by KEN GONYER
After years of investing in my employer’s 401(k) plan for retirement, I recently made a career change. Since the new job’s retirement benefits don’t start until I’ve been there for a full year, I thought it would be wise to open an IRA and continue my retirement savings plan, funding it on my own for that year.
Well, I’m sad to admit it’s been six months since I started the new job, and I haven’t begun saving yet. Not a dollar. I’d emailed a trusted financial advisor right away last fall, fully intending to meet and get things rolling. I was motivated! I didn’t want to lose momentum in what had been a pretty aggressive plan. And then I did the calculations.
Where I had been working before, I saved eight percent of my earnings and the employer kindly matched that, dollar for dollar. Therefore, to maintain the flow of money saved, I would simply need to deposit 16 percent of my gross pay into an IRA invested in mutual funds. Easy, right? It’s more than I had been saving before, but we could certainly deal with it for a year. Unfortunately, when it came time to get started, I froze psychologically. The amount of money I needed to save seemed like a huge chunk of my paycheck, especially after I accounted for money committed to taxes and tithing. I just couldn’t do it! My wife and I talked about just doing eight percent, since we’d managed that before. Even at that rate, I hit a psychological wall. And here I am today, standing in front of this mental “wall” and trying to find a way over.
It has occurred to me in the last decade or so with the 401(k), I’d never agonized over the amount I’d been saving. It was gone before I ever saw it—deducted from my paycheck along with taxes, insurance premiums and medical savings. With electronic deposit of my paycheck, I never held crispy green currency; it was electrons in, electrons out. Only my paystub knew the true story.
With electrictronic deposit of my paycheck, I never held crispy green currency, it was electrons in, electrons out.
Thinking about how “out of sight, out of mind” impacts behavior, I recall using this technique before, in a slightly different fashion, when we wanted to get out of debt. When we had balances on credit cards, store charge cards, auto loans, and a home equity loan, the payments ate up a substantial portion of our take-home pay. Our “snowball” method of debt-reduction began with paying off the smallest debt first. Once that was taken care of, we didn’t just spend the extra money, we applied the amount of that payment to the next smallest debt. Once that was paid, we took the amount we were paying monthly for those two debts and applied it to the third debt. Our payment amounts grew like a snowball rolling down a hill until we’d paid off the last consumer loan. The key was that the “extra” money didn’t get a chance to be absorbed into our discretionary spending. In a way, we used “out of sight, out of mind” to fool ourselves into continuing to live as if our cash flow wasn’t increasing. As a result, we got out of debt more quickly and with a lot less pain.
I’d love to go on autopilot with lots of other things I find hard to get done—things like changing the oil in our cars, replacing the filters in our furnace, adding salt to the water softener, and so on. The best way I’ve found to stay on top of these things is to enter them as a “recurring event” in the calendar on my phone. Even with that, I’m not as consistent as I would like to be. Other financial priorities, however, can be met with the “set it and forget it” method. Each paycheck can be direct-deposited and, at some financial institutions, split up among several accounts such as savings, an emergency fund, a car replacement fund, Christmas club and vacation club. Regular bills can be paid through automatic online payments. Retirement and investment accounts can even be set up to regularly and automatically rebalance the investment portfolio. We already use several of these, and they certainly make life simpler.
So now I know what I need to do. After I get set up for automatic deductions for retirement, the “out of sight, out of mind” savings discipline should be relatively painless. It’s a behavioral change that takes away the routine decision-making questions. I won’t have to ask myself if I should do it or want to do it—it will just happen. I look forward to a time when I can view my IRA balance with happy surprise and say “Wow —that’s a lot … and I didn’t feel a thing!”
Ken and Karen Gonyer live in Broadway, VA. Ken is the CEO of Choice Books, headquartered in Harrisonburg. Karen is a real estate agent with Kline May Realty in Harrisonburg. Email questions to firstname.lastname@example.org.