What I Learned About College Savings from Being a Hoarder
July 30, 2012“Is it better to save part of my annual bonus each year for my son’s college or save monthly?” was the question I fielded from a caller to our financial helpline. The image of seven cameras in my downstairs closet popped into my mind. You might ask what a pile of cameras has to do with college funding. A lot actually – in fact the decision making process behind the pile of cameras may be a major determiner of success in saving and investing for college (or any other goal for that matter).
Because I lived for a number of years in a home with nine closets (including the two linen closets), when I bought something new I simply put the old items in one of the closets. That worked for almost nine years until my husband wanted to move after all our children grew up and moved out. We had to clean out the closets. Until then, we’d never been forced to make a decision on each item.
Decisions take time and energy, which are not things people have unlimited reserves of. It is much easier to shove a camera in a closet than to decide whether to keep it and use it, give it away, or recycle it. Each of those choices requires an entire decision making tree involving multiple decisions of what to do and how to do it so we simply get stuck in the process because there is so much effort involved in each decision.
In fact, there is an entire field of study on how we get stuck. It’s called the Trans-theoretical model of change. In the model, change is described as a series of stages we go through when making a change. Here they are:
1) Pre-contemplation – not ready
2) Contemplation – getting ready
3) Preparation – Ready
4) Action – have taken steps
5) Maintenance – sustaining
6) Termination – resisting temptation. Change is complete.
Stages of change in the Trans-Theoretical Model:
In my example of abundant closet space, I was never required to move out of the pre-contemplation (not ready) stage to contemplation (getting ready). Some people would say I was “fat, dumb and happy” but a problem wasn’t going away. The point I am trying to make is it’s human nature to avoid or delay making decisions until we have to. Understanding that about ourselves can help us in our savings and investing decisions. Consider this: making one decision to save, taking action on it and setting it up on maintenance has a much higher probability of success than making annual decisions that could be relegated to delay or avoidance.
When talking about a savings plan, such as one for college funding, once you have done the work involved to choose the type of education savings plan best suited for your needs and the specific investment, it makes sense to set it up on an automatic investment plan instead of separate annual payments that you need to take action on. This way you have made one in-depth calculated decision that is now on maintenance. If you choose to try to capture funds from an annual bonus, a new decision needs to be made not just once but every single year. If your child is five years old, thirteen decisions need to be made and thirteen actions need to be taken instead of one.
Think about how easy it would it be when you are anticipating your annual bonus to get thrown back into the pre-contemplation stage (aka I’m not ready to deal with this). Other things could go wrong. Annual bonuses certainly aren’t guaranteed; it’s possible there won’t be one. Other financial pressures may put college funding on the back burner and when a lump sum of money is available, it can easily get allocated elsewhere. On the other hand, a monthly automatic withdrawal from a checking account tends to be built into the budget so people look to spend the “net amount” after the savings has been taken out.
Here is an example of what the bottom line might look like when human nature takes over a college saving plan:
The lump sum drop off – if our caller started out well by investing $2400 of his annual bonus at an average annualized 6% return but stopped adding to it, he would have just a little over $5,000 when his son turns 18.
The steady automatic monthly payment – if our caller saved $200 a month and earned about 6% each year for thirteen years, he would have over $45,000 available for his son’s college at age 18.
The amount started out the same and the interest rate was the same but the difference between the two on the surface is simply the amount invested. When you look a bit deeper, the reason behind why it was less was the number of decision points needed along the way. I am not saying to never review your statements and stick exactly to the plan once you started. I am saying that when you are rolling a ball downhill, you can still correct its course but the difference in the effort to roll a ball uphill is monumental.
I no longer own seven cameras but having them all lined up on the floor in front of me taught me something about myself. I have many roles in my life – a professional financial educator, wife, mother, friend, daughter, neighbor, etc – which keep me extremely busy. I can see why I’d toss something in the closet instead of handling it in the moment – I am handling a lot of other important things in my life. We are all human and taking those human tendencies into account in behavior change is vital. In other words, find ways to make things easy on yourself in order to be successful.