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We worked with a client a few years ago who had a lucrative side job as an independent contractor. It was so lucrative, in fact, it paid more than her full-time job. It was a dream scenario: she was able to meet her lifestyle expenses with the income from her regular job, which meant that anything she earned from her side job could go toward her retirement. We advised her to set up a SEP retirement account and put the maximum amount allowed by law into it. A few months passed. Then a year. Then several years. Nothing happened. She didn’t save a penny in the SEP account. She knew she needed to save for retirement, but the inertia of her previous spending habits had full control of her actions. She missed a stellar opportunity—in fact, the perfect opportunity—to improve her financial circumstances in retirement.
Accomplishing your most important financial goals depends much more on doing versus knowing. By analogy, a doctor can tell you to stop smoking and start exercising. You know that you should follow these recommendations, but if you don’t actually follow through, that knowledge makes no difference. Similarly, everyone knows that they have to save and invest for the future. Yet, just knowing this doesn’t necessarily translate into actually saving.
Failing to act can have negative consequences. Think about a will. Everyone eventually dies, but most people die without a will. Coming to grips with your own mortality is one reason individuals don’t prepare for the inevitable. We often recommend clients have their existing wills updated or new wills prepared. Even after setting up the appointment with an estate lawyer, many clients don’t follow through. They know they need to have a will, but they can’t bring themselves to take action.
What prevents people from acting on their knowledge? What stops them from doing things they know they should do? Inertia!
Humans are habit-forming creatures. The ways we think, feel, or act gain stability over time. They become established habits or routines. For example, you might wake up around the same time every morning, you might always have cream with your morning coffee, you might drive to work using the same route, or shop at the same grocery store on the same day of the week.
These stable patterns of thinking, feeling, and acting can be very difficult to change. Doctors witness this phenomenon all the time. They’ll tell someone that they need to change their diet or start exercising, yet the patient continues to eat the same things and continues to avoid the gym. It works the same way with financial planning.
Consider the most common financial malady we see: not having enough money in retirement. The reason people don’t have enough money to retire is usually because they’re not saving enough along the way. Without exception, all of the investors who seek our help know that they have to save continuously for the future, but many of them don’t actually do it. The conscious activity of saving requires that they break free of the inertia of their established habits and routines. If you aren’t used to saving anything, mustering the energy needed to save can be difficult. If left unchecked, that inertia has the power to derail your retirement. It’s the silent retirement killer.
We help clients overcome inertia. We outline action steps for them to take, and nudge them to follow through. But if you’re trying to overcome inertia, the most important advice is to start small and to start now—don’t delay!
If you want to overcome the inertia of your established habits and routines, start with easy steps. For example, if you’ve not been saving any money from your paycheck, start saving 3 percent. After saving 3 percent becomes routine, increase the amount. Start saving 5 percent instead.
But no matter what amount you start saving, the most important thing is to start saving now. Don’t wait! Don’t continue to let inertia carry you along.
A financial planner can provide valuable perspective for making financial planning decisions. But financial planners can’t compel adults to do anything. They can provide advice, but that advice is valuable only if you act on it.