Mental accounting … use it to your advantage

One of the biggest problem I have seen with people is the idea they have to limit themselves to “retirement plans” offered by their employer in order to save for retirement.

The problem enters the picture where people don’t save for retirement because they’re concerned they may need the saved money before then. Thus, they don’t save at all! The baby went out with the bath water on this approach.

Mental accounting has gotten in the way … how we view labels and money … we have mental accounts with mental labels which prevent us from being creative in the way we solve issues facing us when it comes to money and our goals.

 

The first problem is that people get their spending out of balance with their saving. This can be recognized when people feel they can not retire. Why this feeling? A nagging sense they’re not saving enough. Another nagging feeling they might need emergency funds before they reach retirement age.

What are retirement mental accounts? They’re called 401k, 403b, 457, IRA, and Roth IRA. The common feature among these is the requirement that you can’t touch the money prior to a certain age without a tax penalty.

Okay. So what prevents you from saving for retirement and not have the restrictions in the above type of accounts? You can save for retirement in a Joint or Individual account too!

If an emergency comes along, then you have access without tax penalty. You have given yourself another bucket that you can access under different rules. If you never have an emergency, then the money in this bucket becomes part of your retirement resource. Note, vacations are not in the emergency bucket mental account. Vacation money should be put in its’ own separate account at the bank for the vacation mental bucket.

What about other taxes? Yes there are differences. You won’t escape taxes. You simply change their nature in exchange for accessibility prior to older ages. Again, balance.

What about returns? Don’t get greedy! Strike a balance here too.

Taxes and returns are mental distractions as excuses for not taking the step to set up something you feel you need. The action step is to start saving … a drop at a time.

 

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