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We all know what to do. We always have. We know we should exercise regularly, consume moderately and spend less than we make. These are rather easy concepts to understand, yet our comprehension of these important areas of our lives isn’t enough to overcome our behavior. The bad habits we’ve gathered over time make turning over a new leaf incredibly difficult, if not seemingly impossible.
The result is damage.
I find a vast majority of people damage their financial lives in their 20s and 30s, figure it out in their late 40s, then spend their 50s and 60s trying to put the genie back in the bottle. The complexity of the damage generally falls into two camps: things you should have done but didn’t and things you shouldn’t have done but did. Even as I comb through the biggest financial errors I’ve personally made in the last 20 years or so, I find a healthy mix of both types of damage.
My theory as to why people consistently get themselves into trouble revolves around how we identify the problems we task ourselves with solving. If you’re 52 years old and don’t have as much money saved for retirement as you should, you’re well aware of the problem you’re trying to solve. If you’re 22 years old and the world is your oyster, it’s more difficult to identify the problems you’re trying to solve.
In fact, the problems you should be solving only become problems if you don’t acknowledge them. And they never become problems if you identify them before they become problems.
I’m suggesting people somehow prefer to get themselves into trouble and then problem-solve their way out of trouble, rather than address major issues when the stakes are lower. But I’m not exactly sure why that is. I know how I feel when I overeat, yet I predictably disassociate myself from that feeling when I’m associating myself with yet another taco.
This is precisely why I love talking to new college grads about their financial lives. They are a blank canvas. Sure, they may be saddled with student loans, but even those can be overcome with proper acknowledgement and action. New college grads face an exciting world filled with opportunity, and it’s not surprising they struggle to identify the most significant financial challenge Americans face, a problem that doesn’t show itself for decades.
That challenge? Retiring successfully.
It’s the truth, but it’s a tough sell. You try convincing a young ambitious person to address an invisible enemy that won’t rear its ugly head for 45 years. The irony in this is, while they are arguably ignorant to this problem—which will begin to feel like a big problem decades from now—their parents are in the midst of facing the problem head-on.
There are numerous opportunities to solve this eventual problem over the course of a person’s career, but there is one singular moment that can put the problem to bed immediately and permanently. Before that first paycheck hits the checking account, a new grad should arrange to have 12% of his or her pay set aside for retirement. Once young adults commit to that practice over the course of their career, the task is done.
The best conduit for nearly effortless savings is a company-sponsored retirement plan such as a 401(k). An individual retirement account can do the trick, too, although the low annual contribution limits can make it difficult to achieve the 12% goal if annual income is too high.
New grads will face many challenges, but if they address the retirement challenge from the very beginning, everything else will fall into place. This is because new grads haven’t yet fully formed financial habits, good or bad. They will form habits one way or another, just like you and I have.
And based on our natural inclination toward immediate gratification, it’s rather easy to let the bad habits take over for years, if not decades. Intentionality prevents the bad habits from winning.
If you come across any new grads this graduation season, be a buzzkill and explain this to them. Explain to them a bad habit you were forced to fix, after it spun out of control, and let them know they can set themselves up for financial glory with one simple decision to start their careers.•
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Dunn is CEO of Your Money Line powered by Pete the Planner, an employee-benefit organization focused on solving employees’ financial challenges. Email your financial questions to askpete@petetheplanner.com.
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