Inertia – It Can Work For You or Against You, Which Will You Choose?

By Lila Quintiliani, AFC ®
Military Saves Assistant Coordinator

In the behavioral economics book Nudge, authors Richard Thaler and Cass Sunstein say “never underestimate the power of inertia.”  What they mean is this:  people are generally averse to change.  They will stick with the status quo.  Especially when it comes to financial decisions.  In other words, and the authors don’t use this term, but I will – we can be kind of lazy when it comes to making financial choices.

I feel free to use the term “lazy” because I have been there myself.  In fact, a couple of weeks ago, an online subscription that we had purchased was due to expire.  It was for a magazine that we rarely have a chance to read, and I had no intention of continuing to subscribe to it.  Except – and this is where the inertia comes in – our credit card had been used to purchase the subscription.  And in the fine print was an agreement to automatically renew unless we cancelled first.  But we didn’t cancel first, because I had no idea our “anniversary” date was coming up.  So, yes, I ended up paying for a subscription I didn’t want or need.

I have seen inertia strike in plenty of places.  I have had clients come to me who are paying for “credit monitoring services” that they didn’t use simply because it was tacked on to some other purchase and they never got around to cancelling it.  Or those who were enrolled in book or DVD/Blu-ray purchase clubs that they never bothered to change.

To invest in the Thrift Savings Plan is a conscious election that many service members unfortunately never get around to making.  The power of inertia prevents them from going to myPay and choosing to enroll in the plan.   And many TSP participants don’t realize that if they are contributing to the TSP and don’t make a decision as to which funds they want to invest in, they are automatically defaulted to the G Fund, which is the Government Securities Investment Fund.  This fund is undeniably very safe, but it may not be the most complete solution for a very young investor, who might be able to tolerate more risk.  Even a TSP publication says that the G Fund “may not be where you want to keep your accounts throughout your career.” But to invest in the other TSP funds, you must actively go on the website and change your preferences, something we lazy folk don’t always get around to doing.

The good news is that we can harness the power of inertia to work in our favor:

  • Make savings automatic. Whether you are enrolling in the TSP, starting up an individual retirement account, or creating an emergency fund, set up an allotment or direct deposit.  That way you can sit back and watch the savings grow without having to mess with it at all.
  • Go with the flow. The TSP takes a percentage of pay rather than a set amount.  Which can be a good thing, since every time you get a raise, your contribution will automatically (and hence painlessly, because you won’t notice it!) go up.  Try doing the same thing with your savings accounts.  You can’t miss what you don’t see.
  • Don’t stop. Once you have started the savings habit, keep on keeping on.  I actually keep a savings account in a bank that is completely different from my “regular” bank.  It makes it that much harder to get at, and my savings account (earmarked for a new car at this point) is continuing to grow.

I did learn something from my recent bout of inertia, however.  In the wake of my mistake, I went and checked on our current cable deal.  It’s set to expire in July, and I don’t even want to know what the package we have would “regularly” cost.  I have made a note on my calendar, and this time I will call BEFORE our subscription is up!

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