How to Put Money Away

Attending a “The millionaire mind intensive” session got me thinking about money. This lecture dives into the psychology of why some of us are built to thrive at cash while others are programmed to fail and are based mainly on T. Harv Eker’s excellent book, The Secrets of a wealthy mind. If you alter your mindset, says Eker, you can change your financial situation.

Many of you may already know that I have spent the better part of the last six years researching the mental side of retirement, looking for that one brilliant idea that will get people excited about putting money away for the future. There’s a good chance I found the answer in Eker’s book. I strongly advise picking up a copy if you haven’t already.

Statistics show that Canadians are in serious need of Eker’s wealth-building guidance. And his counsel is crucial just now. Take a look at the stats:

A third of Canadians don’t begin saving for retirement until they’re 40 or older, and of those, 65% think that less than $50,000 will be enough to support them in their golden years, as reported by a Desjardins Financial research from 2006.

According to Stats Can, one-third of working Canadians in their 40s and 50s 2003 reported feeling unprepared financially and doubting their ability to maintain their current standard of living in retirement.

This prompted me to wonder why so many of us are terrible at putting money down for the future.

I looked at the academic literature to better understand the human psychology of saving and the reasons for our poor financial planning. What follows is a summary of the information I found on frugal habits.

According to Matthew Rabin of Berkley University, planning for the future is difficult and time-consuming, so most people put it off. The costs of putting off a task of this magnitude are also quite small. The difficulty usually becomes apparent when one is getting close to retirement and realizes that investments take a long time to grow in value.

Financial planning is challenging since it requires making assumptions about the future, including one’s income, retirement needs, the age at which one will retire, the age at which one will die, the rate of inflation, and the pace of economic growth, as economist James Shulz says.

What a huge challenge! To add insult to injury, it’s sad.

Honestly, I’m not great at figuring out how much the economy will grow, how much inflation will rise, or how much money I’ll have saved by the time I retire.

But let’s pretend I can foresee such ambiguities. The time has come for me to decide where to put my savings. If I am terrible at guessing how the economy will develop in the future, then it is even more difficult for me to choose where to put my money.

Now that I’ve done some preliminary study, I know there are many different types of investments from which to choose: stocks, bonds, RRSPs, real estate, GICs, mutual funds, term deposits, life insurance, segregated funds, etc. Even better, I can divide my portfolio to include all these strategies and risk levels. I’m confused; please explain this, and recommend some mutual funds. And how about the tax implications of my various investment options?

There are so many possibilities that my palms start to sweat, and I freeze whenever I try to make a choice. I can’t decide since there are too many options.

Thankfully, Columbia’s Sheena S. Iyengar and Stanford’s Mark R. Lepper come to my aid. Studies show that people with too many choices are less likely to settle on one. Thus, I tell myself I am pleasant company.

Iyengar and Lepper set up jam sample booths at a grocery store with a small selection of 6 varieties and a more extensive selection of 24 jars to better understand the effects of individual choice. According to their data, only 30% of people who saw a stand selling six different kinds of jam made a purchase. In comparison, only 3% of people sampled the spot from the 24 jars purchased.

“Having ‘too much’ choice seems… to have hampered their later motivation to buy,” write Iyengar and Lepper.

Too many choices might make people hesitant to commit to anything. I guess at least I’m not alone in this. How are we supposed to make decisions when thousands of mutual funds are available if we can’t even make sense of 24 jars of jam?

Other than educating myself and locating a qualified financial counselor, I don’t know of any straightforward method to lessen the complexity of choosing the correct investment vehicles for my particular age and stage of life. I’ve been asking close friends and family for recommendations on a reliable and cost-effective financial counselor. I was warned that hidden charges might quickly add to a big chunk of my income if I’m not careful.

Finding a financial advisor, who helped me figure out where and how much to invest, was a significant step in achieving my goal of financial independence. This year I’ll turn 55 and finally be free.

Then I had an epiphany. Now I have an even more significant challenge: I must start saving regularly to invest and expand my money. I know that putting money away for retirement is a good idea in theory, but in practice, I can’t seem to bring myself to do it.

Until I picked up Secrets of a Millionaire Mind, that is.

Eker has discovered a solution to lessen the agony of saving. I’d go so far as to say that this article has inspired me to start actively putting money aside.

If you want to learn more about his straightforward approach to managing your finances, you should pick up a copy of the book. But for now, what Eker calls a PLAY ACCOUNT is a fantastic technique you can IMMEDIATELY implement. Here’s how it goes down:

When you save money for the future, you also save some for entertainment. No matter how much or how little, this account must be funded simultaneously as your retirement savings account.

Spend all your fun money on something just for you at the end of the month. It could be something as simple as a weekend away or as extravagant as a meal fit for a king or a bottle of wine you’d never usually buy for yourself. However, ALL of your play money must be used.

You won’t regret saving for the future as much if you can enjoy yourself and spend money here and now.

After implementing Eker’s money management method, I have seen my retirement savings rise, and my PLAY account balance expand.

Give it a shot, and then report on how it went.

Please email me at gill@directionsrc.com with any thoughts, ideas, or questions.

I hope we get a chance to chat soon.

Right Now,

Best wishes as you chart your course,

Gillian

Gillian Leithman is the head of the consulting firm Directions, Third Age Consultants Inc, whose mission is to help retirees plan for their mental health.

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