The Right Mindset for Saving

March 14, 2013

Positive thinking is an important part of visualizing your financial future.

As much as we recognize the need to save for retirement, many small obstacles tend to get in the way of taking action. It turns out the decisions we make about financial matters, including putting off saving and investing for retirement, are deeply rooted in psychology, according to studies of investor behavior.

Here are five positive changes you can make to your psyche that could help you put yourself in the right frame of mind for saving:

1. There’s no time like the present. Many people procrastinate when it comes to making financial commitments. But whether you have 10, 30 or 40 years to save, the time will pass more quickly than you think. By seizing the moment and starting or adding to your savings account today, you have the benefit of time to potentially grow a larger nest egg, and to ride out rough market periods.

2. Delayed gratification can boost happiness. If you remember being a kid and saving your allowance money to buy a special toy, then you will understand intuitively that immediate gratification doesn’t always buy happiness. Saving for retirement is a marathon, not a sprint. It takes decades for your investments and your asset allocation to perform the way they are intended. The payoff for patience? A smart retirement plan, in which your retirement income needs are matched to your ability to pay for them.

3. Think small investments, make them regularly. Ever see articles with titles such as “Can You Afford to Retire?” or “What’s Your Retirement Number?” and think the only way for you to have enough money to retire is to invest big sums or play the lottery? Sometimes that perception can lead to inaction. Fact is, even setting aside $50 or $75 per week has the potential to grow to a sizeable sum, given enough time. The key is to start early, and to keep contributing regularly to your plan.

4. Stay in your comfort zone. Unquestionably, the financial crisis of 2008-09 took a major toll on American’s retirement savings, in some cases cutting the value of nest eggs in half. The market volatility that followed this period revealed just how nervous many investors became about owning stocks. Investors must carefully consider their ability to continue an investment program when markets decline by 20% or 30% over a relatively short-term period. If such risks are intolerable, you should probably favor more conservative investments. Remember, asset classes that have less risk are less likely to generate returns that are higher than riskier asset classes over the long term. Investors maybe rewarded with higher returns for assuming higher risks. Investing involves a high degree of risk. No strategy assures success or guarantees against loss.

5. Set realistic expectations. In investing, there are very few if any guarantees. For example, while investing in ultra-conservative investments has the potential to provide a positive if modest rate of return, it does not protect you from rising prices at the gas pump or the grocery store. That’s why nearly all investors are best served by diversifying their portfolios with a mix of stocks, bonds and cash investments. It’s also important that, as your retirement date approaches, you think about dialing back your exposure to riskier investments, such as stocks. Although common stocks have historically been among the best-performing investments for individual investors, they do go through years and even decades of subpar returns.

*Diversification does not eliminate the risk of market loss. Investing involves risks, including loss of principal and fluctuating value.