The Automatic Success Plan

In the middle decades of the last century, most workers had an automatic success plan already in place. There are only two simple steps: buy your home and have a defined benefit pension plan. This ensured that people could retire (since they must retire) at age 65. This is why our parents and grandparents didn’t need to be concerned with financial planning or investing.The choices were mostly made by the employer.

The two steps of the automatic success plan have a common element: forced savings.Without having to make a conscious decision each month, the equity in the home was increased through the mortgage payment and the pension plan balance was increased through employer (and possibly employee) contributions. Employees were automatically enrolled and all choices were made by the employer.

The automatic success plan worked only for people who lived within their means and avoided accumulating debt. At retirement, their expenses would decrease (the mortgage payment was gone) and the pension income would start. It was a smooth transition. If the need arose, a retiree could draw on the equity of the home or downsize.

Defined benefit pension plans are increasingly rare. However, there are ways we can still make our plan more automatic and improve our chance of success.

The first step remains unchanged: buy your own home. This requires saving for a down payment and qualifying for a mortgage. That may be quite a task, and I often recommend that people look to family for help. One benefit is that you are increasing the equity (ownership) in your home with each monthly payment. Further, once your home is paid in full, it is very unlikely that you could lose your home. You must have somewhere to live, and a place that you own can increase your stability.

Most of us don’t have an employer who offers a defined benefit pension plan. Your employer may offer a pension plan where they match your contributions. Ensure you are enrolled and contributing enough to receive the maximum benefit from your employer. It is essentially free money, and if your employer matches 100%, with few exceptions, that’s a better return that you would see by investing or spending it in any other way. It makes the savings automatic and makes the investing simple.

If your employer doesn’t offer a savings plan, you can set up your own. Most banks and investment houses will set up a monthly transaction that will debit your bank account and either credit a savings account or purchase an investment. I have found that once the automatic transaction is in place, most people adapt their spending and hardly miss the money. For this reason, I generally suggest setting the amount as high as possible.

In order to boost your savings and accelerate your progress, you could save and invest unexpected income. As an example, a tax refund is a form of forced savings. The government held your money throughout the year, and they return it in the form of a tax refund. If you didn’t miss the money and have no plans for it, it will be spent. However, it could also be used to reduce debt or increase investments, without being missed. Another example is when your receive an increased salary at work. Because you hadn’t planned to spend the increased amount, you could put it toward automatic savings, without missing it.

These ideas can increase the ease with which you save money. Saving and investment money consistency is the surest way to build your wealth and progress toward reaching you goals. The more automatic, the easier it is and the more likely you are to succeed.