, experts say.

Understanding how money works is crucial to avoiding the most common money mistakes; and you can get that understanding at any age, according to Ms Pinto.

Of course, the younger you are, the longer this knowledge has to bear fruit and guardrail you against making financial decisions you might regret, she says.

“Being financially educated when you’re younger also has the added benefit of allowing your savings and investments to compound, the impact of which is usually underestimated by most people,” she explains.

“Understanding this key concept of compound interest and how it works over time is crucial for young people because that’s the one resource they have in abundance.”

Research has shown that children begin to develop money habits from an early age.

Fifty-nine per cent of 2,046 adult Americans polled in a Charles Schwab Financial Literacy survey in 2020 cited the value of saving money as a key lesson to be taught to children.

This was followed by the need to teach basic money management skills (52 per cent), while 51 per cent of respondents said setting financial goals and working towards them was important.

“Being armed with sound financial knowledge by the time you’re in your late teens is probably ideal so that you can incorporate this knowledge into all the life decisions you make from then on – whether it’s the choice of college, career options, buying a car, getting a credit card, or starting a business,” Ms Pinto says.

“This then sets you up for success, helps you avoid the biggest financial pitfalls and gives you a solid foundation on which to build a financially secure future.”

The best age to make good financial decisions is in your twenties, according to Smeetha Ghosh, co-founder and chief executive of Cashee, a digital banking platform for teenagers in the Mena region.

“An example of a good financial decision could be starting to invest small sums in exchange-traded funds in your twenties and continuing that for life versus starting to invest in ETFs only in your fifties with bigger amounts. The value of the principal and interest, compounded over time, would yield significantly higher returns in the former case,” she says.

“Alas, most [people], on average, are not equipped with the right habits, financial know-how or life experiences in their twenties to execute sound financial decisions. This is where the role of parents, financial institutions and the educational system becomes crucial to help the youth inculcate good money habits, and hence good financial decisions, at a young age.”

Cost of financial mistakes in old age

The older you are, the less likely you are to make financial mistakes, Mr Dalby reckons.

This is mainly because when it comes to your relationship with money, you have had more opportunity to learn, to expand your knowledge, to become more financially literate, and instil discipline and good habits, he says.

However, the other side of this coin is that the older you get, the more devastating financial mistakes can be. You’re likely to be dealing with larger numbers and if mistakes are made, you have far less or no time to recover from them, he warns.

“To give a basic example, a 20 year old making a mistake and losing half their net worth is frustrating, but it won’t change their life. Maybe they lose $1,000 and chalk it up to a learning experience. Their lifestyle remains the same and they have all the time in the world to save, invest, and achieve their goals,” Mr Dalby says.

“However, if the same thing happens to a 55 year old, they lose hundreds of thousands, if not more than $1 million. On top of that, they do not have the time to recover properly, and their retirement will probably look very different to the picture they had in their minds.”

This view is echoed by Steve Cronin, founder of DeadSimpleSaving.com, who says it is OK to make poor financial decisions in your twenties and early thirties, as long as you learn from them.

Young adults need to experiment with saving and investing. Making a bad decision and losing money will often teach you far more than everything working out perfectly, he believes.

“Ideally, you should make mistakes with small amounts of money, as you don’t want to blow up your finances completely. It’s also better to learn from other people’s mistakes, so you don’t have to make them yourself,” Mr Cronin adds.