Advertisement
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.

Advertisement - Article continues below

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.

Advertisement
Advertisement - Article continues below
Advertisement - Article continues below

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.

Advertisement

Most Popular

2020 Stock Market Holidays and Bond Market Holidays
Markets

2020 Stock Market Holidays and Bond Market Holidays

Is the market open today? Take a look at which holidays the stock markets and bond markets take off in 2020.
July 1, 2020
What Are the Income Tax Brackets for 2020 vs. 2019?
tax brackets

What Are the Income Tax Brackets for 2020 vs. 2019?

The IRS unveiled the 2020 tax brackets, and it's never too early to start planning to minimize your future tax bill.
June 20, 2020
Searching for the Perfect Place to Retire
Empty Nesters

Searching for the Perfect Place to Retire

We home in on two places with less traffic and lower costs. 
July 2, 2020

Recommended

3 Municipal Bond Funds for Rich, Tax-Friendly Yields
Investing for Income

3 Municipal Bond Funds for Rich, Tax-Friendly Yields

Municipal bond funds allow you to enjoy the benefits of tax-exempt income. By investing CEFs, you can sweeten the pot even further.
July 2, 2020
Is the Stock Market Closed for the Fourth of July?
Markets

Is the Stock Market Closed for the Fourth of July?

Independence Day falls on a Saturday in 2020. As a result, the bond and stock markets are closed for a long holiday weekend. Here's a look at the mark…
July 2, 2020
2020 Stock Market Holidays and Bond Market Holidays
Markets

2020 Stock Market Holidays and Bond Market Holidays

Is the market open today? Take a look at which holidays the stock markets and bond markets take off in 2020.
July 1, 2020
13 Best Vanguard Funds for the Next Bull Market
mutual funds

13 Best Vanguard Funds for the Next Bull Market

Optimistic that the bounce since March is indeed the start of the next bull market? Here are the 13 best Vanguard funds to help you make the most of i…
June 25, 2020