Compromise Achieved!

Well, at least initiated. The new idea is this: rather than take out a big chunk of money from every paycheck for the 401k, we instead start a Roth IRA for my husband (I'm thinking at Vanguard, because I like their index funds) to double the amount of money we can contribute to IRAs each year. The benefits of this include the fact that a) we can get our contributions back if we really need to, b) we will probably contribute to the Roths annually rather than monthly, so we will have more flexibility in the short term with higher paychecks, since we just have to find the $4000 per account at the end of the year within our total savings, c) we will have more control and variety in our investment options. The only downside is that we don't get to deduct most of it this way, but we will be diversified in terms of tax structure since we will still be doing what we need to for matching employer funds in the 401k, plus the Roths and regular taxable investments. I think this will fit our personalities better, since my husband is not one to fall for "if you don't see it you won't miss it." I'll get into why our "pay yourself last" approach works well for us in a future post.

The conservative fatal flaw (gasp!) of this liberal couple

As I am spending more and more time thinking about our finances, and plotting how to best plan for the future, I have come to the inescapable conclusion that the major barrier between us and financial success is the fact that we're total 'fraidy cats. Or, in the parlance of economics, we are extremely "loss averse."

My husband and I have many positive qualities when it comes to financial decisions: we are happy to live below our means, and have never had problems with overspending; we are relatively similar in our approach to money, which has saved us so far from polarizing around saver/spender roles; we are both strongly swayed by rational arguments, so we are usually able to agree on a course of action once we've discussed an issue; and we are good at talking to each other about the emotional and logical components of money stuff.

However, we are also similar in being naturally very loss averse. As I have been reading more and more on the subject, I recognize and (I think) am internalizing that the fundamental basis of financial growth is taking an acceptable amount of risk to reap larger benefits. However, even as I slowly convince my emotions that we are taking unbearable "losses" by keeping so much of our money liquid instead of allowing it to grow, we as a couple have much more inertia to overcome on this front, since my husband is even more naturally loss-averse than I am.

In my next post I am going to brainstorm ideas to help us get more comfortable with risk. This blog is already a great tool, because it will force me to be accountable month by month for how fast our net worth is increasing, and hopefully face the consequences of our conservative strategy. I would really appreciate any advice or ideas that you might have to help us get into a better mindset so that we can make good financial decisions. Help me blogosphere.... You're my only hope!

: )