Dec 22, 2023
While we spend our whole lives making decisions about money, research has determined the specific age range when we make the smartest decisions about spending and saving.
Fifty-four is the sweet spot, according to research from Australia’s ARC Centre of Excellence in Population Ageing Research.
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That’s the age when you’ve developed enough knowledge and life experience to make smart decisions but haven’t started losing key cognitive skills through aging.
“Financial literacy typically peaks at age 54 and then declines,” the study notes.
An older study from 2009 aligns with these results. The study, published in the academic journal Brookings Papers on Economic Activity, found that adults tend to have fewer fees and interest payments from loans and credit cards around age 53.
The study’s authors call this the “age of reason,” when people are less likely to make financial mistakes when it comes to home-equity loans, lines of credit, mortgages and credit cards.
Financial mistakes could include “sub-optimal use of credit card balance transfer offers and excess interest rate and fee payments,” according to the Brookings study. In a cross-section of prime borrowers, “middle-aged adults made fewer financial mistakes than either younger or older adults … with the cost-minimizing performance occurring around age 53.”
A timeline of financial decision-making
In our 20s, we start thinking about future goals—like traveling the world, going to grad school or starting a family. But it’s also a time when people tend to have a lot of high-interest debt, including credit card debt, car loans and student loans. People between the ages of 18 and 29 have, on average, $12,871 average in debt, according to Debt.org, with the average student loan debt hovering at above $35,500.
It’s around this point some financial experts would recommend the 50-20-30 money management technique, which divides take-home pay into three categories: 50 percent for essentials such as rent, gas and groceries; 20 percent for savings and loan payments, including retirement savings; and 30 percent for non-essentials like clothes, restaurants and entertainment. It’s also a good time to start investing to take advantage of compound interest.
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In our 30s and 40s, we tend to settle into our careers; we might also reach other milestones, such as getting married, having kids and buying a home. There are added expenses, such as saving for a down payment or having a kid. But it’s also a good time to ramp up your 401(k).
By the time we reach our 50s, we’ve accumulated knowledge and life experience that hopefully allows us to learn from past financial mistakes. Retirement is within reach, so it’s also an opportunity to max out savings before reaching those golden years.
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The impacts of aging on money management
Younger people have more time to make up for any bad financial decisions they make — like racking up credit card debt to go on that European vacation when they couldn’t afford rent.
But those nearing their retirement years don’t have that luxury. They may be less willing to make risky investments, but that means their returns may be lower, too. And if they underestimate their longevity, they may not have enough set aside.
However, as the earlier studies suggest, perhaps a bigger concern is cognitive decline, which could impact their ability to make savvy financial decisions.
“Older adults who experience cognitive decline often have difficulties managing their money,” according to a working paper from the University of Pennsylvania’s Pension Research Council. “Financial mistakes made by the elderly include falling victim to financial fraud, failing to plan for future expenses and forgetting to pay amounts owed.”
When it comes to smart financial decision making, age isn’t the only factor. A person’s education, financial literacy and personal experiences all play a role — but developing smart habits early in life could make that sweet spot in your 50s even sweeter.
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Vawn Himmelsbach is a veteran journalist who has been covering tech, business, finance and travel for the past three decades. Her work has been featured in publications such as The Globe and Mail, Toronto Star, National Post, Metro News, Canadian Geographic, Zoomer, CAA Magazine, Travelweek, Explore Magazine, Flare and Consumer Reports, to name a few.
