“If you don’t know where you are going, you’ll end up someplace else.”
Could you use an extra $185,750*?
*It’s an average. No guarantees. YMMV.
We all could, right?
Want to know how?
$307,750: Median wealth of investors who did financial planning, vs. $122,000 for nonplanners. #MONEYnumber
— Money (@MONEY) April 26, 2013
Yup. People who used financial planners (not “investment advisers” who view you as a walking piggy bank), had a median net worth of $185,750 more than those who didn’t.
That number means that 50% of the people who used financial planners had a net worth even more than $185,750 higher than their non-planning counterparts.
That doesn’t mean going to a bunch of sites, reading articles, and doing nothing.
It means actually going through the planning process, making a plan, and then executing that plan.
Why does investing a couple of thousand dollars in your future yield such an enormous payoff?
That’s the question that Syracuse’s Dr. Robert Stawski and others set to answer. They evaluated people who had an average income of $61k and a little under four years of college in central Oklahoma to determine what factors were most significant in increasing their retirement savings and contributions.
In other words, they looked at average Americans.
They discovered three main factors:
- Setting goals led to financial planning, which led to more savings for retirement
- The older you get, the more you care about goal setting
- The more income you make, the more money you save
#3 is intuitively obvious. Unless you’re Paris Hilton spending every weekend on benders in St. Tropez, there is a direct link between income and savings. This is the “I can’t spend it all” school of thought for the high income crowd. High income accounted for 40% of the reason that people save for retirement.
But, for those of us who aren’t making seven digits a year or higher, we’re going to have to make a tradeoff between present desires and future needs. If Monkey Brain, what I call your limbic system, gets his way, then you’re going to go all in for present pleasure. Your future self can deal with the consequences, and when the time comes, you’re going to be eking out a living on Social Security.
According to the previously cited research, the critical step in saving more was goal setting. If you don’t have clear and attainable goals in your life, then you don’t answer the question “why” when it comes to saving for retirement.
Setting goals accounted for 38% of the reason that people save for retirement.
However, just having goals doesn’t mean much. You have to do something about it.
That’s where financial planning set in.
People who actually created a financial plan then had the mechanisms in place to help them hit their goals. Getting a financial plan informed these people what they needed to do in order to increase their chances of success in meeting their goals.
That’s where the remaining 22% comes from.
Having a high income and setting goals gets you to the red zone. Making a plan gets you across the goal line.
Which net worth are you aiming for?
- John Davis is a nationally recognized expert on credit reporting, credit scoring, and identity theft. He has written four books about his expertise in the field and has been featured extensively in numerous media outlets such as The Wall Street Journal, The Washington Post, CNN, CBS News, CNBC, Fox Business, and many more. With over 20 years of experience helping consumers understand their credit and identity protection rights, John is passionate about empowering people to take control of their finances. He works with financial institutions to develop consumer-friendly policies that promote financial literacy and responsible borrowing habits.
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