Wednesday, July 11, 2012

1% at a time

I have previously written about the importance of making regular contributions into your retirement account(s), such as your 401K.

I have also written about the importance of keeping your intentions realistic in order to achieve real change and steady improvement.
How many people do you know who go on drastic diets... then end up gaining more weight?  The same applies to your finances.  

Cutting everything out of your budget by depriving yourself will almost always cause you to revert back to your old spending habits.

Real permanent change: whether it's in your health or in your finances, takes time.  

Today I decided to increase my before-tax contributions to my 401K.... by 1%.  

Making adjustments to your 401K plan is extremely easy.  I just emailed the human resources department and was given a form to sign.  I faxed in the form, and the change took place immediately.  The whole process took less than 5 minutes

Studies find that once we set automatic deductions (into your 401K for example), we are likely not to cancel these changes.  The reason is because we are too lazy to take the time to change it.

By investing in a 401K through your employer, your money automatically comes out of your paycheck before you receive it.  And because you don't see this money, you won't miss it.  

I know that if I were to make a drastic change in my contribution, I may have a difficult time adjusting.  With an increased retirement contribution of 1%, i know this won't even make a dent in my financial lifestyle.  In a few more months, I'll increase my contribution by another 1%. 

Gradual positive changes in the right financial direction will help to sustain good savings habits.  Pick a good set of investments in your 401K portfolio and make sure you’re making automatic contributions. 

If your company offers a 401K and you haven’t signed up yet, go do it now!   If your company is matching a percentage of your contributions, make sure you invest enough to meet the company match.  Contributing into your 401K and getting matched is the easiest way to force yourself to invest money, save money on taxes, and also earn free money from your company.

After you set up your 401K, work on increasing your contributions, 1% at a time.  

EDIT:  1% at a time can also apply to slowly increasing your rate of savings, or slowly increasing your investment contributions to your retirement and/or taxable account.

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