My finances, my projects, my life
April 7, 2020

Retirement: how to adopt the right mindset for saving

  Compiled by myLIFE team me&myFAMILY February 11, 2020 97

It can seem impossible to save for a retirement that’s still a long, long way off. But what if all you needed to become a successful saver was the right mindset? Having explored the cognitive bias that stops us from saving, myLIFE is back with the simple solutions that will turn saving into an automatic, painless process.

The key to fulfilling any goal is being able to realistically assess how far you still have to go. When it comes to saving, the first step is being honest about how you manage your everyday finances right now. Once you acknowledge the fact that you’re more of a grasshopper than an ant, you’ll see why it’s important to be disciplined and set up safeguards to stop yourself from frittering away the money you planned to save. But don’t judge yourself too harshly – the vast majority of people are just like you.

Make your savings off limits

To enjoy the best possible retirement and make up for a lower income in the short term, you should be aiming for your savings to increase, not decrease. So the first thing to do is set up safeguards to make sure you can’t dip into the money you’re saving for the future whenever you feel like it. With that in mind, you should make sure that your money is invested in assets that can’t be easily turned into cash to guard against the temptation to spend money without thinking about the future. For example, some life insurance products and retirement savings plans come with tax allowances that you would have to repay in full if you were foolish enough not to comply with the maturity conditions laid down in law.

The best way to connect with your future preferences is to make your future feel more immediate – i.e. more tangible.

Connect with your future self

It’s hard to truly get to grips with the future unless you find a way to visualise what it will look like and what your place will be within it. The best way to connect with your future wants and needs is to make your future feel more immediate – i.e. more tangible.

Several studies have shown that seeing a photo of yourself that has been put through an artificial ageing process can help you to make that connection. You can use secure graphic design software and there are even some apps out there that age your photos. If you know how to draw, why not print out a photo of yourself and make the changes manually?

Once you’ve done this, take the time to write a letter to your future self, asking yourself the following questions:

  • What do you want your future self to have achieved in x years?
  • What don’t you want your future self to be in x years?
  • What can your future self do to have a positive impact on the people around them?
  • What kind of lifestyle will they have?
  • Where will this person live and how will they pay for/fund these projects?
  • How much should I save now to make my hopes a reality?

This exercise may feel a bit artificial to start with, but it really forces you to think clearly about the future. Otherwise, the future will carry on seeming like an abstract concept and this will stop it from influencing the decisions you’re making right now. Of course, you’ll need to get the answers straight in your own mind before you can use them as a basis for thinking about the future.

Make saving automatic

So long as we can identify and address it, cognitive bias isn’t necessarily harmful. For example, given our limited attention spans, human beings tend to stick with the default option wherever possible. And the reason for this is simple: status quo bias makes us inclined to avoid active choices and having to face the fear of making the wrong decisions.

So, if you only take one step, it should be reaching out to your financial adviser or finding a smart digital portfolio app that sets money aside for you automatically. Human beings like the status quo and prefer not to change their minds once a decision has been made. As a result, whatever you set up as the default option is likely to remain in place for a long time. Even a simple monthly standing order to a savings account will help boost your balance in the long run.

Setting a few euros aside each month from the very beginning of your career will make a big difference as you approach retirement.

Start small

You don’t have to have a huge salary to start putting money away. Setting a few euros aside each month from the very beginning of your career will make a big difference as you approach retirement. This is all the more true when it comes to investment. In fact, most advisers would recommend investing little and often rather than investing a big lump sum all at once.

Nowadays, most banks (plus the majority of financial mobile apps) enable you to automate this type of transfer, saving you the mental strain of having to remember to do it every month. You can even plan to increase the amount you save if you get a raise at work or receive an unexpected windfall.

It’s important to find the right tactic to ensure that you don’t experience setting money aside as a loss that limits what you can buy right now.

Make sure the timing is right

One of the major obstacles to saving is our own loss aversion. This aversion makes us highly sensitive to immediate losses (i.e. the lower figure on your monthly payslip because you’re putting money aside) – even for the good of our long-term savings. That’s why it’s important to find the right tactic to ensure that you don’t experience setting money aside as a loss that limits what you can buy right now. It all comes down to timing.

The ideal scenario is to schedule your automatic payment to go out as your salary comes in. That way, you’ll process the transfers in and out as a net increase in your bank balance and setting money aside won’t be quite so painful.

By the same token, if you know that you’ll receive a bonus or a 13th month salary payment on a particular date, you could set up a transfer to your savings account in advance. That way, you won’t even have to think about it until you receive your bonus and then you’ll be more likely to focus on the net increase in your current account balance.

Still not convinced that setting aside some of your current income is worth it? Maybe you could get started when automatic wage inflation next takes effect. The net increase each individual receives when this occurs is not really large enough to have a significant impact on our lifestyles. And yet even just setting aside this small extra amount each month – a sum many people barely notice – could eventually give you the capital you need to achieve a long-term goal.

Round up

Some smart portfolio apps enable you to round up your credit card purchases to the nearest euro. The idea behind this is that you then save those few extra cents on each transaction in an investment or savings vehicle of your choice. And there you have it: you’ve managed to save without even being aware of the transaction.

There’s no time like the present

Lastly, if you only take away one piece of advice, it’s this: start now! Stop procrastinating and stop telling yourself that you’re too young or poor to save. They’re just empty excuses to put off until tomorrow what you could do today.

We reap what we sow. That’s true in relation to our finances, as well as all other areas of life.

Make the choice to commit to saving once and for all, pick the option that suits you best and automate the process. Once you’ve taken these steps, you can put it to the back of your mind and your money will do the hard work for you. Eventually, you’ll have the cash you need to turn your dreams into a reality and make the most of your retirement. Don’t forget to visualise the future to make it seem more tangible. We reap what we sow. That’s true in relation to our finances, as well as all other areas of life.