Americans pay a price for procrastinating on financial matters, but many delay anyway.
Missed financial opportunities abound, whether it’s getting a late start in retirement planning, failing to draft a will or simply not having enough cash on hand to meet emergency expenses.
“People know they need to take action, want to take action and plan on doing something — someday,” said George Fraser, a Scottsdale financial adviser.
Americans delay for all sorts of reasons. Some feel overwhelmed by the potential effort involved, others are intimidated by the knowledge required, while still others are paralyzed about making mistakes.
People also have a “present bias,” or tendency to underestimate the importance of future consequences when making decisions, according to Shlomo Benartzi, a UCLA professor and author of the book, “Save More Tomorrow.”
“People greatly prefer to spend now rather than save for the future,” he noted.
Procrastination also is linked to inertia, which “traps people into continuing to do what they are currently doing,” and to “loss aversion,” Benartzi wrote. The latter concept is tied to an unwillingness to sacrifice, even if it could mean greater eventual gain.
“People do not like to see their paychecks shrink, which makes them reluctant to increase their contributions to their retirement accounts,” he wrote.
Here are some financial tasks around which delays can be costly, with tips on how to address them.
1. Paying only the credit-card minimum
This is among the worst financial behaviors on which to procrastinate. Why? Because credit card interest rates are high, and compounding works against borrowers. In other words, you’ll be paying more and more interest on accumulated interest, possibly for years.
The current average card rate is 15 percent, according to the Federal Reserve, but some consumers are paying above 20 percent. Meanwhile, the clock is running.
Suppose you charge $1,500 on a card carrying a 19-percent interest rate. If your credit card company requires that you pay only 4 percent of the balance each month, your initial payment will be a modest $60. But it will take 106 payments over seven years to pay off the debt, according to an example provided by the Federal Trade Commission.
If the minimum payment is lower, it will take longer. In the same scenario as above but with a 2.5-percent minimum payment, it would take 208 payments spread over 17 years.
One tip is to ignore the minimum payment amount that’s typically listed on credit card statements. These figures can give people a false sense of making progress. Rather, strive to pay more than the monthly minimum if you hope to make a noticeable dent in your debt.
2. Not building up emergency savings
The reason so many people pile up credit card debt in the first place is that they lack ready cash to pay for car repairs, medical expenses or other big-ticket or surprise costs.
Financial advisers routinely suggest having enough money on hand to meet at least three to six months of normal expenses. Yet just 39 percent of respondents said they had enough liquid assets to cover an unexpected $1,000 expense, according to a Bankrate.com survey released in January.
Laura Walton of the education-oriented TCI Foundation in Tucson said gimmicks or games sometimes can work as motivators. For example, you might start by saving just $1 in the first week, then $2 the following week, $3 after that and so on. After a year, you’d have more than $1,300.
This approach builds momentum by helping people achieve small successes first. The key, Walton said, is setting specific and easily achievable goals, with definite deadlines.
“I have found that most people are genuinely pleasantly surprised once they look at their finances,” Walton said. “They see their goals are possible if they just save a little more here, spend a little less there.”
3. Ignoring estate-planning basics
Estate planning inherently is a difficult topic. You must ponder your eventual death (or incapacity) and decide to whom you want your assets to go.
Many people delay drafting wills because they must decide which family members, friends or others to appoint as executors, Walton said. It becomes easier “once they realize they can always change those names as needed,” she said.
Nearly two in three Americans lack a will, according to a Rocket Lawyer survey conducted in 2015.
Procrastination also can apply to other types of estate-planning documents such as trusts and powers of attorney (which authorize others to act on your behalf should you become incapacitated).
The people you name, or the documents themselves, typically can be changed later if necessary. So, too, for beneficiaries on individual retirement accounts, life insurance policies and 401(k) retirement accounts.
It’s wise to review your beneficiaries at least once every couple of years.
4. Not getting serious about retirement
For decades, the financial industry has warned Americans to boost their retirement savings, often pointing to the funding crisis brewing with Social Security as a motivation. Fraser, a financial consultant with Retirement Benefits Group, thinks the warnings have been a mistake and have paralyzed people with fear.
Rather, he prefers to build hope and redefine the challenge in a positive way, with simpler terms.
For example, he likes to tell new 401(k) plan participants that they could start saving with as little as one penny from each dollar of salary, then boost that by 1 cent a year.
“Everyone knows what a penny is, and most people don’t even bother to pick them up off the street,” he said. “If people think they need to start saving 15 percent right away, they’ll never get started.”
Even individuals who start late with retirement planning can make headway if they just get going. They probably won’t reach the level of savings that experts suggest, but they’ll be better off than doing nothing.
Curiously, the federal government unwittingly encourages procrastination by letting taxpayers invest in IRAs as late as mid-April and still count the contribution as if made the prior year.
In a 2017 report, researcher Morningstar.com identified “waiting until the 11th hour to contribute” as one of the key retirement mistakes that people make.
“Those last-minute IRA contributions have less time to compound,” Morningstar noted, “and that can add up to some serious (forsaken) money over time.”