According to Merriam, a habit is:
“a recurrent, often unconscious pattern of behavior that is acquired through frequent repetition.”
If there is one piece of financial advice I could give all of you in 2014, it is this: form a retirement savings habit. Whether contributing to a 401(k), 457(b), IRA, or Roth IRA, pick a savings number that you can handle and begin the plan. After this is established, I want you to pretend like that account doesn’t exist.
Don’t get me wrong – I am not saying to ignore how the account performs, but rather to ignore the funds as they are automatically being invested for you. This is not money that should be withdrawn to buy a car, invest in a business, or to pay off debt, nor is it an emergency fund. There should be other funds designated for those purposes, as this money should be used ONLY IN RETIREMENT. I believe this one act will put you ahead of the game when it comes to retiring with dignity.
You may be thinking to yourself, “that is too easy…there has to be more to it than that…where is the catch?” The catch is making it a habit, meaning it happens over and over again without you having to think about it. The reason this is so important is because of a concept called “dollar cost averaging.”
The stock market fluctuates up and down over the short term, but over longer periods of time, it has trended upwards. If you’re consistently adding money at all times, you are buying more shares of the investment when things are cheap, and less when things are expensive, which is exactly what you want to do. However, the vast majority of people cannot do this on a regular basis unless their retirement account is set on autopilot. Even then, it’s only accomplished because the investor is not thinking about it.
You are your own worst enemy when it comes to saving for retirement, so let’s take you out of the equation.