My husband and I are simplifying our lives – we went from a 5 bedroom 3 bath house to a two bedroom condo. We gave our kids the extra furniture and other possessions we don’t need, and what they didn’t want went to charity. Instead of keeping china and crystal in a hutch (or in the closet) to sit and gather dust, except for twice a year for a holiday celebration, we are using it every day now. Otherwise, it will be passed on to our children who might not ever use it either! Life is slower and our pot roast and potatoes are displayed much more elegantly.
Whenever I tell anyone about this step we have taken, they heave a collective sigh as if they could imagine letting go of this complexity in their lives would relieve countless burdens. Our society is complex – our attention is often required on many directions. It certainly robs us of peace and tranquility, but also may actually have something to do with people not meeting their goals – specifically financial. Studies have shown that too many choices actually inhibits decision making.
Professor Sheena Iyengar at Colombia University studied how consumers make choices. Her team set up a display of jam in a California Gourmet Grocery store. Every few hours they switched from 24 different jams to six. Regardless of how many jams were displayed, people tried an average of only two jams. Even though customers flocked to the display when there were 24 jams there, only 3% purchased the jam. When only 6 were displayed, 30% of customers made a purchase of a jar of jam. According to Professor Iyengar, this “raised the hypothesis that the presence of choice might be appealing as a theory but in reality, people might find more and more choice to actually be debilitating.”
Professor Iyengar also studied 800,000 401(k) plan participants and found the highest participation rates from employees in their company 401(k) plans were in the plans with the fewest number of funds to choose from. These research studies apply directly to financial decisions you are making today because if you think about it, no one ever has ONE SINGLE financial goal. You not only have short-term and long-term goals, but intermediate goals as well, and they are all competing for your dollars to fund them. Someone wanting to get their financial act together is suddenly faced with the age old question, “do I save or pay off debt?” which is not unlike, “what came first, the chicken or the egg?” We often hear parents asking if they should pay for their children’s college or fund their retirement? Should I buy or rent? All of these goals have layers of complex decisions behind them. Just thinking about it can be overwhelming causing “analysis paralysis.”
I can see why someone after a long day’s work would rather pick up the TV remote and watch a football game – four quarters and ends with a declared winner. It’s simple. Your team made the playoffs or they didn’t. There is no grey area!
Being financially successful in a complex world isn’t too difficult if you know what is stacked up against you. You simply need to simplify – prioritize and automate.
Here are some ideas to consider:
Short term goals: SIMPLIFY! This is simply a matter of choosing the most important goals (no more than three) and focusing on them, tackling them one at a time. Consider starting with either the smallest amount or the most important – use the savings for goal calculator to determine how much you need to fund your goals.
As to what came first, “the chicken or the egg?” – the chicken comes first! In order to get out of debt, you have to have an emergency fund! With no emergency fund at all, when there is an unexpected expense, you have to pull out the credit card thus perpetuating the vicious cycle. To set up a debt reduction plan, consider paying the minimum on your debts for a few months until you have at least a small cushion in savings. From there, find extra money to pay down your debt but also set up an automatic transfer from checking to savings to keep at least a minimal amount going into savings!
Long term goals: for goals such as retirement and college funding that are “out of sight, out of mind,” the answer is to spend time on the front end setting up your plan, but then putting it on “auto-pilot” so that you only need to review your plan annually and check your statements quarterly. Automatic savings plans work for any kind of long term goal – 529 college savings plans allow an automatic withdrawal from a checking or a savings account that drafts monthly for deposits into your children’s college accounts, and if you are saving for another goal, you can do the same kind of automatic savings into a brokerage account or a mutual fund to grow your wealth.
Simplifying your life doesn’t mean slowing down. It means focusing on what is important to you – your priorities rather than everything in your path. By simplifying your finances you are possibly giving yourself the opportunity of actually meeting your goals – all of the ones that are important to you.