While many of us strive to think and plan for the long term, it is much easier said than done. In fact, our brains are hard-wired to address immediate needs and concerns.1 Thus, we tend to think — and act — with a short-term focus, ignoring the long-term consequences of our actions. Naturally, this approach doesn’t help us prepare for the future. Fortunately, there are a few things you can do to help think and plan for the long term, especially when it comes to long-term financial planning.
When we’re stuck in day-to-day to-dos, we can easily lose sight of the things we want to accomplish over the long term. It’s great if you can check the little things off your list. But how often do you focus on your major life goals? Here’s one tip to help shift your thinking from the short term to the long term: Ask yourself, “What do I want to accomplish in the next three years?” Don’t limit yourself to goals that are strictly “financial.” A goal could be anything from “open a business” to “own a classic car” to “tour Europe.” This can help you identify what is most important to you. Mapping your goals can be simultaneously clarifying and motivating, which sets you up for the next step.
Protecting the most important things
Short-term thinking can also lead us to lose sight of critical events that could severely impact our lives. To identify these events, ask yourself: “What is the biggest thing I have to lose today?” Stop for a moment to think about that. What if you or your partner were unable to work?
As humans, we all tend to think we have more control over our lives than we really do. That’s one reason why we often ignore the possibility of negative events, like unexpected death or disability, happening to us or our loved ones — even though the consequences can be dire.
Ensuring that you and your family are fully protected should always be your first long-term financial consideration. Life insurance, for example, will protect your family in the case of your death, while disability insurance can make up for lost earnings if you’re too sick or injured to work. How much protection is enough? Well, how much do you expect to earn before you retire? That’s the amount you need to protect. This calculator can help you formulate an estimate.
Saving for the long haul
Many of us are tempted to jump on a hot stock or market sector. Why is that? It’s exciting, if not addictive, to incessantly check the ticker and watch a hot stock climb. But saving may be the better long-term play. It can be a tough discipline to get a handle on and may not have the same emotional appeal of investing in a hot stock. But a rate of savings can be more lucrative than a rate of return on high-stakes investments. This is particularly the case when you’re working toward a specific long-term savings goal like college or retirement.
So, to get your savings in gear, start by putting away 15 to 20 percent of your income. Tip: Use direct deposit to your savings account to help maintain discipline, and check the account regularly, say quarterly or yearly. What’s more, adhering to a consistent rate of savings helps you avoid taking too much risk with your money.
In fact, the ability to save over the long term is of far more consequence to your financial health than an investment’s rate of return.2 When people fail to save, and when they take inappropriate risk, they may have to scramble to start putting away money for retirement later in life. As a result, they don’t have enough income to live on when they stop working and they don’t have the financial resources to cover an emergency: Two-thirds of Americans say they would struggle to come up with just $1,000 to cover an unexpected expense. A good savings goal equals the equivalent of one year’s salary. In terms of investments, balance your assets with 50 percent in “more-liquid” funds –– money you can access immediately –– and 50 percent in “less-liquid” funds.3
By taking a long-term view, you can make better decisions that will benefit you both now and in the future. Setting goals, protecting your earning power and saving diligently can help get you both thinking and acting with the long term in mind.
- Ken Whitehead, “Short Termism and the Human Brain: How We Tune Out the Long-Term Consequences of Our Actions,” Inspired Economist, 2014.
- Anora Mahmudova, “Here is why your savings rate is more important than your investments’ returns,” MarketWatch, 2017.
- "Views of the National Economy Are Clouded by Personal Finance and Employment Concerns," The Associated Press-NORC Center for Public Affairs Research, 2016.