Every year here on the AgingOptions blog, we offer an article or two about making New Year’s resolutions, many of which concern personal finances. As part of that theme, here we suggest a slightly different take on the question of how to practice better saving and spending habits this year. In this article from the Wall Street Journal, which we first featured one year ago, reporter Anne Tergesen provides a novel idea. The way to make big changes, she says, is to start small.
People Feeling Overwhelmed Can’t Successfully Make “Big Changes”
“Here’s a suggestion for those planning to make big changes in the new year,” Tergesen writes: “Consider making them small instead.” She adds that, after a disorienting year like the one we’ve just been through, this advice is particularly apropos. “This approach is likely to be especially helpful in , after a year when many have been under financial strain.”
The problem, according to Stanford University behaviorist Dr. BJ Fogg, is emotional. People who are stressed or overwhelmed, he told the Wall Street Journal, “cannot make big changes and aren’t likely to even try.” Instead, as the article puts it, there’s a better way. “To boost the odds of success, he recommends focusing on small, even tiny, changes—such as doing two push-ups a day or saving 1 percent of pay.” Eventually, says Dr. Fogg, author of “Tiny Habits: The Small Changes that Change Everything,” those small habits become ingrained, creating a foundation for bigger habits.
Motivation is Tough to Sustain, Especially with Overly Ambitious Goals
“New Year’s is when many people feel motivated to make changes, including making saving for retirement a priority,” says the Wall Street Journal. “But motivation can dissipate quickly, as anyone who has joined a gym in January and stopped going in February knows.” Instead, Stanford’s Dr. Fogg recommends “finding ways to shrink your goals to make them easier to accomplish.”
While ambitious goals may seem admirable, the article advises, people often set themselves up for failure by choosing goals that are unrealistic, such as “achieving financial security.” That’s a worthwhile aim, but it’s not going to happen a single year. “The key is to attach such goals to specific actions, such as establishing an emergency fund or catching up on retirement savings,” says the Wall Street Journal, “and to start with a realistic step” like setting aside even 1 percent of your salary in a retirement account. If you start with something manageable, you’re far more likely to stick with it when an unexpected expense arises.
Stay Positive, and Don’t Beat Yourself Up Over Past Mistakes
Any kind of self-improvement can trigger a downside, the Wall Street Journal article suggests. “People have a tendency to focus on the negative. But resist the urge to dwell on how far behind you are or beat yourself up for past missteps, such as cashing out a 401(k) when leaving a job. Instead, focus on how the small steps you are taking now will add up to something substantial over time.”
The concept of compounding can help us see the power of small steps over time. “Someone with a $50,000 salary who saves 1 percent a year will have almost $19,000 in 20 years and more than $77,000 in 40 years, assuming a 6 percent annual return,” the article calculates.
In a similar way, what may seem like a tiny reduction in those investment management fees really adds up. “According to Vanguard Group,” the Journal reports, “$100,000 invested at 6 percent a year would grow to $429,000 after 25 years with no fees. With a 1 percent annual fee, the balance would grow to $339,000.” Suddenly, tiny changes take on real significance.
Start with Changes That Require Minimal Effort and Little Sacrifice
“When looking for ways to save for retirement,” one adviser suggested, you should probably avoid “cutting back on things you enjoy, big or small. If you abstain from vacations, restaurant meals or a daily Starbucks habit, you might feel deprived and lose the motivation to stick with it.” Instead, find savings in what the article terms “windfalls that require little effort.” Cancel unused subscriptions. Contact your cellphone and cable company and negotiate a better rate. When that tax refund or raise comes in, if you can’t save the whole amount, save what you can.
Eventually, the article advises, tackle bigger windfalls with more substantial returns, “such as refinancing a mortgage or negotiating a rent reduction or salary increase and regularly reviewing your spending to identify potential savings.” And when inevitable setbacks happen or plans get derailed, follow Dr. Fogg’s advice. “Think of it as an experiment,” he said. “Figure out why it didn’t work, make changes to your approach, and try again.”
Take Advantage of “Auto-Pilot” Savings, and Celebrate Every Victory
As the Wall Street Journal article points out, there’s at least one major difference between habits of personal health and habits of saving for retirement. “In contrast to eating healthier or exercising more, retirement savings can be put on autopilot, via payroll deductions to a 401(k) or automated transfers from a savings account to an individual retirement account or emergency fund.” This is the best way to save since you never see the money you’re setting aside.
But whatever the goal, you need to reward yourself. “When you’re done with a task, celebrate as soon as possible, if only by silently congratulating yourself,” the Wall Street Journal urges. Researchers say that, when we celebrate, our brains release “feel-good neurotransmitters” – and that rush of good feelings helps bake those habits into our behavior.
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(originally reported at www.wsj.com)