Paul Winkler: Welcome. This is the Investor Coaching Show. Paul Winkler. And that’s what we talk about. You know, there are all kinds of problems that people face when it comes to money and retirement and planning and mental pitfalls. Our brains mess us up every time. You notice that? It’s just like, “Man, if there weren’t this doggone brain that I got in my head, I’d probably just do fine.” You ever notice that it’s just like, ah, stinking thinking, you know?
Helping Employees Save
So I was reading this article this week, and I thought this is something I want to share because it’s come up a few times where I’ve talked to people about getting yourself prepared. We were actually working on a retirement plan this week for a company. And just one of the things I was talking about for them is—I love getting in there and teaching to the rank and file employees because a lot of times they never really get good stuff.
Typically, they get marketed to from insurance companies, insurance salespeople, annuity salespeople. Annuities, it’s like the solution to every financial problem we ever have, right? An annuity! What do I need? Annuity! What do I need for—Annuity! Wait a minute. I didn’t even tell you what I was asking. Annuity! Or, you know, life insurance, whole life insurance policy. And it used to be that you never heard about it. Now it’s starting to come back. People talking about that more. And I just shake my head and go, “Ugh.” Target date fund! “Ugh, good grief.”
But anyway, what one of the things that we were talking about is just getting people some better education about investing, saving, planning for the future, and things like that. And you know, sometimes it’s just a matter of getting in there and motivating somebody and just showing that their life can be different. Not only can their life be different, but every generation after them. It’s because, you know, you can straighten out one generation’s thinking, you can do a lot to help the next generation’s.
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Why We Don’t Save Enough
You’ll get me into a brain study conversation if I’m not careful. Bring it on. We look at why people don’t save enough for the future for retirement. I’ve talked about that before, how we kind of think of ourselves as a stranger in the future. You know, brain scans—they studied people’s brains and they said, “Okay, think about a movie star.” And then they said, “Think about yourself,” and the brain scans are different. “Now think about yourself in the future and think about that movie star,” and the brain scans become the same. Why? Because we think of ourselves in the future as a stranger. You may have heard me say that before.
Well, why don’t we save enough for emergencies? That’s another problem that people have. And they dip into the retirement plans, and they got 10% penalties, 25% penalties. And sometimes the plans can be pretty significant, and then taxes on top of that. And you’ve just basically decimated your retirement plan because you didn’t have anything else for emergency set aside. So what they did is, AARP had a Public Policy Institute study. And they found that 71% of workers would likely contribute to an emergency savings fund if their employer offered one, and 87% would do so if their employer made matching contributions. Free money, anybody would do that, right? But 71% would just do it even without the matches. I think it’s interesting.
It’s because we know we’re not disciplined. We know we don’t like to go and set aside money. It’s just, we’re not good at doing it. And then they found that one in four, or excuse me, four in 10—more than one in four. Four in 10 of Americans wouldn’t be able to come up with $400 in a financial emergency. That’s pretty bad. Four in 10 can’t come up with four hundred bucks for an emergency.
And if they do have an unexpected expense, they’re going to have to rely on costly measures, you know, payday loans or something like that, which are horrible. You know, you owe the payday loan, they’re charging you an exorbitant amount of interest. And because typically they only tell you what the interest is for a short period of time, you don’t even think about it. It’s no big deal. But if you actually look at how many times you’ve paid for that emergency, with the interest rate, it’d make you sick. Over a lifetime, how much money would you have had, had you not resorted to those measures rather than going and borrowing money at these huge, usurers’ interest rates? Or you go to a credit card. Pretty much just bad, you know?
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Research Shows Small Amounts Are More Manageable
So what can you do differently? Well, you can prepare. Arlene always likes to say, “10, 10, 10. Put 10% of your income away for savings, 10% for retirement, and then 10% for giving.” You know, that’s kind of her rule of thumb, as we always talk about.
They did some recent research at the University of California, Los Angeles, and Stephen Shu at the University of London showed that people were four times as likely to start saving when asked if they would save $5 a day versus being asked to save $150 a month. Which just shows that people aren’t great at math, you know. Thirty days in a month times $5 is 150. But when you talk about it in small bites it’s just so much more manageable. You know, when we say $150: “Oh man, that’s a lot.” $5: “Oh yeah, I can do that.”
So getting people to think in smaller pieces is better. It’s like, how do you eat an elephant? One bite at a time, right? How do you do this? You do it a little bit at a time. Just a little bit each day, and you got it. You got people saving. You’re looking at this big barrier of $150 a month, and it’s like, “That’s not affordable. I can’t do that.” But break it into small amounts, and people are likely to do it.
Now one of the things that I thought was really interesting in this Wall Street Journal article, “People Don’t Save Enough for Emergencies, There Are Ways to Fix That:”
This is another bit of mental accounting to consider. People find it easier to let go of small amounts when it’s coming out of money that feels like a windfall. More than half a century ago, a study by Michael Landsberger looked at the impact of German restitution payments on the household budgets of Israelis. He showed that people given small to moderate windfalls actually increased their spending.
So you got this windfall. You got this money that you didn’t expect it was going to come in. And what do you do? Do you save it? No, they actually increased their spending by more than they received. I mean, do we sense a problem here? It’s like, “Wow, I’m rich. I got all this money! Man, go spend!”
Companies Count On Human Nature
More recent research showed that consumers plan—if they were given a $10 coupon at an online grocery store, well, do they just spend the $10 to the groceries? No, they spent the windfall on items they wouldn’t have otherwise have bought. You know, easy come, easy, go. It’s funny, because companies know this stuff. Companies, they got your number. They know how you are. They know what goes on, and that’s why they give away this stuff, because they know how your mental accounting works. I mean, we’re humans!
Now it’s like investing. You’ll look at mutual funds. And I constantly am amused when people say, “Oh, I like this mutual fund better than this one because the management fee is lower.” And I shake my head and go, “They’re doing all kinds of things in that fund that actually are really harmful to the point where the returns are a whole lot lower because of some of the things that they’re doing. But you don’t see it. So it doesn’t bother you.”
Or you see some of these online brokers. You know, we’ve talked about these things before, these apps where you buy stocks. And some of the ones that are free are charging 10 times as much, or they’re making 10 times as much money as the ones that are charging more, and you just don’t realize it. And they’re playing people, and they just know human nature. “I’ll go and make the investing experience into a gambling experience, make it into something like you’d do at a casino, and you’ll invest more.” Well, I don’t even want to call it investing. You’ll gamble more. You’ll mess around with stocks more. You’re more inclined to go and make the next trade.
There are companies that will do this with trades. So they’ll say, okay, let’s bring people in and say, “Hey, we got this really cheap mutual fund.” And then what they’ll do is they’ll pull you in. And then they know you’ll start to do other stuff. Maybe not even realize you’re doing it. Maybe it’s the investment firm doing it. And you don’t even realize it’s happening because they sneak up on you. It’s just human nature. You got to realize we are hopelessly human, to paraphrase an old Kansas song, for those of you that are Kansas fans.
Inertia Is An Obstacle To Saving
Finally, there’s the question of inertia, the very human tendency to not take action. Even small obstacles become daunting barriers to saving, which prevent us from following up on our good intentions.
You know, we find this same thing with 401ks. They have these automatic enrollments of 401ks. And employees, enrolling them in 401ks, it’s really effective. Why? How does it work? Well, if you have to enroll in your 401k at your workplace, you’ve got to take action and do something, you’re very unlikely to do it, they find. But you’re a whole lot more likely to do it if they automatically enroll you, and you have to disenroll. If you actually have to take action to stop them from taking money out of your paycheck to put it into the 401k, you’re not going to do it. And he says, “Okay, I know I probably should save. I’ll just go do it.”
And that’s just the way we are, right? So that’s one of the things they’re looking at, going, “Hey, maybe this is something we can do for people when it comes to regular savings.” And they’ve been able to boost plan participation significantly by doing this. And they find that people are not mad when companies do it, either. That’s the interesting thing. They’re not upset at the company for automatically enrolling them and go, “Hey, wait, wait, wait, wait, quit taking money out of my paycheck for this 401k!” They’re actually glad they’re doing it.
I thought that was interesting. I had not heard that statistic before, that they’re actually happy that companies are automatically enrolling them, which is good. It just shows that people realize their own faults and inability to actually take action.
Can Automatic Enrollment Help with Saving for Emergencies?
The same thing can happen with emergency savings accounts too, if we could just get automatic enrollment. Now, this is something that may have to take a little bit of time to get the legalities out of the way. But you look at that and go, “Wow! Maybe we could get people to save more if we just automatically do it.”
Now, I’ve often done this with people where they don’t have anything like that. And I’ll just go, “Hey, go down to your bank. You got your paycheck going into your checking account, right?” And they’re like, “Yeah.”
“Okay. Do not pause. Do not pass go. Go straight to your bank. And I want you to go there and automatically have them bank draft your checking account to a savings account. Don’t get fancy. Just bank draft it and have money automatically go make it into a bill.”
You’re going to be amazed. And you know what you’re going to be amazed at is how you don’t miss it. You don’t even think about it. It’s something that’s like, “Well, okay, it’s just money. It’s gone.” And you’re not gonna find that you’re going, “Oh man, I really wish I had that $20 back” or whatever. You get used to it is really what it gets down to, you know? So that’s a really good thing to do. Just bank draft your checking account to go straight to a savings account.
Now they said they found that if workers were paid biweekly, you can save part of their paycheck during the two months in a year in which you get three paychecks. So that’s a little trick right there.
And you see that companies do this with mortgages. Make a payment—it’s every two weeks, right? You go, “Well, if I make a payment every two weeks, I’m making two payments per month.” Well, not necessarily. You might be making more payments. Because if you go every two weeks, how many weeks are there in the year? Fifty-two. Divided by two, and that’s 26. And then you go and divide that by two. It’s at 13. Well, if you think about it, it’s only 12 months in a year. And we just came up with the number 13. Why? Because you got a couple months in the year where you have an extra week in the year.
So these mortgages where you pay every two weeks, that’s why you get it paid off sooner because you’re making extra payments. You can make an extra monthly payment per year and have the same effect. And it’s no magic as to why that works. But that’s just a little bit of mental accounting. It’s a little bit of something that tricks us into doing the right thing. In some countries, in Germany and in Austria, employees get their bonus in the form of a 13th paycheck at the end of the year. And thus, they can be invited to save some of that extra paycheck. So that’s the same thing, just a little bit different way of doing it in that way.
Save Your Annual Raise and Watch Savings Grow
Now, if a worker is getting a pay raise, he could save part of the additional income. And this is an example I’ve given to a lot of people, and I’ve recommended this often, go, “Do this! You get a pay raise.”
Now people say, “I can’t save any money.” And so let’s say you get a 3% pay raise every year. And let’s say for five years, you just save it. At the end of five years, you’re saving 15% of your income. And you know, how many people are saving 15% of their income? I dare say that there’s not too many, really. You know, I get some people come in and go, “Ah, you know, Paul, I’m 40 years old and I only have $200,000 saved.”
I’m going, “Guess what. You’re way ahead of your friends.” You know, people do not save well. And it’s just because of this inertia and the problem of getting things going. You’d be shocked if you go out there and look at people your own age and say, “Hey, what’s the average amount of savings for somebody that’s putting your age?” The data is out there on the internet. You can find it, and you’d be shocked how few people really do get this savings thing down.
So you’re getting a pay raise—take that extra money and put it away. And before long, you’re saving what you ought to be saving and what will really, really make a huge difference. And the difference between you doing well in the future and you just barely scraping by or wondering how you’re going to make it into retirement.
I’m going to continue on with this. I kind of like this topic. I’m going to continue on in just a second here. Just a few more things that I think are really important about getting this savings thing together, and a couple more points I’d like to make before I’m done with this.
Using Windfalls to Recover from a Financial Shock
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From time to time, employees might need to dip into their emergency savings account. In fact, 60% of American households in one survey from Pew Charitable Trust experienced a financial shock, defined as a significant loss in income as a major expense in the last 12 months.
Well, I guess a lot of you can probably figure out what a big part of that was, right? You know, a lot of people ran into some troubles with COVID and all of that stuff that happened. But I would say that that’s probably not unusual, period. You see that a lot. People run into financial shocks, and they don’t know what to do and where to pull money from. Based on that data that I just said, how little people have in savings, not a surprise at all.
A third of households experienced two or more shocks in these cases. As soon as funds are withdrawn from the emergency account, the next windfall—be it a bonus, a 13th paycheck, or the next pay raise—would automatically be reallocated to refill the accounts.
So that’s one of the ideas. Try something like that. If you have a financial shock, just take that extra money and stick it in there. And part of this is coming up with a regulatory environment and making it feasible to do something like this. These are just ideas that might be out there. And it’s good for you to know some of the ideas out there, but may spark some ideas of your own. If it’s not something you’re doing, go, “Well, gee, why don’t I do that? Why do I have to wait for regulations to catch up before I save a paycheck? Or if I have an extra week I’m getting paid in a month, why do I have to wait for that? I’ll just do it myself.”
Some may argue that this nudging system merely reshuffles savings, shifting funds from retirement to an emergency account. While that’s not necessarily a bad outcome, there are several reasons to believe these proposed changes could result in higher savings overall.
This is where it gets interesting. This is some of the psychology behind it that I find so fascinating. They said that the first reason is that it “reduces the risk that people will take on unusually expensive debt in the aftermath of a financial shock, thus diminishing the future savings potential.” So people go, “Well, maybe I won’t do some of them, those things where I spend a bunch of money after a shock. Maybe I’ll think twice, if this is going to be an automatic thing, that they’re going to yank a bunch of money out of my paycheck. I might think twice about it.”
How The Partitioning Effect Helps People Save More
The second reason involves a “so-called partitioning effect.” And they had this research from the University of Toronto and University of Virginia. And they showed that giving people two savings accounts leads to greater overall contributions. Now, this is funny, because this is something I’ve had people do as well. Remember, I said earlier, what you’d want to do to get your savings rocking and rolling is you might just actually have a bank draft from your savings account or your checking account to a savings account.
So you might have, let’s say, a car fund, and every so often you’ll wipe out the car fund. So you basically go, okay, so how often do I buy a car? I buy cars, let’s say, I buy it every five years. So 60 months or something like that. So I buy a vehicle that often. So if I take an account and I wipe it out every 60 months, and if I were to save like 200 bucks per month into that thing, that’s $12,000. And then, I go and turn in my car, and I get $5,000 for my car when I turned it in. And there’s $17,000. So maybe that’s what I pay for the next car. I guess it’d be a fairly cheap car. Maybe you save more for a car than that, but I’m just giving you the math and, you know, just basically how it works.
So that would be something you could do, though. You’d go in and have that. You might have two goals going on. And that other goal may be, you know, every so often you have a sinking fund that gets funded to make sure that you have money sitting aside for an air conditioner or a roof at the house or whatever. But here’s the interesting part, is that if you have two savings accounts, people feel compelled to contribute to both accounts.
And they actually did this study in India, where they gave people two envelopes. They didn’t give a savings account, they gave them envelopes. And they said, “Here. Divide your savings in these envelopes.” And what they found was that when people had two envelopes, they saved nearly twice as much money as those that were just given a single envelope. So they just felt compelled to put them both in both envelopes.
Having Multiple Goals Increases Savings
And the same thing if they have their savings in a 401k account. You save more when you have—and I’ve always said that. You know, people ask me, “Paul, do I get out of debt completely?” And it’s just interesting to me to see that there is actually research behind this brain research, behind things that I’ve taught for, good grief, 30 years. And it wasn’t that I’d seen research. It was just, I just know my brain works this way, and I’m kind of thinking if I’m this way, everybody else is this way.
But people would ask me this: “Hey, Paul, I got this debt over here, and I know I’m supposed to save. And I’m supposed to put money in a 401k. Do I just wipe out the debt first before I put money in savings and before I put it in the 401k?”
And I would say, “I don’t want to tell you what to do, but I’m going to tell you how I operate.” And I’ve always said, “Well, here’s what I do. I have a tendency to do more if I’ve got multiple goals.” And I’ve found just with me that if, when I had car debt a million years ago, I would go and I would put some money in paying off the car. And then I had some money going in, paying off and putting money in my savings account. And I would be putting money away for retirement. And I just found that I did more when I had those three goals all at once, rather than just shooting for one goal and just going only with paying down the debt first, and then once I paid down the debt, then start saving.
It’s just interesting to me to see that the research is actually showing that I’m not alone. That’s the way people are. So they said in the article that if we set up an automated system, kind of like automatic enrollments for 401ks, that if we set up an automatic system for emergency savings, people are just going to shift money that they were saving into retirement into emergency accounts. And that’s all. And as I said, in the previous segment, no. When people have two separate goals, they tend to do both. They tend to save more because they feel compelled to do both. And people won’t necessarily save less for retirement if you set up an automatic way of doing emergency accounts. So I find that’s very true. That’s human nature.
How Financial Worries Impact Decisions
Now, one of the things they said was that there’s another reason that this is not necessarily the case. And that is because of the negative impact of money worries on our decision-making. Now, there was some research that was done. I don’t see exactly where it was, but they found that “the stress of poverty makes it harder for people to plan ahead and exert self control, as it consumed scarce mental resources.”
Now this is really interesting to me because of a show that I did quite a while ago. And I had done some research on how middle-class people, wealthy people, and poor people are just different when it comes to money. And it was research going into low-income neighborhoods.
And they found that in low-income neighborhoods, if somebody had money, many times because of the desire to keep cohesion between friends and between—the people were so dependent upon each other. And in low-income neighborhoods, if somebody had money in their pocket and somebody came up to them, one of the friends came up and said, “Oh man, I need money,” you know what would happen? “I need this. Oh my goodness, I’m in so much trouble, I got to have $20 right now.” It was often very common for that person to pull $20 out of their pocket and give it to their friend, even if they had rent due next week. And it was just a different way of handling money. It was almost incumbent upon them to help their friend out, even if it was going to put them in financial straits.
So when it comes to how lower-income people handle money, it’s just interesting to me how they do tend to do that, and the stress of poverty—so this whole thing about the stress of poverty changing how people act makes a lot of sense to me, based on what I already knew.
Now it says, “The scientists estimate that the cognitive cost of poverty is roughly equivalent to functioning after pulling an all-nighter.” Now, if you’ve done that, if you lack sleep and next day, you’re like, going, “Oh man, I am dragging.” You know what that’s like. That’s brutal, to come in after an all-nighter and you’re just going, “Oh man, I’m dragging.” And that is the stress when you’re low on money. Well, think about it. If that’s your employee, if you have employees, and they’re this stressed about their finances, just imagine what that’s doing to their ability to do work at your company. That’s pretty rough, and you’re probably not getting the best out of them. So that’s one of the reasons they’re saying, “Hey, if we set these things up at companies, it could really be really great for a company.”
And that’s why I’ll say that to employers. People that we work with, companies we work with with 401ks and retirement plans, I’ll often say to them, “Hey, look, you know, it’s nice. One of the nice things of having a 401k, number one, is it gets people to stress less about money.”
Education Can Lead to Success
And one of the reasons I like teaching about investing is because it gets people to worry less about markets, how they work, where returns come from, what causes market downturns, what they should do, how they should respond or shouldn’t respond, knowing whether their investment’s in the right place—because nobody’s worried about their investments after a market upturn, right? Nobody worries about “Am I’m I doing this right? Am I messing up? And should I be fixing this? Should I be doing something different?” Nobody ever worries about that at those points, right? It’s always after a downturn that I start to question what I’m doing. “Am I doing this right? Have I made any mistakes?”
So that’s why I always say teaching. That’s why education is so important with investing. Because I don’t want you at the point of a market downturn to start to question yourself and wonder whether you’ve done something wrong. So that’s why I’m really adamant about that.
And they added to that. Then that was actually part of their fourth point as well. In here, was:
The financial stress can also affect job performance, thus hindering the future earnings potential of workers. One recent study showed that truck drivers who are more anxious about their finances are more likely to get into preventable accidents, presumably because they’re so worried that they’re less focused on driving.
So it could be a liability issue. You own a company. You’ve got people that they’re worried about their money all the time. It might be not only that they’re not taking care of your customers, and they’re not taking care of the people that they work with, and they’re not functioning at a high level. It might be a liability concern too. So that to me is just interesting stuff. So I thought I would share that with you.
So lots of things that you can do. If you’re not the employer, but you’re the employee and you’re going, “I do worry about money a lot”—automate it. You can do it yourself. Like I talked about, set up automatic bank drafts to savings accounts from your checking accounts. Set up automatic increases in your 401k every year. Increase the percent by 1% or something, or by 3%, like I said a little bit earlier. Increase it by your raise.
And by the time a few years roll by, it’ll be automatic. And you won’t be thinking about it. It’ll be before you get your paycheck, because nobody ever saves—after they spent all the money, and they’ve paid out all the expenditures, and then go, “Okay, how much do I have left to just save?” Well, typically, what is it? None, nothing. So the best thing to do is save first and spend what’s leftover. That’s the difference between successful people and unsuccessful people is really the order that they handle their finances in. Spend first, save what’s leftover? No: save first, spend what’s leftover. Much better, much, much better way of doing things.
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