Americans pay a price for procrastinating on financial matters, but many delay anyway.
Missed financial opportunities abound, whether it’s in getting a late start in retirement planning, failingto draw up a will or simply not having enoughcash on handto meet emergency expenses.
“People know they need to take action, want to take actionand plan on doingsomething someday,” said George Fraser, a Scottsdalefinancial adviser.
Americansdelay for all sorts of reasons. Some feel overwhelmed by the amount of potential effort involved, others are intimidated by the knowledge required, whilestill others are paralyzed about making mistakes.
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People also have a “present bias,” or tendency to underestimatethe importance of future consequences when makingdecisions, according toShlomo Benartzi, a UCLA professor and author of the book, Save More Tomorrow.”People greatly prefer to spend now rather than save for the future,” he noted.
Procrastination also is linked to inertia, which “traps people into continuing to do what they are currently doing,” and to “loss aversion,” Benartziwrote. The latter concept is tied to an unwillingnesstosacrifice, even if it could meangreater eventual gain. “People do not like to see their paychecks shrink, which makes them reluctant to increase their contributions to their retirement accounts,” he wrote.
Here are somefinancial tasks around which delayscan becostly, with tips on what to do about them.
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Paying only the credit-card minimum
This is amongthe worstfinancial behaviors on which to procrastinate. Why? Because credit card interest rates are high, and compounding works against borrowers. In other words, you’ll bepaying more and more interest on accumulated interest, possibly for years. The current average card rate is 15%, according to the Federal Reserve, but some consumers are paying above 20%. Meanwhile, the clock is running.
Suppose you charge $1,500 on a card carrying a 19% interest rate. If your credit card companyrequires that you pay only 4% of the balance each month, your initial payment will be a modest $60. But it will take 106 payments over seven years to pay off the debt, according to an example provided by theFederal Trade Commission. If the minimum payment is lower, it will take longer. In thesamescenario as above butwitha 2.5% minimum payment, it wouldtake208 payments spread over 17 years.
One tipis to ignore the minimum payment amountthat’s typically listed on credit-card statements. These figurescan give people a false sense of makingprogress. Rather, strive to pay more than the monthly minimum if you hope tomake a noticeable dent in your debt.
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Not building up emergency savings
The reason so many people pile upcredit card debt in the first place is that they lack ready cashto pay forcar repairs, medical expenses or other big-ticketor surprisecosts.Financial advisers routinely suggest havingenough money on handto meet at least three to six months of normal expenses. Yet just 39% of respondentssaid they hadenough liquid assets to cover an unexpected $1,000 expense,according to aBankrate.com survey released in January.
Laura Walton of the education-oriented TCI Foundation in Tucson said gimmicks or games sometimes can work as motivators. For example, you might start by saving just$1 in the first week, then $2 the following week, $3 after thatand so on. After a year, you’d have more than $1,300.
This approach builds momentum by helping people achievesmall successesfirst.The key, Walton said, issetting specific andeasily achievable goals, withdefinite deadlines.”I have found that most people are genuinely pleasantly surprised once they look at their finances,” Walton said. “Theysee their goals are possible if they just save a little more here, spend a little less there.”
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Ignoring estate-planning basics
Estate planning inherently is a difficult topic. You must ponder your eventual death (or incapacity) and decide to whom you want your assets to go.
Many people delay drafting willsbecause they must decide which family members, friends or othersto appoint as executors, Walton said. It becomes easier “once they realize they can always change those names as needed,” she said.
Nearly two-in-three Americans lacka will, according to one survey by Rocket Lawyer conducted in 2015.
Procrastination also can apply to other types of estate-planning documents such as trustsand powers of attorney (whichauthorize others to acton your behalf should you become incapacitated). The peopleyou name, or the documents themselves, typically can be changedlater if necessary.So too for beneficiaries on Individual Retirement Accounts, life insurance policies and 401(k) retirement accounts. It’swise to review your beneficiaries at least once every couple of years.
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Not getting seriousaboutretirement
For decades, the financial industry has been warning Americans to beef uptheir retirement savings, often pointing to thefunding crisis brewing with Social Security as a motivation. Fraser, a financial consultant with Retirement Benefits Group,thinks the warnings have beena mistake by paralyzing people with fear.
Rather, he prefers tobuild hope and redefine the challenge in a positive way, with simpler terms. For example, he likes to tell new 401(k) plan participants that they could start saving with as little as one penny from each dollar of salary,then boost that by one cent a year. “Everyone knows what a penny is, and most people don’t even bother to pick them up off the street,” he said.”If people think they need to start saving 15% right away, they’ll never get started.”
Even individuals who startlate withretirement planning can make headway if they just get going. They probably won’t reach the level of savings that experts suggest, but they’ll be better off than doing nothing.
Curiously, the federal government unwittingly encourages procrastination by lettingtaxpayers invest in IRAsas late as mid-April and still count the contribution as if made the prior year.
In a 2017 report, researcher Morningstar.com identified”waiting until the 11th hour to contribute” as one of the key retirement mistakes that people make. “Those last-minute IRA contributions haveless time to compound,” Morningstar noted, “and that can add up to some serious (forsaken) money over time.”
Reach Wiles at firstname.lastname@example.org or 602-444-8616