Regardless of where one falls on the financial spectrum, expenses nearly always approach income. Well in most cases. One would hope that the lifestyle of those in the highest income levels (the outliers) doesn’t consume their entire paycheck. But for the vast majority, saving is a struggle.
Unless it’s a well developed habit that we’ve practiced for some time, it’s a struggle for the same reason that any change is a struggle. It doesn’t matter whether it’s a change in our eating habits, exercise program, or the time we get up in the morning. It is a natural resistance to change known as homeostasis.
Homeostasis doesn’t differentiate between good and bad, productive and non-productive, it just strives for the status quo. The good news is if you are already exercising, homeostasis will tend to keep you exercising. The bad news is if you’re not saving, it will tend to keep you from implementing a savings program.
A major benefit of 401(k) plans is that the savings is automatic, before the employee even sees the money, so that helps to overcome the inertia that homeostasis provides.
Of course you have to be in the 401(k) plan to enjoy that effortless form of saving, but many companies now make participation the default option for new employees. That is, new employees are automatically enrolled upon hire and have to manually opt out. Because of that, participation in 401(k) plans is at an all-time high.
For young employees just entering the workforce, that is a sure-fire recipe to have a sizable sum at retirement. Their only regret is that they might have saved more. Kind of like life insurance.
During a recent review of a client’s life insurance program, I commented on what a fine job he had done. His response was “I should have bought more.” I had sold him his first policy when he was 25 and now, at 54, after several additional purchases, he had a significant amount of life insurance that would require no more premiums when he retired.
When I asked him if he had some financial obligation that I wasn’t aware of, he replied no. Was he recently diagnosed with a terminal illness? Again, no. When I pressed him further, he just said “You tend to look at these things differently when you’re older.”
When I reminded him of his resistance to the premium each time I proposed new insurance, he responded that he could have found the premium somehow. I suppose we all could. I’ll close with a quote from President Warren G. Harding (who, by the way, was nowhere near as bad a president as history has judged him).
“I took out my first policy as a youth of nineteen. I have found policies a pretty heavy burden upon my resources at times, especially in my early years, but I have always found them to be very comforting possessions and if I had my life to live over, I would seek to take more rather than less.”