I have been a financial advisor for close to 25 years. If I had to cite the one problem that stops most people from being fully financially functional it would have to be procrastination. It’s very difficult to be a successful investor if you simply just can’t get started. As evidence for the seriousness of this problem I offer the astounding success of auto enrollment in 401(k) plans. Auto enrollment plans do not wait for employees to sign up to participate in the plan. When the employee becomes eligible they are simply enrolled without their consent and some percentage of their pay is deducted and placed in a default investment option (usually a money market or target date fund). It is then up to the employee to opt-out if they do not wish to participate. Employers report 20 to 40% increases in long-term participation rates when auto enrollment features are put in place. Keep in mind that, other than the auto enrollment feature, these plans were unchanged. Therefore, one can conclude that the only reason these employees were not participating before was that they just couldn’t get started.
Procrastination is such a universal human pastime because its roots lie deep in our evolutionary biology. During much of our history as a species, goodies had to be seized and consumed immediately because; a. it was problematic that you would find more goodies any time soon, and b. it was difficult or impossible to store goodies for future use. Humans adapted by heavily discounting future benefits in favor of current benefits. The expression “a bird in the hand is worth two in the bush” perfectly describes this problem of “intertemporal choice”, as psychologists put it. This is why we put off going to the gym, saving money, losing weight, quitting smoking, and reading the great classics in favor of watching TV, eating Twinkies, the comfort of tobacco, and reading mindless trash. All of these choices involve foregoing current benefits for future benefits. Let’s face it, for most of us, dealing with our finances effectively means just that, foregoing current consumption in return for future benefits. Procrastination, in addition, is a surprisingly complex behavior (no, it’s not simply laziness) other factors also have an impact on our decisions to not take action on a specific issue. Fear (of failure, of making bad decisions, of being “sold” something by aggressive sales people), and being overwhelmed by the sheer size of the problem (this factor has gotten far worse with the explosion of information available on the internet) both contribute significantly to financial procrastination.
There are very few aspects of our lives, however where procrastinating hurts us worse than our finances. Typically people wait until their late 50’s to seek help with retirement planning. This is far too late. I have been asked to “fix” 401(K) portfolios that had been ignored for over a decade. These included portfolios where vendors had been replaced and all the funds simply allowed to “map” over to what the new vendor said was a similar asset mix several times. In many cases these investors were leaving return on the table and at worst they exposed themselves needlessly to additional risk by not rebalancing to their original target asset allocation. Some never really had a target allocation.
How can we overcome our natural tendency to procrastinate?
1. Redo the mental math that causes us to discount future benefits in favor of current ones. One of the best ways I’ve found to do this is to picture what you want your financial life to look like. If you are like most of us, it is a far cry from your present situation. Draw this diagram on a piece of paper. Where you want to be versus where you are. Congratulations, you’ve just taken the first step in figuring out how to get from where you are to where you want to be financially.
2. Set realistic financial goals and prioritize them, then attack the ones that, by ignoring them, damage you the most. The first thing we do with new planning clients in our practice is to help them through this process. Most people cannot address all of their financial issues simultaneously, most of us have neither the money nor the time, but we can deal with the one or two we identify as the most critical.
3. Keep track of your spending! This doesn’t make me very popular with clients but most people have no idea where their money is going, just that it’s gone. A few years back I decided to take weight loss seriously. The best advice I came across was to track how many calories I was eating for a few weeks, not diet, just count the calories. I was shocked at how many calories I was mindlessly consuming. I was then able to set a daily calorie target. In case you didn’t recognize it, this is a form of budgeting. Try it for a few weeks with your spending.
4. Set aside a few hours each week to deal with financial matters. This is in addition to the time you spend paying bills. Use that time to read up on financial matters, especially in areas that you have identified as a priority.
5. Get a financial coach. Make an appointment with a fee-only financial advisor. Initial consultations with these professionals are usually free of charge. During this meeting the advisor will want to get to know both you and your financial situation. He or she will help you list and prioritize your financial goals and give you a general idea of how the advisor can help you achieve them and how much it will cost. The advisor should be willing to serve as your financial “coach” to help motivate you to stop procrastinating and get your financial house in order. Stick with fee only advisors; this avoids the fear we all have of being sold something.
Note: this post is almost two weeks late… I just couldn’t seem to get it started.