As You Age, You Get Better and Worse with Money
Here’s how you can get smarter with money quicker and stay smart for longer
Psychologists have found there are two primary forms of intelligence that impact our ability to make financial decisions throughout our lives; fluid and crystallized intelligence
In this second entry in the Dollars & Decades series, I’ll explain these two forms of intelligence, how they change as you get older, how they help you make financial decisions, and provide research-backed tips on how to increase each to make better financial decisions.
What are fluid and crystallized intelligence?
Fluid intelligence: Your ability to process new information in an unfamiliar situation to make the best decision possible.
Crystalized intelligence: Knowledge you have accumulated over time to help you solve problems you have already encountered.
How do fluid and crystalized intelligence relate to financial decision-making?
The TLDR Version:
In entry one of the Dollars & Decades series, I discussed why the young and old struggle with financial decisions because the form of intelligence they excel in doesn’t match the type of money decisions they need to make.
Young people have more fluid intelligence but lack the crystallized intelligence to deal with repetitive and relatively simple decisions like budgeting and saving. As we age, we lose fluid intelligence but gain crystallized intelligence — which is unfortunate because fluid intelligence is what’s needed for the complicated financial decisions older people make, like estate planning.
The detailed explanation:
Research has shown that our ability to think on our feet and solve new problems tends to improve as we reach our 20s but then starts to decrease once we reach middle age and continues to decrease the older we get. On the other hand, our crystallized abilities increase until middle age and then plateaus.
One of the most powerful ways to improve financial decision-making is through experience and forming good financial habits.
As you gain experience performing routine financial tasks like managing credit cards, you develop what researchers call decision-making scripts — which refers to how people can easily sort through information and make a good decision once they have enough experience with that decision. The more often you read your credit card statement; the easier it becomes for you to understand what you’re looking at and pull out the information that’s important.
Researchers have found that throughout our adult life, we continue to increase our financial knowledge in a number of different financial issues that require us to repeatedly make similar decisions leading to an increase in crystallized abilities.
When I was in my 20s, managing my finances felt overwhelming. Nobody taught me how to manage money, and suddenly, I had to manage massive student loans while keeping my spending under control on a very modest income. However, as I gained more experience managing my finances, I started developing decision-making scripts.
I began to recognize patterns in my spending habits and learned how to make better decisions through trial and error. Now, in my 30s, I find managing money much easier because I have put in the reps — simple financial tasks have become intuitive.
As we get older, our bodies don’t work as well as they did when we were young — that includes your brain. Our fluid intelligence begins to decline, which is partially offset by the increasing crystalized intelligence we gain through experience. It’s a lot like driving the same car for 20 years. The car itself is slowly deprecating and breaking down, but your skill as a driver is increasing as you gain more experience.
In a 2009 paper, researchers found evidence that most people make their best financial decisions at the age of 53. For many, this is the sweet spot where our fluid intelligence has not begun rapidly declining, and crystalized knowledge has peaked.
Luckily, this also happens to be when many people reach their prime earning years and where optimal financial decisions can have an outsized impact in either “playing catch up” or putting themselves in a solid financial position before they reach retirement age.
How to increase fluid and crystallized intelligence to make better decisions with money
Increasing crystallized intelligence is straightforward; you learn to do by doing.
If you want to learn how to stay within your budget, start tracking your spending. Then, continue tracking your spending for a long time. Eventually, it becomes second nature to know when you’re overspending.
Soak up as much financial knowledge as possible (Reading this publication is a good start) — a sustained investment in financial literacy will compound your crystallized knowledge over time.
Increasing and maintaining your fluid intelligence is trickier, but it helps to remember that your brain is part of your body. Researchers in a 2016 paper found we can help maintain fluid intelligence by living a healthy lifestyle and working our brain like any other muscle in our body.
Here are some general best practices to maintain your fluid intelligence for as long as possible.
- Prioritize sleep
- Eat a healthy diet and hydrate
- Cutting out cigarettes and alcohol
- Focus on your stress and mental health
There are also exercises that can help our minds stay sharp for longer.
- Practicing mindfulness
- Socializing, meeting new people, and trying new experiences
- Playing puzzles, crosswords, and other games that require strategic thinking
- Learning new languages
If you want to maintain your fluid intelligence, don’t let your mind stagnate — always challenge yourself.
A version of this story was originally published on the Making of a Millionaire Substack, the home of my writing. As a thanks for reading my work, existing readers can get 75% off their first year’s subscription here.
This article is for informational purposes only. It should not be considered Financial or Legal Advice. Not all information will be accurate. Consult a financial professional before making any significant financial decisions.
