It’s true, the calendar change from 2011 to 2012 is not that big of an event. Granted, we will celebrate as if it were, thinking that “out with the old” and “in with the new” can be impacted by some arbitrary date. It is often this short-term thinking, the hopefulness that this year will better than the last, that is at the heart of why we never seem to feel confident in our retirement plans, our investment decisions and how we manage our money. All of these are long-term efforts that exist in the absence of short-term events like a change in the date.
If you look back on 2011, you might find your personal finances in better shape than the years past. You may have saved more. You may have invested more. But chances are, this is not the case.
Cavett Robert once suggested: “Character is the ability to carry out a good resolution long after the excitement of the moment has passed.” And that moment for most of us, the excitement just past will begin showing up as the bills for Christmas. Many of us will make a promise to do better with little or no plan as to how we can improve the state of our personal finances.
Review why you made them
Timothy Pychyl, a professor of psychology at Carleton University in Canada, says that resolutions are a form of “cultural procrastination,” an effort to reinvent oneself. Among the most common resolutions – and only 50% of us engage in this exercise are the obvious: weight loss, exercise more, stop smoking. And quite a few of us make some promise to ourselves that involves better money management. Unfortunately, these promises create what is known as a false hope syndrome: a belief that you are a better person than the one looking back in the mirror.
A successful resolution requires a rewiring of the brain, which is no easy task. So no matter what the resolution, the only way to make it succeed is to focus on only one promise to do better. The goal should also be specific and done in small steps.
Don’t let the bills from Christmas derail the promise
Even before the Christmas holiday had passed, the news was reporting that we had spent more than in previous years and did so without a significant increase in pay. We either tapped into our savings or we tapped the plastic. Which means that the promise we make to improve our personal financial situation will face its first test once those bills arrive from Christmas.
The best way to keep your resolution is to take small steps. Make the hurdle too high, psychologist say, and you will not make the leap, become discouraged and do what you have done for years: break those promises to do better.
Every resolution you make ironically deals with money. Weight loss usually means fewer restaurants which means money saved. Stopping smoking will put more money in your pocket as well. Exercising for many people might end up saving them money on their health insurance.
But the easiest and most direct way of increasing your personal financial wealth is to increase your contributions to your retirement plan 401(k). Once again this an be done in baby steps. Because the most successful resolutions are done with small changes, celebrated as milestones, increasing this contribution can be as easy as setting a goal of increasing the contribution by 4% over the course of the year by doing so in one percent increases every four months. This of course assumes you are making a contribution now.
If you aren’t, then begin with 5%. This level of contribution, in almost every situation will not impact your take-home pay. So nothing really changes. But increasing it by 1% every four months will begin to take a little bit away from your spending. By the time next year rolls around, you will have adjusted to 9% – if you have kept your promise.
Enlist your family
The best resolutions involve some sort of help. Psychologists call these people accountability buddies. And there is no better system in place than your family. Go on a diet and your family usually goes on one too. Go on a financial diet and tell your kids that not only will there be less to spend, but that you are saving it for the future.
Because the goals are not too difficult, you can take the opportunity to teach your kids about why you are doing what you are doing and if you don’t really know, the education will be a shared experience.
2012 can be a game changer for you financially and if you do this, it will pay huge benefits later in life. Everyone has a little wiggle room in their budgets and few of us are willing to remove them. Increasing your contribution is the easiest, the least intrusive and actually gives you a better result.
On another note: we begin the second season of Financial Impact Factor Radio on 01.03.12. The conversation will continue to focus on the things you can do to improve your financial present and more importantly, your financial future. As many of you already know, we changed the format slightly towards the end of 2011, switching from a weekly one hour show to a daily format of a half hour. We also changed the time we broadcast to 6am in the west/9am in the east. Join us as we continue to build that long-term foundation with discussions that will help you understand this complicated world of money, retirement and investing.
Happy New Year!
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