New year….new you?
How to make your investing resolutions last
You may have set a financial resolution for 2023 – perhaps to put away ‘extra savings each month’. But do you know how much that ‘extra’ could add up to by retirement?
What if I told you saving $500 more a month could result in an increase of $284,000 by retirement for someone in their early 40s.
That’s the power of defining your financial resolutions.
A history of the ‘New Year's resolution’
Exercise was invented in 600 B.C. That is when the Greeks figured out that if you took part in strenuous activity that you hated enough times you would get stronger and faster. On January 1st 599 B.C the Fitness First in Athens had a lot more toga-less visitors than normal. History would suggest this overcrowding will be a short-lived affair. Most resolutions fail. 25% fail within the first week. Before the start of February 43% more people have quit. Only 9% of people succeed in keeping their resolution. All is not lost. There are ways you can increase the likelihood of keeping your money related resolutions in 2023.
Those stats may be motivating for some people to keep going. Others may use it as an opportunity to give up. The true question is how to channel the natural inclination to use the start of the year for self-improvement in a way that truly benefits your future.
The first step is to acknowledge that change is hard. Lasting change requires structure and a framework to push you to persevere until a habit is formed. The key is to connect each small action to a larger goal. That provides context to each small sacrifice. The act of saving and investing is an exercise in delayed gratification. Forgoing consumption now leads to more consumption later as long as you manage to earn a return in excess of inflation.
Understanding the impact of the sacrifices you are making on your future will make it easier to keep going. Blind faith that what you are doing will help in some way, at some point in the future will only get you so far. Just ask the 68% of people that give up on their resolution before February.
Most resolutions are short-term and vaguely align to something that is popularly perceived as being beneficial.
“2023 is the year I am going to get into shape, get my finances in order, read more and learn another language.” – Every millennial finfluencer
They often dramatically diverge from your established behaviour.
“I went to the gym 5 times in 2022 but I’m committed to going 365 times in 2023.” – Intoxicated man at New Year’s Eve party.
Quantifying the end goal
The problem is that most resolutions are lazy and ignorant. They are lazy because they are done without defining the end goal. They are ignorant because without an end goal there is no way of knowing what it takes to achieve it.
If I managed to save $500 extra a month I would have $284k more at retirement if those savings continued until I retired. And maybe that $284k would allow me to retire a year early. Or maybe it would represent another weekend away every year of retirement. Regardless of what the extra savings provide, the ability to come up with a dollar figure to substantiate a resolution makes it more tangible. The motivation derived from understanding the future impact of your sacrifice will always exceed mindless exhortations to give up brunch to buy a house.
The reason I can be so specific is because I have a retirement goal. And my retirement goal is not some vague notion of what it may take to retire. It is specific and includes when I will retire, how much I need to retire and how much I will save over my remaining work years.
In setting this goal I have not confused specificity with permanence. I can adjust my retirement goal along the way as my circumstances change. Adjusting a goal is far better than not establishing one in the first place. For instance, making a resolution to save $500 more a month is an adjustment. An adjustment that I know will result in an increase of $284k. It was establishing my original goal that allowed me to calculate the return I need to get there. That allowed me to project forward the impact of my resolution. The sacrifice I would have to make to save $500 dollars a month now has context. Quantifying the benefit may be the motivating factor it takes to keep going. Successful resolutions are focused on the desired outcome rather than completing a set of activities. Just as successful investing is based on goals and a strategy designed specifically to achieve it.
If you are looking to make changes to your finances this year start with you. What are you trying to achieve by saving and investing? What is your investment strategy to achieve your goals? Use some of the resources at Morningstar to establish the foundational framework that will allow you to join the 9% of people that keep their resolution.
If your resolution is to know more useless facts, I have a good one for you. The Greek term gymnos means “nude”. That is how the ancient Greeks exercised. That should clear up any confusion over my reference to toga-less athletes in the first paragraph. And that of course is why the most crowded rooms around the world right now are called gyms.
Resources for a successful 2023
