Robots have replaced many jobs that people used to do.
Luckily, they haven’t replaced all of them but there is something to be said for programming a robot to do a job. They just do what they are told. They don’t have to make decisions.
We can actually learn something from our plastic and steel computerized robot friends about wealth building.
Take the human component of decision making out of the equation to have more cash and more income in retirement.
Too many choices becomes too much trouble
Studies have shown that people actually shut down when they are faced with too many choices.
In a famous study by Columbia University professor Sheen Iyengar, researchers set up a jam tasting booth and switched from offering 24 jams to taste or six (6) jams to choose from. On average, customers only tasted two in either case and they received a $1 off coupon for the tasty jam. Though more customers were drawn in by the large assortment of jam, only 3 percent of the customers purchased some. From the small assortment, 30 percent of the customers purchased jam.
Buying jam is very different than investing money, of course, but other similar studies from chocolate to speed dating were conducted with similar results. It seems too many choices paralyze people. It’s the same with our money choices and I personally believe the reason employees are able to save so much in the 401(k) is because they only have to make one decision.
The decision they make is to set it up on payroll deduction.
Why auto deductions work
Each month their funds are automatically taken out of the account, so they don’t have to make a separate decision each month on their investments. If they did, many wouldn’t invest every month. Once the one decision is made, or programmed if you will, the rest is automated like our robot friend. It’s done by a computer and not a human.
In order to create wealth, a key is to have employees set up as many automated investments as possible. They need to take what they do with their 401(k) one step further and set up “auto-escalation” so their contribution goes up by 1 percent each year until they hit the maximum amount.
In addition,they can set up an automatic transfer from checking to savings each month to build an emergency fund. Their bank might not have auto-escalation on a savings account, but they could send themselves a recurring reminder in Outlook every six months to increase the payment by a fixed interval like $25 or $50. They could set up an automatic investment from their checking account to an investment account such as a mutual fund or index fund.
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If savings are increased by $50 a month – it means an additional $3,000 in five years. By $100? They would then have an additional $6,000. They might have had to dip into this for an emergency, but if so, that means they didn’t need to use a credit card for that emergency and pay 14 percent interest to someone else!
Three simple decisions
If someone set up an automatic investment of $100 a month to a mutual fund that earned 5 percent, they would have an additional $6,809 in five years time or $40,746 in 20 years time.
Imagine if someone increased their 401(k), too! They would have made only three simple decisions that would have increased their wealth significantly by giving them a stronger safety net with emergency fund and an investment account, plus, a 401(k) to provide additional income streams in retirement.
Instead of making 36 decisions in a year, one per month per account, they would simply have made three simple decision,s and now are much richer.
How nice is that?
This was originally published on the Financial Finesse blog for Workplace Financial Planning and Education.