One Cupcake Or Two?

While not the most glamorous topic, and providing no immediate discernible benefit, savings is the one thing we should all be doing from our very first paycheck. Savings is the one element we have total control of in our retirement accounts. Gains and losses can fluctuate as the as the markets are highly unpredictable. In regards to account balances, contributions are the one element we can control completely.

In your youth saving for retirement is last on your list of priorities. Buying your first car, taking that ski trip to Vale with your friends, your latest Smartphone purchase… Your tendency will always be to rationalize every bad financial decision possible to get what you want NOW. People will always “explain away” their reasons for not doing something they know they need to do. We all have friends that engage in bad behaviors who would be better served; quitting smoking, going back to school, losing weight… People wish to do only those things that give them immediate satisfaction and are pleasant. Savings offers neither of those immediate rewards.

I am reminded of a study on children’s behavior. And remember while we are on the subject, children’s behavior is nothing more than people’s behavior in its infancy. If we do something as children we are likely to engage in the same behavior as adults – we just might hide it better. It’s called habit. Strong habits form in childhood. I have often said you can look at an adult and their behavior and pretty much tell how they would have behaved in the sand box as a child.

Back to that study, a group of children were given one cupcake and were promised a second cupcake if they could wait ten minutes before eating the first cupcake. As most parents could tell you, 10 minutes later, no cupcakes were in sight. Only faces full of icing and tables full of crumbs. It is human nature to enjoy the reward. Instant gratification is hardwired into our DNA. Patience is a learned behavior and requires a long view of the situation at hand and does not come easily to us. Humans struggle to look past 5 to 10 years in the future and 10 minutes to a kid with a cupcake is 9 minutes longer than they are willing to wait to enjoy the reward. As an aside those children who understood the concept of delayed gratification and waited for that second cupcake fared better in life.

One of my absolute favorite ways to painlessly advise increasing your contributions to your retirement accounts is to allocate a portion of each raise directly to your retirement account. The beauty of this is that your take home pay never gets smaller and you will never notice missing what you never had in your check. I have personally used this technique to increase my contributions to their current level.

Studies have shown people only seriously begin to think about retirement in their mid 40s. This is understandable as youth considers themselves invincible (almost immortal.) Advancing years force people to consider their own mortality. The wise realize there may be some time after their participation in the work force stops and the need to plan for and fund that period of time. Your mid forties is “coming late to the party” and not the ideal time to start funding your retirement account (but better late than never!) To capitalize on the miracle of compounding interest, the key ingredient required is time. Failing to fund your retirement account early in life will forgo that magic and dilute the result. Starting early is essential.

An added benefit of saving early is that you learn to live within your means. This will greatly ease the transformation into retirement as you won’t have to make a radical adjustment when your weekly paycheck ends and you begin to live off your retirement funds. You will have planned for this eventuality and your habits will be ingrained that you’re living within your means. Properly done a well executed retirement plan can be an almost seamless transition from working to retirement.

The story of the Grasshopper and the Ant is one we are all familiar with. The moral of the story carries a powerful message, plan for the future. This story is present in all cultures in multiple forms. There is an old Proverb that states “Dig your well before you are thirsty.” Same premise – prepare for your future. Ignoring Sage wisdom carries a price. Start funding your retirement account today and live a better life tomorrow.