As mentioned in our latest blog post, the lack of financial literacy is a real problem in our country. Personal finance is not a required course in most schools and there is very little emphasis on practical financial education of any kind, even though it is something everyone must deal with. In my opinion, one of the greatest issues when it comes to financial literacy, and the retirement unpreparedness crisis in our country, is the lack of delayed gratification. Delayed gratification is “the act of resisting an impulse to take an immediately available reward in the hope of obtaining a more-valued reward in the future.” ¹
As credit has become readily available for consumers, so has countless advertisements and targeted marketing telling us that we “need” the latest styles, tech gadgets, and upgraded vehicles. This makes it harder than ever to continuously make the choice to save a dollar rather than spend one.
Some of us are inclined to be savers and naturally think about putting away a dollar before we think about spending one. For others, the naturally inclined spenders, it can be more difficult to prioritize saving over spending. Interestingly, I see more cash flow problems arise as people become more successful in their careers and their income goes up. When resources are scarce, there is less free cash flow so prioritizing spending is a necessity. However, as earnings go up, and free cash flow starts to increase, some folks have a hard time balancing how much to spend and how much to save. For the naturally inclined spenders, this can spell trouble.
If you are a natural spender, there is still hope. The key is living below your means, or spending less than what you are bringing in. If you are spending all your earnings, there is no room left for saving. The first step is determining how much extra cash flow you have and making room for more by cutting unnecessary expenses.
Next, you need to take a hard look at your financial situation and determine “your number,” which is the amount of money you need to save to retire and become financially independent. This number will vary based on your spending goals, other resources (such as social security and pensions), and many other factors. It is not a rule of thumb, it is based on you and your short– and long-term goals. From there, you can calculate how much you need to save each year to reach your target.
The best way to structure your retirement savings program is to automate your contributions; go ahead and bite the bullet and increase your savings rate to your target contribution. Just as we easily adapt to income increases by spending more, most folks will also quickly adapt to income decreases (less income because more money is going to savings). If you automate all your saving and investment contributions, then what is left over is yours to spend. For those of us who have 401(k)s or other employer sponsored retirement plans, this is very easy because the contributions come directly out of your paycheck before it hits your bank account. For spenders, that is the key. Getting those dollars out of your hands before you even have the chance to spend them.
People are living longer, and even though some people think they will be able to work forever, that might not be the case. Many are forced to retire due to health issues or layoffs. Make sure that you build your retirement strategy around a reasonable retirement age and leave some flexibility to adapt if things do not go according to plan.
At Pathfinder Wealth Consulting, our CERTIFIED FINANCIAL PLANNER ® Professionals, have specialized expertise that allows us to build a plan based on your individual needs and goals. Our tailored approach avoids the “rules of thumb” and gives you specific guidance to get you to where you need to be. If you would like to chat about the art of delayed gratification to secure your financial future, give us a call at (910) 793-0616 today.