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Investor Psychology

To Save More, Focus on the Future

When imagining your financial life, clarity counts. A vague desire for peace of mind might become “I want to have at least $1 million.”

As regular readers of this column are aware, financial health has both economic and emotional dimensions, and the right balance of the two is crucial for success with your money. If you have any doubts, consider the blissful spendthrift on the road to financial ruin, says Sarah Newcomb, a behavioral economist at investment research firm Morningstar. Or the fearful penny-pincher, who may be wealthy but doesn’t feel secure. Newcomb is on a mission to help investors and the advisers who work with them master both economic stability and emotional well-being. Two aphorisms sum up her thinking on those two fronts: “Time is money” and “Power is happiness.”

Newcomb is the author of Loaded: Money, Psychology and How to Get Ahead Without Leaving Your Values Behind. I spoke with her recently at the annual Morningstar investor conference about her latest research, which shows that the further ahead you think and the clearer your picture of the future, the more you’ll save and the better you’ll manage your cash and credit.

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The impact that thinking ahead has on your savings might surprise you. Newcomb’s survey of several hundred U.S. residents found that living-in-the-moment savers who looked ahead less than a year typically had saved less than $20,000; people who had thought about their financial lives 20 years hence had saved 20 times more. Even looking ahead by just a few years increased savings fourfold. The time-horizon effect on personal finances was significant for people of different incomes, ages, education levels and genders, and it had a greater impact on saving than did those demographic factors. “Income matters,” says Newcomb. “But mindset matters more.”

The problem is that only 70% of those surveyed had thought 10 to 20 years ahead; just 8% had planned out their whole financial lives. Fortunately, there are ways to trick yourself into staring down your financial future. One is to picture yourself there. Discount broker Merrill Edge ran a successful ad campaign from 2012 to 2016 that encouraged saving by letting customers use a tool to see age-enhanced images of themselves. Mobile apps such as FaceApp and AgingBooth can help you connect with your older, future self. If you can stand seeing your future gray hair and wrinkles, it could help boost your account balance.

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Picture this. When imagining your financial life in the years ahead, clarity counts, says Newcomb. Instead of thinking, “I want to be financially secure,” be specific: “I want to live in an upscale retirement community near a golf course.” Not “I want to relax and enjoy myself,” but “I want to travel to see my children and grandchildren twice a year and treat my family to a Disney vacation at least once.” A vague desire for peace of mind might become “I want to have at least $1 million in assets, not including my home.”

Empowerment is the key to emotional well-being, at least when it comes to finances. People who believe they create their own financial destiny are happier with respect to their money than those who believe they have less power, according to Newcomb’s surveys. Again, that conclusion applies to people of both genders and of different ages, income and education levels. Amazingly, feeling in control has more than twice the impact on financial satisfaction that income does.

The lesson is that it’s important to stay involved in decisions about your finances, even if you work with an adviser. Non-earners need to recognize where they exert control in their family’s financial life: Do they shop for the household? Plan vacations? Make decisions about living costs or children’s schooling? Celebrating even small successes, such as opening a 401(k), can help build confidence. And surmounting near-term hurdles—say, curtailing restaurant meals to save for a trip—can work wonders in making you feel up to a lifetime of financial challenges.

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