Investing For Your Future
Monthly IFYF Investment Message
November 2005
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Investing for your future usually requires making one or more behavioral changes. Some examples are reducing household expenses to free up money to invest and enrolling in an employer 401(k) plan. Research indicates that changing behavior is a gradual process and that people need to be receptive to making a change in their life before change can happen.
One well-known behavior change theory called the Transtheoretical Model of Change (TTM) describes five change stages ranging from "cluelessness" about the need to change behavior (the precontemplation stage) to ongoing maintenance of a positive action such as regular purchases of shares in a mutual fund. Developed by researchers at the University of Rhode Island, the TTM also describes 10 change processes related to the five change stages. The remainder of this message describes how to use some of these processes to improve investing behavior.
Before someone can even think about changing their financial behavior, they will experience the change process called "consciousness raising." This means that they will begin to learn new facts, ideas, and tips that support the idea of making a positive change (e.g., investing in a 401(k) plan). Seeing information about the benefits of enrolling in a 401(k) plan provided by employers can help raise workers' awareness level. For example, one popular tool used by may employers indicates that a 25 year old who invests 1% of a $30,000 salary ($300 annually) would have almost $50,000 at age 65 with an 8% average annual return and about $75,000 with an additional 50% employer match.
Another early change process is called "dramatic relief." This means experiencing the negative emotions that go along with negative behaviors (e.g., high debt and lack of invested assets). The fear that many women harbor of becoming a "bag lady" is an example. Another is watching a close relative struggle due to lack of financial preparation for retirement. Stories about the problems and/or successes experienced by other people can be a powerful motivator to make financial behavior changes.
A third change process that occurs early on is called "social liberation" by researchers. In laymen's terms, this means realizing that social norms are changing in a way that supports a positive behavior change. In other words, "the writing is on the wall." An example is an employer that implements a 401(k) plan or profit-sharing plan or increases the match available to workers. These savings opportunities indicate strong encouragement for workers to invest for retirement, especially if no other savings options (e.g., a traditional defined benefit pension plan) are provided.
Once people decide to change their investing behavior, other change processes become important when they take action. One, called "helping relationships," is the social support provided by other people. An example is expense reduction by all family members in a collaborative effort to free up money to invest. Another, called "counter-conditioning," is the substitution of positive behaviors for negative ones. An example is investing $50 a month in a mutual fund with money saved by bringing lunch from home instead of buying it at a deli.
A third change process in the action stage of change is called "stimulus control." This means removing cues to engage in negative behaviors and adding cues for positive behaviors. Two financial examples are avoiding trips to the mall that lead to overspending and automating investments through tax-deferred employer retirement savings plans or automatic investment plans available through many company stocks and mutual funds.
Further information about positive investment changes can be found throughout the Investing For Your Future home study course. For example, Unit 3 describes dozens of strategies to "find" money to invest and Unit 7 describes employer retirement savings plans. Further information about changing behavior can be found in the book Changing For Good (1994, Avon Books) by Prochaska, Norcross, and DiClemente or at the Web site http://www.uri.edu/research/cprc/TTM/ProcessesofChange.htm.