Did you know that according to research over the last couple of decades, our psychology causes most people to act irrationally when it comes to money.  And this is why most people are not saving for their retirement.

Your psychology is hurting your retirement in several ways.

Firstly, most people are present biased.  People tend to place more value and benefit on things today than on things in the future.  You have probably heard this described as “instant gratification”. People are more likely to spend their money on “exciting” purchases like a new phone, new clothes or a dinner out, rather than setting money aside for their future.  Another phrase for this is temporal discounting.

Secondly, recent research has found a cognitive bias toward earning over saving.  Putting this simply, it means we unconsciously spend more brain power on earning than on saving.  Because the brain thinks we must earn before we can save, our brains may blind us to opportunities to save.

Thirdly, most people suffer from inertia.  We get so caught up in our day to day lives that we fail to act on things that do not require immediate action, like our retirement.  Small hassles, like filing in paperwork, can stop us from consolidating superfunds.    And if the decision is a complex one requiring evaluating several options (like which superfund should I consolidate into), inertia and overwhelm generally means we rarely make a decision at all, and end up doing nothing.

Fourthly, people can suffer from loss aversion.   This refers to people’s tendency to prefer avoiding losses to acquiring equivalent gains: it’s better to not lose $5 than to find $5.  As a result people avoid taking actions like putting more money onto super.  They don’t want to “lose” a part of their pay packet.

So if your psychology is hurting your retirement, what do you do about it?

The good thing about your psychology hurting your retirement, is that you can take steps to change your psychology.

One way to do this is to start exercising the saving muscle of your brain.

You can do this by practicing paying attention to saving.

And this has nothing to do with the actual dollar amount you are saving.  Think about exercising your saving muscle like you would exercise for your first marathon.  In training for the marathon, you start out running short distances and slowly build up to the marathon distance.  Same with exercising your saving muscle. Start with small decisions made regularly to save money.

Not only will you get the monetary value of your savings compounding, but you will also make your saving muscle stronger, compounding the returns even more.

Another way is to outsmart your psychology by adopting adopt the SMarT Plan.

So what is the Smart Plan?

SMarT stands for Save More Tomorrow plan

It is fairly simple – you commit today to save a portion of your next pay increase and / or bonus.  That could be anywhere from 10 per cent to 100 per cent of your next pay increase and / or bonus.

If you have not already got the pay rise or the bonus, this helps you beat both loss aversion and present bias.    Why, because if you can meet all your expenses from your current income, why do you need to spend all of any future wage increase or bonus you get?

All you need to do is beat inertia.  So just write down now what percentage of your next pay increase and what percentage of your next bonus you want to save. By writing these numbers down you have made a promise to yourself that you will put save this amount of money.

Are you the sort of person who breaks promises?

So use the SMarT Plan to beat your psychology and start saving for your retirement.

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Do you and your family a favour and start taking steps so you can improve the health of Your Wealth and get off the treadmill of working till you drop.

Wayne Wanders

The Wealth Navigator

wayne@thewealthnavigator.com.au

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