What makes the rich rich? Looking at the spending pattern of various income groups in the US makes it clear: Savings. The real difference between rich and poor is that the rich spend more of their income on savings (pensions and insurance) and education.

Source: WSJ, Department of Labor,

When creating wealth, preserving it, and passing it on to the next generation is the formula for financial success, it’s amazing that less than 20% of Americans have a written plan when it comes to investing and even retiring. [1].

The paradox in human behavior is that we are perfectly rational and capable of planning a major event in our lives, but this is often forgotten when it comes to investing. In fact, you’ll find that only a third of investors have a written plan that guides their investment strategy and retirement plans.

Why is a plan necessary?
The investment world is a harsh jungle, a world of murky waters where the smartest and most organized survive and succeed while the rest are swallowed up. A written plan short-circuits our normal response to something as emotional as money. It prevents us from drawing on our instincts and emotions. Instead of following the herd mentality that can lead you to make unwise investment decisions, a plan will force you to stick to a sound strategy backed by fundamental investment principles. Some of the difficult emotions you will have to overcome when investing include:
1) The fear of failure
2) The tendency to continue with a certain approach just because you started it
3) Personal matters such as relationship problems at home.

It is also important to point out the main reasons why investors fall prey to the market and lose their precious funds:
1) Omitted facts and figures mislead investors into investing in a structurally flawed company or financial instrument
2) Overconfidence makes some investors think they are invincible and can always beat the market.
3) Everyone wants to be seen as a champion, the successful general capable of leading an army to victory. This can cause you to make investment decisions that are not based on rational thought but rather on a desire to impress your friends, co-workers or family members.

By having an investment plan in writing and actually following what it says, you will have drastically increased your chances of earning and increasing the size of your savings or investment portfolio. The following are simple steps to create a plan and avoid the herd mentality and knee-jerk impulses that make us fools when investing:

1. Set specific and realistic goals
For example, instead of saying you want to have enough money to retire comfortably, think about how much money you’ll need. Your specific goal may be to save $500,000 by age 65.

2. Calculate how much you need to save each month
If you need to save $500,000 by the time you are 65, how much will you need to save each month? Decide if that is a realistic amount to set aside each month. If not, you may need to adjust your goals.

3. Choose your investment strategy
If you’re saving for long-term goals, you can choose more aggressive, riskier investments. If your goals are short-term, you can choose conservative, lower-risk investments. Or you may want to take a more balanced approach.

4. Develop an investment policy statement
Create an investment policy statement to guide your investment decisions. If you have an advisor, your investment policy statement will describe the rules you want your advisor to follow for your portfolio. Your investment policy statement must:

Specify your investment goals and objectives,

Describe the strategies that will help you achieve your goals,

Describe your return expectations and time horizon,

Include detailed information about how much risk you are willing to take,

Include guidelines on the types of investments that make up your portfolio and how accessible your money should be, and

Specify how your portfolio will be controlled and when or why it should be rebalanced.

A smart investor with a written plan and strategy has already won half the battle without making a single financial decision. By implementing the plan and adhering to the established trading rules, the savvy investor will avoid the pitfalls caused by human emotion and behavior and will end up winning big.