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Saving for a Healthy, Happy Future

Financial responsibility plays a huge role in overall health, happiness and security, today and for the future

A number of recent surveys show that few U.S. employees will be financially prepared for retirement. The Employee Benefit Research Institute’s 2012 Retirement Confidence Survey found that many workers have virtually no savings or investments, including 30 percent who have less than $1,000. In total, 60 percent reported that the total value of their household’s savings and investments, excluding primary home value and employee-sponsored pension, is less than $25,000.

Are we as a society so intent on instant gratification that preordering the new iPhone 5 is all the further we can plan? Can we not imagine what an underfunded retirement might look like, with its ramen noodle meals and constant worry?

By and large, Americans stink at saving money. But the sense of entitlement imputed to younger generations is only partly to blame.

We’re just not hardwired for it.

“It’s a cultural myth that things used to be better. While it’s true that savings rates have declined over the past 50 years, we as a society were never really good at saving to begin with,” says Karen Carlson, education director for the nonprofit organization InCharge Education Foundation, which teaches financial literacy. “People are not innately good at saving. We’re not motivated by long-term goals. Saving is a nontangible, complicated, abstract idea when set against a consumer culture that’s all about instant gratification.”

Studies have shown that we are less likely to exert ourselves for a delayed reward and that the perceived value of delayed rewards is less than the value of immediate rewards. So if given the choice a person is liable to accept, say, $340 now instead of $500 a year from now, says Len Green, a psychologist specializing in the psychology of economic decision making at Washington University in St. Louis.

“It might make good evolutionary sense – the old ‘bird in the hand’ adage.” Green says. “It sort of makes adaptive sense to overvalue the present. That said, we still have to think about the future.”

Self-awareness helps. Once we understand our psychological hang-ups about saving for the future, we can counter them with new information and attitudes.

One problem is our tendency to organize our finances so the emphasis is on bill paying as opposed to personal priorities. “We have a checking account, write the bills, and if there’s any extra at the end of the month, we move it over to savings,” says Jeanne Brutman, a financial planner and consultant based in New York City.

Instead, she recommends opening a new account linked to your current checking account and designating it your “deposit account.” Every time you get money, either by paycheck, tax return, rebate or gift, deposit it into your deposit account.

Your checking account will be renamed your “monthly account” and used only for writing bills. Calculate your monthly expenses including savings (aim for 5 to 10 percent of your earnings), which “is like a bill you pay to yourself,” Brutman explains. If monthly expenses total $3,200, only transfer from your deposit account $3,200.

Set up an automatic transfer from the monthly account into a third account, which will become the three to six months’ worth of expenses it is recommended you have on hand. Automatic savings transfers are critical because it takes the decision making out of our hands.

Don’t think of this nest egg as an emergency or rainy day fund. “That’s a calamity-based way to think about savings,” Carlson says. “You also want money on hand in case a great opportunity comes along, like getting a professional certification.”

Carlson calls hers an “opportunity fund,” while Brutman calls hers a “freedom fund.”

When this account is fully funded, “You can allocate your 5 to 10 percent savings to pay down debt or build investments that create cash flow,” including mutual funds, bonds, whole life insurance or annuities, Brutman says.

From an economic standpoint, having money distributed across three or more accounts doesn’t necessarily make sense. But psychologically, “You’re telling yourself and the universe how you are going to spend your wealth,” Brutman says. “You acknowledge the commitments you’ve made and only agree to transfer so much of your wealth to meet them.”

As most of us know, “The more you put into a spending account, the more you spend, above and beyond those commitments,” she adds.

Meanwhile, the deposit account will grow, and that money can be “swept into savings or investments,” Brutman says.

Four ways to grow your savings

1. Shrink your monthly account. If you transfer $3,200 to cover expenses, try moving over $100 less to see if you can live on $3,100. “Keep going until you hit your low water mark,” Brutman suggests.

2. “Don’t approach saving as a zero sum game,” Carlson says. “We’re psychologically better at replacing things than cutting them out.” So if you discontinue cable, replace it with a cheaper Netflix subscription.

3. Make long-term savings difficult to get to. If you have a 401k or similar retirement savings plan through your employer, divert more money into it than your savings account, Carlson recommends.

4. When you get a raise, divert 50 percent of it into your 401k. File the paperwork before you receive the larger paycheck. If you delay, you’ll experience a sense of loss rather than gain.

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