I am considered the more indecisive one in the family. It usually takes me a lot of time agonizing over purchasing decisions that involve larger sums of cash and multiple very different options. For example, in the past few days I have tossed and turned over booking an accommodation for 3 nights over Easter weekend, which I postponed until the last minute. It took me a few weeks to decide on the location to avoid highway traffic; then another few days to sort through the already thinning openings. The nice ones seem too expensive, the less expensive ones have a small bed. One has a good view; the other has a better location. In short, there is not one place that fits all my ideal criteria, and choosing any one seemed like I’m taking a risk. Eventually I had to force myself to settle on the one that last caught my attention, pay the deposit, and stop worrying about it.
It got me thinking, we generally focus on making the best financial decisions, but not enough on the consequences of not being able to make a financial decision. In certain scenarios, financial “indecisions” actually are more costly than making a suboptimal decision. Below are a few common ones:
#1: Pay check deductions for employer-sponsored retirement account
If your employer offers a 401(k) or IRA that allows you to contribute, usually there is a small default contribution rate at 2% or 3%, or sometimes even at 0% if you do not opt in. It’s easy to get used to the amount of take home pay with the default contribution after a few cycles and settle into a pattern of spending. You may not even consider the fact that you should be or are able to save more by simply upping the contribution rate. By not consciously making the decision of how much you want to save in your retirement account, you are letting other people decide for you. Eventually you may even miss out on the opportunity to get free employer contributions.
Tip: At the end of the year, or when you change jobs, always make a conscious decision on how much you should and can save.
#2: Picking investments for retirement account
Even after deciding how much to save, many people postpone the decision on where to invest their contributions because they don’t know how to pick investments and are wary of losing money. Eventually they may forget about it and allow the money to sit in cash. Year after year they are missing out on the growth opportunities, especially for those who have many more earning years to come.
Take the 5 year period between July 2006 and June 2011 for example, which covers the period of Global Financial Crisis (and corresponds to the first 5 years of my professional life). If you consistently invested $500 a month in a Life Cycle Fund such as Vanguard Target Retirement 2040 (for people who wish to retire around 2040), you would have gotten $35,881 in your account; whereas if you didn’t do anything with it, you would have exactly $30,000 cash in the account. That’s a difference of 20%!
This is not to say that a target fund is your best investment option, but only to illustrate that even if you don’t know what’s best, investing in a target fund is better than doing nothing. If you don’t feel comfortable building a portfolio on your own, don’t postpone investment decisions any longer and find a professional (or lots of online reading) to help you. The longer you keep only cash in the accounts, the more likely its value will be eroded over time due to inflation.
Tip: Find a fee only financial planner who is willing to provide financial advice not only on assets under management but also on your employer-sponsored plan.
#3: Get disability and life insurance coverage
Many people do not get nearly enough disability or life insurance coverage from work. However, we usually don’t think about it- because if we are paying a premium in our pay check every month, we must be covered, right?
Not exactly, depending on your family size and expenses, group policies may only cover part of your family’s needs when catastrophe hits. For example, if you are the sole breadwinner in the family, think about how your family can move forward and have their needs met if something cuts short of your income earning capability. Sometimes to get more coverage, you need to buy a policy outside of work and go through the underwriting process, which includes filling out a lot of forms, some medical exams, and determination of pre-existing conditions.
Even if we are aware of the need for more insurance, the lack of immediate consequences usually keeps us in limbo. Once you find the motivation to contact an agent, you may also get stuck in the underwriting stage since all the other things in life seem more important at the moment.
Most likely nothing serious will ever happen to us, so the premium we pay is down the drain. However if the unexpected did happen, the financial consequences would be huge. Therefore, financial indecision on getting properly insured can be life changing. So stop postponing this important decision.
Tip: Start with finding out your exact coverage from employment. Work with a licensed insurance professional to get the proper coverage.
Postponing important financial decisions is like avoiding dental visits. It’s not pleasant, and may not seem necessary at the moment, but eventually you will find out the consequences of not making them. What other costly financial indecisions have you encountered?