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CFP Board eNewsletter | September 2006
When Willpower Won't
Survey: Do You Plan Your Shopping with a List?
Getting to Grips with Pensions
Time to Invest?
Recent Financial Alerts
About This eNewsletter
When Willpower Won't

You've had a rough day at work. You had to deal with the stress of an irritable boss, unrealistic deadlines and irritating colleagues. You had to get through an office birthday party with your diet intact, heroically denying yourself a slice (or two) of that double chocolate cheesecake. Throughout it all, you remained admirably calm and imperturbable, a model of self-control. Now, on your way home, you spot something in a store window-maybe it's a watch, a pair of shoes, or even a slice of double chocolate cheesecake-and feel that you've just got to have it. Surely, after a day like yours, you deserve it. These are the ideal circumstances in which impulse buying strikes.

Impulse buying is a spontaneous desire to spend money, usually on something you don't really need and may not actually want. It can occur when you're on a high (as a way to celebrate) or in a low (as a way to cheer yourself up). As an occasional indulgence, it is relatively harmless. Indeed, shops and supermarkets encourage impulse buying by strategically placing enticing items throughout the store, especially around the checkout aisles. Impulse buying becomes a problem, though, when you can't control it and it starts to eat a hole in your budget. That's when it may be time to resist the urge to splurge. "Almost everyone engages in impulse spending at one time or another," says Kathleen Vohs, a psychologist and assistant professor at the University of Minnesota's Carlson School of Management. "But even people identified as 'impulse buyers' can and do control their impulses. We're most vulnerable during times when we have already exerted a lot of self-control and willpower."

Willpower is like the battery in your cell phone: if you use it a lot, it runs down; if you don't recharge, it eventually gives out. Vohs and colleagues have conducted experiments to see how the exertion of willpower in one situation affects willpower in another situation. In one study, two groups of dieters were asked to watch Bighorn, a documentary depicting the lives of a herd of Bighorn sheep. As if subjecting people to this video was not cruel enough, half the dieters were seated within arm's reach of a big bowl of M&Ms. The other half were seated 10 feet away. After the video, both groups were asked to solve a complex geometric puzzle-without knowing that the puzzle was unsolvable because the researchers had left out essential information. The dieters who resisted the nearby bowl of M&Ms gave up more quickly on the puzzle than those who were seated further away from temptation. Why? Because they used up more willpower to control their sweet tooth. "Our reservoir of willpower is finite," Vohs explains. "When self-control resources have been depleted by one task, there is often too little left for other tasks."

So what's a shopper to do, especially when consumer culture constantly challenges our self-control by presenting alluring temptations at every turn? The good news is, our willpower batteries can be recharged. The less good news is, you still have to use some willpower to do it.

Vohs suggests several strategies to resist impulse buying. The first is to control your attention. "Don't focus on the products. Don't even look at them," she says. "The longer you look at something you want, the more tempting it becomes. Keep your eyes straight ahead and mentally remove yourself from all those shiny, pretty things." It can also be helpful to deploy counterarguments: Think of all the other ways you could use the money you would otherwise spend impulsively; list the reasons that you don't really need the object of your impulsive desire. (This is a bit of a risky strategy, though, since it's as easy to talk yourself into something as it is to talk yourself out of it.) Finally, Vohs says, it sometimes helps to allow yourself a small impulsive purchase instead of the larger one that really tempts you. "You might buy a pack of gum instead of a piece of cake, for example," Vohs says. "The danger here, though, is of the snowball effect, that one impulse purchase leads to another."

Vohs' research shows that willpower is not always the most effective way to resist impulse buying. After a hard day at work, or a series of close encounters with double chocolate cheesecake, the smart thing to do may be to remove yourself from tempting situations, at least until your self-control resources have had time to replenish themselves. "Our impulses are strong," Vohs says, "but resisting them can be empowering. Be aware that impulse buying messages are out there, but tell yourself: I'm not the kind of person to succumb." In other words, though the ads might urge you to 'just do it', sometimes it's better if you just don't.

- James Geary

Survey: Do You Plan Your Shopping with a List?

Everyone knows that reaching a big goal requires making a plan and mustering the discipline to stick to the plan. But when it comes to smaller goals, like having groceries for the week or a new outfit for work, many people forget about planning and simply run to the store. Let us know whether you plan your shopping with a list or if you shop list-free.

Take Our Survey.
Getting to Grips with Pensions

Space flight is a tricky business. To set a spacecraft down on the right spot, millions of miles away from its launch pad, requires pinpoint accuracy. Even the tiniest error in the trajectory means that a ship will miss its target by a wide margin. That's because, when traveling across such vast distances, small miscalculations at the beginning become huge errors by the end of the journey. You may set out to reach one planet but find yourself lost in space instead.

Something similar has happened to pensions - the "defined-benefit" retirement plans that employers can set up to provide former employees with a pre-determined amount of income during retirement. Thirty or 40 years ago, no one accurately calculated the pension requirements of all those baby boomers, many of whom are now approaching their golden years. The result: the U.S. Department of Labor estimates that corporate pension plans are underfunded to the tune of some $450 billion. And as the cost of funding those retirements becomes clear, many companies are making drastic course corrections by discontinuing traditional schemes. According to the National Retirement Risk Index, almost 45% of U.S. households are at risk of being unable to maintain their pre-retirement standard of living during retirement. In other words, our retirement plans are on Mars but our pensions are on Venus. Last month, the Federal Government introduced a course correction of its own: the Pension Protection Act (PPA), which is designed to shore up the pension system and thereby provide people with a little more security in retirement.

The PPA requires companies to calculate their pension obligations more accurately, so that funds going into the system equal the funds they will eventually have to pay out. Starting in 2008, firms must also take steps to make their plans solvent, while those with underfunded schemes will be penalized by having to pay extra premiums. It will still be years before the pension system is in the black, but these are important steps to get the journey to retirement back on track.

While the PPA doesn't do much to encourage companies to extend pension benefits to more employees, it does contain other provisions designed to help individuals make the most of their other retirement saving options.

Perhaps the most important change is that the Act allows companies to automatically enroll employees in defined contribution plans such as 401(k) and 403(b) plans. At the moment, only between 60% and 70% of those eligible to join a corporate-sponsored plan actually do so. Why don't more people join? After all, their futures are at stake. Francis Vitigliano, a pension specialist and visiting scholar at Boston College's Center for Retirement Research, calls it "the Statue of Liberty effect." "If I go to New York City only one day a year, I am definitely going to visit the Statue of Liberty," he says. "But if I live in New York City, and can see the Statue of Liberty whenever I want, I never actually do it. Enrollment in pension schemes was made so easy that people tended to think they could always do it later, and then never ended up doing it." With automatic enrollment, some think participation may increase to more than 90%. Individuals will still be able to opt out, by simply telling their employer 'No, thanks.'

The Act also includes a provision that encourages employers to provide financial advisors for participants in defined contribution plans such as 401(k) and 403(b) plans. Having financial advice available through the workplace may be just what it takes to get more people saving for retirement through these plans - especially those who feel intimidated or confused by the choices offered by their defined contribution plan. "A significant number of people are not interested in making their own financial decisions," says Vitigliano. "They are happy to have a professional make those decisions for them. And there are guidelines in place [in the PPA] to avoid conflict of interest in choosing investments." If your employer hasn't arranged options for you to receive professional advice about your employer-sponsored retirement savings plans, now is a great time to let your employer know you're interested.

Other provisions of the Act that provide benefits and new options for retirement savings include the following:

  • Keeping recent increases in the annual contribution amounts people are allowed to put in retirement accounts (for 2006, up to $4,000 in IRA accounts and up to $15,000 in 401(k), 403(b) and 457 plans), including the amounts people nearing retirement can put in as "catch-up" contributions (for 2006, up to $1,000).
  • Keeping the recently-introduced Roth 401(k), a retirement savings option that employers can set up, allowing employees to save after-tax income that can be withdrawn later in retirement without additional taxes.
  • Allowing a way for non-spouse beneficiaries to transfer inherited funds from a 401(k) or other company-sponsored plan to an IRA account, allowing them to avoid the immediate tax obligations such inheritances used to create for the beneficiary.
  • Allowing a way for individuals (only those aged 70 ½ or over) to donate IRA funds to charities without having the withdrawal of those funds subject to taxes.
  • Allowing an option for income tax refunds to be deposited directly in an IRA account.

If any of these new provisions sound interesting, be sure to consult a financial planner or tax professional to learn if they apply to your situation.

The PPA is an important step in reforming pension and retirement savings plans. But there's still far to go. Vitigliano points out that only half of all working Americans have access to employer-sponsored retirement savings plans. One challenge ahead is to make employer-sponsored retirement plans available to the other half. Another is for retirees to learn to manage their money as they move from what Vitigliano calls "the accumulation phase to the decumulation phase." In other words, baby boomers have spent most of the past few decades building their wealth; now they have to figure out how to spend it responsibly so their wealth will last throughout their retirement. "Many people will have a mix of Social Security, savings/investments and home equity to work with," says Vitigliano. "They will have to make some tough decisions. The first step is to be aware those decisions are out there."

For those who want a glimpse into their financial futures, the Center for Retirement Research has just the thing. Its Get Rich Slow game is designed to get people actively engaged in retirement planning. Though devised for women and meant to be played in a group setting, Vitigliano says individuals of either gender can profit from it. The game is played just like real life: you make financial decisions and then deal with the consequences. Getting informed about pensions and retirement savings plans-through employers, financial planners or games like Get Rich Slow-is the only way to make sure that the long, strange trip toward retirement takes you to your desired destination.
Time to Invest?

When you've managed to save a bit of money, it's only natural to think about investing that money in something that will give you a decent rate of return. After all, you want your money to work just as hard for you as you have for it. But, before looking at how the stock market is performing, it's best to first review your goals and determine how much time you need to achieve them.

For shorter-term goals-generally any goal you wish to reach within a year's time-investing your money in, for example, savings accounts or certificates of deposit (CDs) are the safest option, as the rate of return for such accounts generally is fixed or experiences only slight fluctuations. Many safe savings options are offered by banks, and the federal government insures bank accounts up to a certain amount, providing another layer of safety for savings kept in these accounts.

Additionally, your savings for short-term objectives should have liquidity-the ability to be retrieved easily as cash-without delays and with as few fees and other penalties as possible. Retrieving money from a bank account or any other fixed-return investment is generally quick and straightforward. In exchange for safety and liquidity, however, the rate of return for these accounts tends to be much lower than that for riskier, less conservative investments.

When your goal is further out in the future - say five years or more - you may be able to afford more risk in exchange for a higher rate of return. Money invested toward your long-term goals should be money you won't need to get your hands on quickly, so even if the investment drops in value at one point, there will be time, hopefully, for the investment to re-gain its value. Although buying higher-risk investments such as stocks or mutual funds may involve some fees for withdrawal or redemption, these investments often have the potential to grow your money over time so the fees won't seem as significant.

When you're comfortable with the time frame for your financial goal and have decided what level of safety and liquidity make sense for the money you're putting toward that goal, you'll also want to consider setting aside emergency funds. Putting aside the equivalent of three to six months of your current income can provide you with a cushion to handle unexpected changes such as a medical emergency or job loss. You'll need to keep these funds safe and accessible so that you can manage sudden changes without creating additional financial problems. If you haven't created an emergency fund, you may want to add one to your savings plan.

You'll also want to consider the state of your retirement savings. Retirement may be the most expensive financial goal you have. If retirement seems far away, it may be a long-term goal that you want to reach by growing your savings through investments. But if retirement is just around the corner, you should approach your savings with more attention to safety and liquidity. However far retirement may be, you'll want to make sure saving for retirement is always a part of your personal finance goals.

If possible, you should be working toward both your short-term and long-term goals simultaneously. Whether your primary focus is saving or investing, whether you're most comfortable making financial decisions yourself or with the assistance of a financial professional, it's important to keep your goals clear so that you can make the right decisions for your situation.
Recent Financial Alerts

NASD has issued a new consumer alert titled "Look Before You Leave: Don't Be Misled By Early Retirement Investment Pitches That Promise Too Much." Early retirement is something many people dream of, so people listen up when someone presents an investment idea that promises to make that dream true. This alert highlights some recent investment scams that have come to light through recent NASD enforcement actions and offers tips to help you identify fraudulent investment schemes.

The Federal Deposit Insurance Corporation (FDIC) and National Association of Insurance Commissioners (NAIC) have also issued consumer publications related to the financial safety of students. FDIC's publication offers money management tips for teens, including advice on how teens can guard themselves against identity theft. NAIC's publications provide an overview of the types of insurance coverage appropriate for college students and why renters insurance is a good option for college students living on their own.

Read more about these and other financial alerts.
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