Synopsis: Many of us make resolutions on New Year’s Day to lose weight, exercise more or maybe save more money. How are those going a month later? Most Americans don’t keep resolutions after a few weeks. Why is that? We’ll discuss strategies for planning and fulfilling that big change in your life.
Host: Gary Price. Guests: Tom Somodi, CEO & President of the Change Science Institute; Chris Carosa, Pres. of Carosa, Stanton Asset Management, author of Hey, What’s My Number?
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How Are Those Resolutions Going?
Gary Price: It’s February, and most of us who resolved a month ago to lose weight, save more, or get rid of the clutter in our lives are beginning to make excuses for why we aren’t living up to our promises. You’re not alone, according to Tom Somodi, CEO and President of the Change Science Institute.
Tom Somodi: There was actually a University of Scranton study done in January of 2014, and it indicated that only 8% of resolutions succeed, so 92% of resolutions, according to that study actually fail. And I think one of the main reasons for that is consistent with the main reason why most change fails even when you’re using a proven process, and that’s what I like to refer to as the Silver Bullet Syndrome.
Gary Price: Somodi talks about change in his book, The Science of Change: Basics Behind Why Change Succeeds and Fails. He says that we rely on the “silver bullet” to get what we want, but ignore the other aspects of our lives that also affect our behavior.
Tom Somodi: In Change Science one of the major principles is this environmental override that states that in order for any given process, any given methodology to succeed, there’s a set of requirements associated with that methodology. And the conditions in your environment need to support those requirements, and that’s where, if you have a disconnect between those conditions and those requirements, that process or methodology will fail even though it’s a proven methodology elsewhere.
Gary Price: That environment is different for all of us. You could be single, married, with or without children; employed or unemployed; in a job where you work long hours or in one where you only work part time. How do you save more money if your rent goes up, or your car or furnace breaks down? “magic bullet” solutions fit only a very few people’s lifestyles, and for the rest of us it’s tough to make them work. Somodi says that if, for example, you want to put aside more out of your paycheck, you have to look at all of the processes you can use to save.
Tom Somodi: And then you want to be realistic about it. You want to look at each of those processes, and you want to look at the conditions that exist in your environment, and then try to pick from a realistic standpoint the process that has the fewest disconnects to what you have in your environment. So, if you have a particular set of bills, your conditions may not allow you, for example, to take advantage of certain savings plans, you may need more flexibility than that.
Gary Price: Next, he says is “functionality trade-off.” For example, if you need a new car, you’ll have to look at how much more money you’ll be spending on transportation in your life with new car payments and higher insurance premiums. Can you accept the economizing in other areas that these additional expenditures will require? Or, if you want to lose weight, do you want to spend extra time at a gym, and maybe less time with your children? These are aspects of life that need to be considered at the outset whenever you decide to make a substantial change in your life. Then, Somodi says, you have to look toward the future.
Tom Somodi: If you’re looking at saving more it’s based off of your assumption of what your income is going to be. And if that’s based on receiving a raise, or not receiving a raise, then that assumption may change as time moves forward. And so what you want to do is, when you make your decisions, you want to write down these major assumptions and you want to monitor those assumptions. And so many people get frustrated because the process starts to fail, and they get frustrated and kind of give up. As opposed to saying, “Okay, hey I see what’s happening here, I made these assumptions. I thought my raise was going to be this, and in fact it’s that. Therefore, rather than giving up, let’s just tweak this thing. Lets modify it based on the new assumptions that I have to make, and the new realities that exist.”
Gary Price: Taking the new car example, if you find that extra costs aren’t made up by a lower-than-expected salary increase, can you find a way to make up for it? Maybe offering to drive co-workers to the office for a weekly charge? Or if you want to lose weight, can you save by dropping the gym membership and figure out no-cost ways to exercise more, maybe taking bike rides with the kids? For saving in the long-term, there are some strategies that you might want to consider. Chris Carosa is President of Carosa Stanton Asset Management, and author of the book, Hey, What’s My Number? He has some ideas on saving for retirement that can make it easier, and more profitable, to keep that resolution to save more. First is, “don’t save a cent.”
Chris Carosa: That sounds like the total opposite of what people say to do. Saving money is really hard to do over the long term if you’re not prepared to do it. So rather than jumping right in and say, “I’m going to save more and I’m going to do this,” and find out a few weeks later that, you know, I actually need the money for something, what you should do is you should prepare yourself. You should make a commitment just to plan what you’re going to do. Not necessarily execute it right now, but just make a promise to yourself that you’re going to take a look at your retirement and find out what it is that you need as best as you could. And there’s any number of retirement calculators or advisors who can help you sit down and do this sort of plan.
Gary Price: On his website, lifetimedreamguide.com, is a calculator that can help you find how much of your earnings you need to stock away to have the money you think you’ll need to retire. Carosa gives an example of someone in their mid-twenties.
Chris Carosa: You might think $1 million is a lot to get to you when you retire, but this number that the calculator calculates shows that you need only around 3% to 6% a year in order to get that million-dollar number. And a lot of people they’re freaked out by the million-dollar number, they just focus on that first. In fact there’s a famous commercial with these huge numbers holding over people’s heads weighing them down. That really disturbs people, but when they realize it’s only maybe 3% or 4% or 5%, they understand that’s actually doable in the market. It’s well below the average return that the stock market has shown. So what I say is, don’t save a cent just make your plan, figure out what you need to do and then you can decide how to implement that.
Gary Price: Once you’ve made a plan, it’s time to invest. Carosa says that you shouldn’t watch the market every day or you’ll drive yourself crazy with the ups and downs. He says the best advice is “do nothing,” and says that those who followed that advice during the recent recession ended up ahead.
Chris Carosa: There are some people who just said, “Well, I’m going to do something about this. I’m going to get rid of stocks.” and so they went from stocks to cash. Well the people who did nothing are well ahead of the game because they did nothing. The stock market obviously came back, plus some, whereas those who sold and did something actually ended up being losers, and they’re playing catch-up, and they’re going to have a hard time catching up. So this advice is actually totally opposite of what you’re taught to do, you’re always taught to be proactive, you know, take action, do something. Well, in fact, most people aren’t experts when it comes to picking stocks, so, don’t! Just admit it. “I’m not an expert. I’m going to put it down in a reasonable investment option, and just let it ride.” It will go up, it will go down, but the ups and downs that you see today will look like mere nudges in the future when you retire.
Gary Price: Another piece of advice is to be mindful of the different fees that certain investments to 401(k)’s charge. Carosa says that you can maximize your earnings by keeping more money in your account and less in the pocket of your fund manager. How do you find these fees? Well, investment companies are required to inform you, but Carosa says that it’s not always easy to find that information.
Chris Carosa: Out-of-pocket fees are fairly easy to determine, that’s really the plan or the company or you are writing a check to some service provider. And those are lumped together with the indirect fees, which are a lot harder to figure out, when you get your quarterly 401(k) statements. So, what I ask people to do is go actually right to the mutual fund prospectus. The prospectus is this form that every mutual fund has, and it discloses all this information. And on page two or three of the prospectus should be a fairly easy to read table that identifies the fees, and what you’re looking for, is you’re looking for non-standard fees.
Gary Price: One of those is the 12B-1 fee that’s used by the mutual fund for marketing purposes.
Chris Carosa: You want to look for commissions, 12B-1 fees, those are stated outright on page two or three of the prospectus. If your fund has that, you probably want to look for a new fund. It turns out only one out of ten 401(k) plans use funds that have 12B-1 fees today, this is according to the Investment Company Institute. So 90% of 401(k) plans out there don’t use these kinds of fees, and that’s good, because studies have shown that funds that rely on brokers to sell them, which is what these feeds are usually used for, generally underperform funds that don’t have these fees by about 1% a year. Over the course of a lifetime that could equal a third of your total retirement assets, so that’s a pretty significant difference. It sounds small, it’s only 1%, but over a twenty or thirty year career that’s a lot of money.
Gary Price: Carosa, like Tom Somodi, says careful planning and looking at all the different aspects of saving money, rather than just deciding to do it, can reap bigger benefits in the long term. And whether it’s losing weight, quitting smoking, spending more time with the family, looking at all the possibilities and being flexible will bring more success than any “magic bullet” plan you find on January first ever could. For more information on Chris Carosa and his book, Hey, What’s My Number? You can log onto his website at heywhatsmynumber.com. For a look into Change Science and how it can help you plan change in any part of your life, Tom Somodi invites listeners to visit his site at changescienceinstitute.com.
For information about all of our guests, you can log onto our site at viewpointsonline.net. I’m Gary Price.