Help Yourself Make a Change

Big changes aren’t easy for anyone, whether pivoting to a new career, ending a relationship, or starting a new fitness regimen.But one of the tried and true ways to navigate transitions is by establishing a new routine. Routines provide structure during periods of change, structure that helps us let go of the previous chapter and feel like we’ve truly begun the new chapter.So how can someone change their financial routine to help improve their retirement prospects?In his book “The ONE Thing,” Gary Keller reviews a wealth of research on habit formation. I’ve gone back to this book so many times that I decided to show you my well-worn version with flags, notes, stains and all:Unfortunately, Keller found that for most of us, the hardest part is actually forming the new habit. “Habits require much less energy to maintain than to begin,” he says. In the beginning, before a habit is successfully established, you need to rely on willpower and discipline to stick to the new routine. But if you are able to do so for long enough, the new behavior becomes automatic or ingrained.In an experiment on establishing new habits for diet and exercise, researchers found that the average person took 66 days to adopt new daily behaviors. “It takes time to develop the right habit, so don’t give up too soon,” Keller encourages his readers.Last month I wrote about evaluating your investing plan. And if you’re like most people, you probably discovered that a higher rate of return could really help you meet your financial goals. (Long-time readers know that I’m a firm believer in the long-term wealth-building power of the stock market, and you can read more of my thoughts on targeting a higher rate of return here.)But if you are a conservative investor, this may sound scary.So how can you establish and then maintain the habit of investing in stocks?One of my favorite tricks for creating a new financial routine is automated investing. The hardest part about changing directions is making the decision and then sticking with it. With automated investing, all you have to do is make the decision. The automation then provides the discipline, willpower & routine for you.Here’s how you do it…First, take a look at all of your accounts, and divide your investments into two big categories -- high risk / high expected return and low risk / low expected return. Said another way, divide them into Stocks and Bonds/Cash.Second, take a look at the contributions you’re making to your retirement plans, whether a 401k or IRA or other type of account. What percentage of your monthly contributions are going into Stocks? What percentage of your contributions are going into Bonds/Cash?Now we’re at decision time. If you need to grow your Stocks category, increase the percentage of contributions (i.e. new money) you’re adding to the Stocks category. (If you’ve discovered you’re a little too heavy in Stocks, you can do the opposite and increase the contributions you’re making to Bonds/Cash.)Automatically adding a little bit more to stocks -- just a little bit at a time -- is one of those habits that can add up to a lot over time. Consider that a conservative $100,000 portfolio that grows at 4% per year will grow to about $219,112 after 20 years. A slightly more aggressive portfolio that grows at 6% per year will grow to about $320,714 after 20 years.When you put it in dollar terms, investing in stocks is a habit that’s worth establishing.