Do you want to work until you’re 67 ½?
We didn’t think so.
You’d probably prefer to retire early and this is possible, even if you’re currently close to dead broke.
The answer is to create one simple habit – planning ahead.
What statistics tell us
People who said they thought about retirement “a lot,” or even “a little” – got to retirement age with twice the amount of money as people who didn’t plan for retirement. This is according to a study done in 2007 by the Pension Research Council.
Here’s another fascinating statistic. Parents who had a plan as to how they would pay for their kids’ college education ended up saving 76% more than parents who saved for their child’s’ education but didn’t have an actual plan. This is according to Sally Mae’s 2016 report How America Saves for College 2016.
And a study done in 2015 by the Center for Financial Services Innovation (CFSI) found that U.S. families who plan for big emergency expenses were 10 times as likely to be healthy financially as those that don’t.
Financial health defined
How did the CFSI define financial health? It defined it as having retirement savings and an emergency fund, high credit scores, a sustainable debt load, and property, health, and life, insurance.
People who do plan don’t focus just on long-term goals, either. They also plan and save for near-term expenses such as those that will come up in the next week, or the next six months. The fact is that you can’t dream about having a future free of debt if you don’t first have a plan for paying tomorrow’s bills.
If you can’t plan because you’re too worried
If you’re so broke you’re having a hard time just coping with today’s expenses, it’s hard to plan. In fact, according to two college professors – one from Harvard and the other from Princeton – our brains are wired in such a way that we tend to make matters worse when we don’t have enough of what we require.
If you’re having a tough time making ends meet, you will be so focused on solving today’s problems you’ll actually have less mental energy available for much else. This preoccupation actually makes it more likely that you’ll forget things and make mistakes because you’re so preoccupied with immediate problems. For example, some people take out high-interest loans that make it even tougher for them to pay their next month’s bills. In fact, believe it or not, if you’re preoccupied with financial problems, your IQ can drop by as many as 13 points, which is about equivalent to being up all night. In addition, this can have a negative effect on our ability to control our impulses and resist temptation.
Find some breathing room
The two professors mentioned above have also said we need “slack,” or time that can lessen our cognitive loads. If you’re time-strapped, this could mean keeping open a couple of 30-minute slots during the day to deal with unexpected events. If you are financially strapped, “slack” means creating at least a small emergency fund. Having just a couple of hundred dollars put away could cover an insurance deductible or a car repair. But what’s really important is that this can ease the mental strain that comes from living from payday to payday.
Develop the saving habit
Once you’ve developed some slack in your financial life, you need to develop the habit of saving. What financial advisors say is that we need to pay ourselves first. This means saving some money each month or each payday before paying your bills. Households that are financially healthy often use other plans for saving money, such as banking all of one spouse’s income while living on the other’s. Other people say their tax refunds, bonuses, or money gifts.
The important thing is that just doing it’s more important than how you do it. Once you develop the savings habit, you can then begin planning – even if it’s for just a few weeks ahead.
Many financial articles stress that it’s important to not overspend today so you can be saving for the future. However, what people most often need is to save and plan for the near-future. When you do this, you should find it much easier to manage the long term.