Plenty of Americans probably could use a financial pep talk right about now.
Many people lack emergency savings. Others remain far behind in retirement planning.Still others are scared about the stock market. Inertia, if not downright paralysis, can set in.
When that's the case, gradual shifts in behavior – small steps – can help.
Here are some tips for saving, investing and retirement planning, with a focus on making changes in modest increments, without having to sacrifice too much or take on excessive risk.
1. Start saving with that first dollar
It's like that Taoist proverb says: The journey of 1,000 miles starts with the first step. With financial planning, it starts by investing that first dollar. Simple? Nearly one in five households have a zero or negative net worth. Plenty of others have minimal savings.
Retirement consultant George Fraser encourages reluctant savers by telling them they can start by socking away as little as one penny from each dollar of earnings, then increase it by a penny (or more) each year after that.
That way, the goal of amassing tens or hundreds of thousands of dollars doesn't seem so daunting, said Fraser, managing director at Retirement Benefits Group in Scottsdale.
The tactic works well in 401(k)-style retirement plans, where employees can start low and gradually increase their savings.
In recent years, to boost participation, many employers have focused on automatically enrolling workers in 401(k) plans, then increasing, or auto-escalating, the amount they contribute, unless workers opt out. But most workers don't opt out.
Once enrolled, participants tend to stick with the program. The idea is to take advantage of inertia, the natural tendency of many individuals to take no further action. But first, they must get started.
2. Use other periodic windfalls
If you can't manage to find any free cash from regular paychecks, try using bonuses, raises or other special increases.
Willard Bradshaw, a 72-year-old retired civil engineer, said he made a habit of taking half the pay raises he received over his career and putting the money into retirement accounts.
When he got a raise of, say, 3 percent, he would put 1.5 percent into savings. Within a few years, Bradshaw said he was contributing the maximum yearly amount allowed by his defined-contribution plans.
Bradshaw, who splits his time between Goodyear, Arizona, and Salem, Oregon, calls it a simple method that requires some discipline but doesn't involve too much scrimping. He considers it important to have the money diverted from paychecks without thinking of each savings decision, as happens with 401(k) payroll-deduction plans.
After a while, you learn to make do without receiving some of that money, he said.
Another possibility is to put income-tax refunds to work. Roughly two in three taxpayers receive refunds, and for some people it's the largest lump sum they'll get all year. Federal refunds last year averaged about $2,800 – more than enough to jump-start a savings or investing plan.
But realistically, most people can identify a few dollars even from routine expenses that could be diverted to savings. For example, a Vanguard Group study estimated that a person could amass more than $100,000 over 30 years, simply by cutting out a $3.50 premium coffee drink each day and investing the difference.
3. Set up a dollar-cost averaging plan
Related to the idea of commencing on a savings plan is the notion of moving into aggressive investments, namely stocks and stock funds, on a gradual basis.
If you are investing for the long haul, you realistically should hold most if not everything in stocks, reflecting the market's historic tendency to appreciate. But since that would involve considerable risk, and much anxiety, a dollar-cost-averaging strategy is more practical.
This is the notion of moving set amounts of money into stocks or stock funds on a regular basis, without pondering each decision – say $100 each pay period. Over time, you will buy shares at a blending of prices – some high, some low. But you avoid the risk of purchasing everything all at once, at what could be a market peak.
There are different ways to dollar cost average. You could put a steady amount of your income into the stock market each paycheck, as through a 401(k) plan. You also could gradually shift from a bond fund into stocks. Or you could invest the interest income from a bond portfolio into stocks.
Or you could do the reverse – making your assets more conservative by moving out of stocks, assuming you are nearing retirement age. Either way, the idea is to adjust the riskiness of your portfolio through gradual moves.
Research conducted by academics underscores the importance of gradual changes or "nudges" to improve personal financial results. The main thing is to get people started and build on small successes.
Reach Wiles at email@example.com or 602-444-8616.
This article originally appeared on Arizona Republic: Here are 3 small steps to grow savings of thousands of dollars in a 401(k)