We’ve all done it at some stage. There’s a financial decision to make – perhaps an insurance renewal or option to switch to a cheaper utility provider – and we don’t take the opportunity, because it would involve more work and the benefits don’t feel tangible.
We know we’re not really doing the right thing, but we rationalise it so it doesn’t feel like a concern. We could all be more financially savvy if we really put our minds to it, but who has the time?
Yet when it comes to your long-term financial plans, this type of outlook could hold you back from achieving your ambitions. One of the biggest obstacles to our future could be our own mind-set.
As Philip Graves, consumer behaviour expert and author of three books tells Skipton, we are programmed to think and act in a way that can prevent us making the best financial decisions.
|Philip Graves, Consumer Behaviour expert and author|
“There’s a conflict going on where we tend to be focused much more on what ifs immediately accessible to our minds,” he states. “You can be occupied by short-term thoughts, which feel more significant to us than something that’s very elusive and uncertain – such as, in 40 years’ time, how might your life be?
“Our inability to process the future easily can result in us giving too much attention to the short-term.”
Why we make good and bad decisions
Philip believes the lack of gratification from making more considered choices goes a long way to explaining why we sometimes go against what we know we should really be doing.
“In a modern consumer society, and when we’re making decisions around things like financial services, there’s sometimes a bit of a conflict between how we mostly make decisions, and how we are expected to make decisions,” Philip explains.
He cites the example of pensions, which people have traditionally veered away from despite knowing they make good sense.
“Despite attempts to incentivise people to get pensions, with things like tax breaks, we got into a situation where the only way the government has been able to move things forward was by defaulting people into a workplace pension, and saying you’re going to have one unless you go through a lot of hoops to say you don’t want it. Because they realised people would go with what’s easy.”
The figures support the theory. According to the Office for National Statistics, 73% of UK employees had an active workplace pension in 2017 – up from less than 47% in 2012, before auto-enrolment took effect. By making it more difficult to not have a pension, the government ensured an extra 9.5 million people now have one.
“Where things like workplace pensions are done by default, they are probably – unfortunately – a direction we need to go,” argues Philip.
Investing in your future
Another obvious area where we can be reluctant to make considered, long-term decisions are with our savings. It’s no secret interest rates have been stuck at historic lows, yet that hasn’t stopped thousands of people still using them for long-term goals, when investing your money might achieve better returns.
Philip believes this a result of how we typically view saving. “People tend to feel more focused on savings in the sense of the squirrel, storing nuts. They’re not seeing it as an investment; they’re seeing it as putting something away”.
So they feel good if they’re adding to the stack, and maybe feel bad if they’re taking something away from the stack. But what makes them feel good or bad is very much what’s focused on them, not the return they’re getting.
“You add to that a sense everyone’s kind of getting the same rate, and with rates not high anyway, the difference between a rate of 0.5-1% doesn’t feel like a significant amount of money. And then there’s quite a lot of effort involved moving that money around.
“So you’ve got all these different factors going on, and any one of them, or any combination of them, can lead to you actually not acting.”
So what’s the solution for making better financial decisions? Philip is clear that it’s not easy, and training your mind is key, “When people are approaching their personal finances, one of the biggest hurdles is these are things they’re not usually doing regularly. So they don’t have these patterns of behaviour they can go to which make it easy. Nearly everything they have to do around it is new and unfamiliar.
“One of the few things I suggest is to get help from someone who knows what they’re doing. You also need to recognise that it’s a bit like DIY jobs – it’s probably going to take longer than you think it should.”
Although the rewards are less tangible at first, Philip believes thinking more about the long-term can make a real difference. “Once you take the decision to do it, it’s worth sticking with it. Recognise it’s going to take a bit of effort, but when you’ve done it once it gets easier the next time; once you’ve done it a few times it gets easier after that.
“And it’s a process that’s worth going through, because the stakes are significant in terms of making some important financial decisions – from protecting your family to securing your future.”
Download your free copy of Moneyetc
The spring edition of our investor magazine, Moneyetc is available for you to download and read. The 28-page magazine is full of in-depth features and topical stories that could support your financial planning.
Set sail to a brighter future
- We provide insights on markets over the last 20 years.
- And discuss how despite constant changes its important to keep a long-term mind-set.
Checkmate for Brexit
- We analyse the current Brexit situation.
- We also look at how to deal with your finances in times of uncertainty like these.
How to be a smart investor
- We provide tips from industry experts on how you could be a smarter investor.
|Download your Moneyetc guide|