Bedtime in the Ward household can be a trick or a treat, depending on how the kids feel that night. What always kills me is the look I get when I remind them that they have to brush their teeth before they go to sleep. Do I really have to explain to them night after night why brushing their teeth is so important? I guess so because I do. Either it’s because my children suffer from short-term memory loss, or more likely it’s because they suffer from “behavioral inertia.”
Behavioral inertia is exactly what it sounds like. As humans, we have a tendency to keep doing what we’ve always done or in this case, not done. This idea of behavioral inertia spills over into financial behaviors as well.
Suffering from “financial inertia” can lead to undesirable circumstances. For example, if we are not in the habit of balancing our checkbook, we could easily overdraft our account. If we are in the habit of using a credit card to make purchases, we could easily rack up more debt than we can afford to pay off each month. If we are in the habit of only making the minimum payment on a credit card, we could end up paying twice as much for our purchase when you add up the interest.
In these instances, financial inertia works against you, but there are ways to make it work for you. Miranda Marquit has written a blog post on the subject of overcoming “financial inertia” for GoodFinancialCents.com. In it, she spells out five ways we can overcome financial inertia. To get more from her post, I wanted to expand on a few of her points. This week I’ll look at point #2 – “Automate.” Next week I’ll focus on point #3 – “Track Your Money.”
Saving money can be difficult, especially if you try to do it as an afterthought, but the consequences of not saving–or not saving enough–can be disheartening. According to the Employee Benefit Research Institute (EBRI), 60 percent of workers report total household savings and investments of less than $25,000 (not including home equity or pension benefits). This may explain why only 37 percent plan on retiring before age 65 or why only 14 percent are “very confident” they will have enough money to live comfortably in retirement. Our own research has revealed that nearly half (49%) of employees do not have an emergency fund to cover unexpected bills or a loss of income. With so much economic uncertainty looming, now is not the time to suffer from financial inertia. Take the first step and put your savings on autopilot. Here’s how:
1. Save for retirement using your 401(k)
Sure, the 401(k) gives you tax benefits, and if your company matches contributions, that’s even better, but perhaps the greatest benefit to the 401(k) is simply the fact that it comes directly out of your paycheck before you ever get a chance to spend the money. This is a perfect example of using financial inertia to your advantage.
2. Save for medical and childcare expenses using a flexible spending account (FSA)
Just like your 401(k), money comes directly from your paycheck. The best part is you don’t have to pay taxes on the money you contribute as long as it is used for qualified expenses. Just be sure not to over-contribute as funds not spent during the plan year are forfeited. To avoid this from happening, only consider medical and childcare expenses that are routine and happen consistently every month.
3. Save for medical expenses using your health savings account
If your employer offers a high-deductible health plan, and they allow you to make contributions via payroll deduction, do it! Payroll deduction is automatic, and like the FSA, contributions are tax-free when used for qualified expenses. Even better, unlike the FSA, unused funds accumulate over time so you can build up a nest egg for down the road.
4. Direct deposit into more than one bank account
Just because it’s not an employer-sponsored plan doesn’t mean you can’t simulate a payroll deduction into a separate account. Susan and I have been doing this for years. We take a portion of each paycheck and deposit it into various accounts, including an account for groceries and an account for annual expenditures like our summer family vacation. By keeping this money out of the regular checking account, we are able to better manage our cash flow and avoid “forgetting” to save for non-monthly expenses and emergencies.
5. Transfer money automatically into savings accounts
If your payroll does not allow you to directly deposit into more than one account, consider having your bank do it through interbank transfers. You can set these up as periodic transfers, or use programs like Bank of America’s Keep the Change(R) program, which automatically rounds up each debit card transaction to the nearest whole dollar and transfers the “change” from your checking account into a savings account.
However you decide to do it, once you get started it’s hard to stop–and that’s exactly how financial inertia can work in your favor. Next week, we’ll look at how to overcome financial inertia by tracking your money…