It's the new year, and that means you're going to read story after story after story (and hey, those three are just from The Motley Fool!) about new year's resolutions you should think about making for your finances.
And that's a good thing -- given how woefully unprepared the average American is for retirement, we should be finding ways to save more. But there's an additional step that can make things even easier -- and surprisingly, it involves forgetting your New Year's resolution.
Three powerful words that can change how you save
I don't mean forgetting in the hyperbolic way -- "forget this idea, this one's even better!" -- I mean, literally, making a change in your savings rate and then forgetting about it. Hide it so you never see the money you're missing, and automate it so you never have to do anything -- those savings will just build up quietly in the background.
If you remember nothing else from this article, remember these three words: Status quo bias. We humans tend to default to doing nothing whenever possible. Status quo bias is the enemy of all new year's resolutions, because it represents the extra effort we have to take to change something in the short term -- whether it's slimming down by a few pounds or making a catch-up IRA contribution.
And while we're very good at quick-effort springs (take a look inside a gym on January 3rd), it's difficult for us to sustain effort-filled change over the longer term (check back inside that gym in February, and you'll see what I mean).
Using status quo bias to your advantage
The solution, then, is to flip around what requires effort. Instead of, for example, taking the effort to pull money out of each paycheck to try and get to the maximum IRA contribution for 2015, your better bet might be to set up an automated transfer from your paycheck so you achieve the max each year without that grinding effort. (The amount to save per paycheck depends on whether you're paid twice monthly or every two weeks -- if twice monthly, $229.17; if every two weeks, $211.54.)
This philosophy of automating your savings is what underpins the entire 401(k) system in the United States. After all, the savings are taken from your paycheck before you see the cash. And indeed, one of the key ways employers have successfully pushed workers to save in 401(k) programs is through automatic enrollment -- where workers have to make an effort to not participate. For example, a study by the Center for Retirement Research at Boston College found that auto-enrollment plans had 77% worker participation, as opposed to 67% participation for those without auto-enrollment.
There are other potential benefits
My wife and I spent our first three married years with no automatic savings deferrals from our paychecks outside of our 401(k)s. And while we successfully made maximum IRA contributions and grew our short-term savings, I noticed something that seemed to be getting in our way.
After we put some money away each month, we'd feel a sense of accomplishment. And as that sense of accomplishment grew, we both felt OK spending more money on other things. Since we'd been good on our proverbial financial diet, maybe we'd earned a little chocolate ice cream (with a shopping spree on the side). Removing the warm and fuzzy feelings of accomplishment from our monthly savings -- by making saving no longer an act, but rather something we're just passively observing -- has made us more careful with our money -- and saving more as a result. This is purely anecdotal, but at least for us, it's made a big difference.
Thinking long term
Regardless of whether my particular story resonates with you, consider the beauty of taking the work out of saving. One effort -- the act of setting up an automatic deferral of money from your paycheck, whether it's for an IRA or a savings account -- can make a big difference for your financial future. Maxing out your IRA means that in 30 years, you'll have over $600,000, assuming a 7% annual return (which is reasonable given historical stock market returns).
You'll then leave the effort you were spending on saving available for other pursuits. Like maybe taking advantage of the empty gym in February.
