What makes you financially unique?

This is the second of two Insights on the many ways that each of us is unique – and why your understanding of this is key to planning your money.

What we’ve covered, and what’s coming up?

These Insights are suitable for people of all ages and wealth levels.

In the first Insight, we explored the non-financial factors that make us unique.

We looked at the problems with personality labelling models that try to simplify who we are. And we pointed to some more robust tools for gaining insight into our personalities, emotional styles, character strengths, and more!

If you’ve not yet read that first Insight, please start there.

In this second Insight (a 10 to 20-minute read), we’ll focus more on how our unique financial goals and circumstances create a need for a unique financial life plan.

We’ll also show you how to avoid a classic behavioural trap which makes a lot of people’s financial planning (and their working lives) unnecessarily hard!

Here are the sections for this Insight:

1. How will you start planning your money?
2. Why do people focus on the products?
3. Why must your financial product set be unique to you?
4. How could you map out your money-life goals?
5. What are your unique financial (and human) facts?
6. What is the happiness forecasting problem?
7. How do you balance these challenges?
8. Bottom lines and next steps.

So, let’s get right into this.

How will you start planning your money?

In broad terms, you can start planning your money in one of two ways.

You can focus your attention on either:

1. Learning everything about the financial products and investment strategies available.
2. Your future life goals – for yourself and anyone else you want to help.

And yes, as you might have guessed, the second approach is easier and produces the best results!

It’s easier because it uses your expertise about yourself, your unique attitudes, life goals and circumstances.

It produces better results because you must know what you want from your money and when before you can know which boxes and investment funds might be suitable for holding your money.

So, we urge you to start on the right of this picture.

Doing so will save you from many headaches upfront!

It’s the prospect of those headaches, by the way, which stops many from starting work to design a financial life plan.

Why do people focus on the products?

The short answer is that most are unaware of the financial planning process.

Here’s the evidence – almost no one searches for this most valuable service.

FYI: The blue line is still at the bottom if we replace financial planning with financial advice or financial coaching. 

Generally, people have no idea what these services are about.

Most of our attention (if we think and talk about money at all) is captured by financial product promotions, online bloggers, and the money sections of the weekend press.

Articles designed to make you believe you can find the best products in the market – by reading more of their articles!

We know how the online world became a battleground for our attention. Social media platforms are FREE to use because our attention is the product social media companies sell to advertisers.

They aim to keep us online long enough to buy something or click that affiliate commission-earning link to the new savings account or credit card!

What’s more, they employ a lot of smart Psychologists to design the user experience to keep our attention on their platform.

If that sounds far-fetched, watch this documentary where the people who designed those systems confirm this is their aim.

Anyway, regardless of the cause, there are two big problems with our product-first approach to money planning.

First, it’s extremely hard (unless it’s your job) to learn everything about all the financial products in the market.

You’d need to learn about:

• The rules on how much money you can put in.
• When you can take your money out.
• The tax or product penalties that might apply.
• Any other (input, ongoing and on-death) taxes that might apply.
• Any other risks and costs that might affect your funds?

And, if you really want to learn how to choose suitable boxes for your money, you’ll need a sound approach to the task.

Like the one we outlined for you here.

The second (and showstopping) problem with a product-first approach to money planning is that you never find the ‘best’ financial product or investment fund.

No such thing exists!

What you will find are various good (and not-so-good) examples of most product types.

Financial products are a bit like cars.

Some are more affordable and suitable for your needs than others. And you’ll find a range of financial vehicles 😉 that could suit your needs.

Your financial product set must be unique to you.

A competent financial planner will only ever suggest financial products that take account of your circumstances and help you achieve your financial needs and goals.

And because your needs, goals, attitudes and circumstances are unique, your plan must be unique, too.

This is a vital point to grasp.

It means there is NO book, video, podcast, or blog (including ours) that can ever offer you a ready-made financial life plan.

Yes, we know that might sound frustrating.

But it’s great news if it simplifies your money planning and gets you started in the right place, right?

Let’s bring this to life with two examples

Imagine you’ve inherited some money – say, £100,000 – and you’re wondering how you might invest, say, £30,000.

You’ll allocate the rest of the money between:

• Bank savings – for access in case of emergencies.
• Paying for some home improvements.
• Taking the family on a dream holiday.

As we’ve said, there is no best vehicle for your £30,000, and no one can advise you where to invest it unless they’re qualified to do so and understand a great deal about you.

Here’s why that is – in two simple examples:

Example 1: Helping children with university costs – in a few years

Let’s say you want to use this £30,000 to support two children through university, starting in four and six years.

And you want to know that the money you allocate to these goals (plus interest, as a minimum) will be available, in total, for your children when they need it.

In this case, you may wish to keep that money safe in a bank savings account or in a very low-risk investment fund.

And if you have unused allowances to save in tax-advantaged money boxes – you might wrap the fund in one of those, too.

Now, what if you had a very different financial life goal?

Example 2: Escaping from work early!

Let’s say you planned to use your £30,000 towards an early retirement in, say, 15 years from now.

And, to make this interesting, we’ll assume you plan to drip-feed the money into your workplace pension over a few years at a rate of, say, £500 per month.

In this case, given the much longer time horizon and the fact that you’re phasing your money into your pension, you might choose to invest those monies into a stock market-based fund (in your pension scheme) for higher potential returns.

These examples show two things:

First, your capacity for investment risk can be very different for each of your financial life goals.

And that’s a concept we explored in more depth over here.

Second, we hope these examples show that you won’t find a good home for your money simply by poring over product comparison sites.

Once you know the type of financial product you need, those sites may be helpful, but you must start by deciding on your goals for that money.

How could you map out your money-life goals?

Think about what you want to have, become or do.

And think about what you’d like to do less in the future, too!

Here’s an example money-life map of these things.

Remember, your map will look different because it’s unique to you. 

If you have some spare income or capital to save or invest, you can start designing your money-life map immediately.

Just decide if you want to build some funds to:

• Slow down from work before the state pension age?
• Take time out before retirement so you can:
  • Take a long luxury holiday?
  • Spend more time pursuing your hobbies or special projects.
  • Research and write a book?
  • Plan and start a business?
  • Study and acquire new skills?
• Help a younger loved one with some of their costs while at university – or with a deposit on their first home?

Whether you have one or many financial life goals, for each one, you’ll need a rough idea of the following.

1. How much (in today’s money terms) will you need and when?
2. How much money can you afford* to put towards those goals – as a lump sum and/or as regular savings over time

Only then can you (or your financial planner) decide on the most suitable financial products and investments to help you achieve those goals.

* We assume your financial foundations are all in place – which means:

• You spend less than your income (from all sources) each year.
• You have enough (accessible) cash savings for emergencies – like a temporary loss of work or expensive repairs to your car or home.
• You’ve made arrangements to provide enough money to any financial dependents in the event of your death or severe disability. And your loved ones have clear instructions for dealing with your financial and material possessions in the event of those disasters.
• You’re on track to receive a full state pension, and you’re receiving any other state benefits you’re entitled to.
• You’ve paid off any credit card or other expensive debts.

If those foundations are not in place – you’ll need to deal with those first.

What are your unique financial facts?

It’s fair to say that compiling a list of all your financial facts can be a tiresome job – esp. if you’re not into personal accounting-type tasks.

However, whether you plan your money on your own or, as we recommend, with the help of a professional adviser, you must have clear sight of your financial facts.

You cannot make a sound financial plan without these details.

Is this really that boring?

Well, look at the questions below and decide.

It’s your unique answers to questions like these – and possibly more depending on your circumstances – that you (and your financial planner if you use one) will need to develop a plan.

There are two groups of questions.

First, we’ll look at the hard facts about your finances.

Second, there are questions about your human side.

What are the hard facts about your finances?

1. What is your income after tax and other deductions?

Include your income from work and other sources, like investments, property, and pensions.

And note how your income might change in the next year or two.

2. How do you spend (and plan to spend) your money?

What are your regular living expenses?

Include the costs of your regular holidays, weekends away and other trips out.

A good financial plan will fund our future goals, of course, but it will also leave us with enough money to enjoy life on the way!

Just think about those areas of spending you could cut back on (or cut out) without affecting your quality of life. 

You don’t want to waste any money you’ll want in the future.

And note how you think your spending will likely change over time, too.

3. What is your net worth?

This will inform your future financial choices.

So, if you own your home, what do you think it is worth?

And, what is the value of other properties, savings, investments, insurance and pensions in your name?

Your net worth is simply the value of those assets, less any amounts you owe – on mortgages, personal loans, credit cards, Hire Purchase agreements, etc. 

While looking at your loans, note the remaining terms and the interest rates charged, too.

4. What is the financial situation of your wider family?

This may sound like an odd question to consider, but it can be highly relevant if family wealth transfers make sense.

Very few people know of government-approved ways to avoid unnecessary capital taxes – and as Roy Jenkins, former Labour chancellor of the exchequer, once said:

Inheritance tax is a voluntary levy,
paid by those who distrust their heirs
more than they dislike the Inland Revenue!

Sensible planning in this area can help you to leave more to those people or causes you care about – and less to the taxman.

5. What is your attitude to investment risk?

A qualified financial planner can help you assess your general attitude to investment risk.

More importantly, they will help you find investments aligned with your capacity for investment risk, which may differ for each of your life goals, as we saw in those examples earlier.

Questions about the human side of you

6. What are your attitudes to various money questions?

We learn our attitudes towards money from those who influence us – throughout our lives.

And it’s helpful to note our attitudes to money questions – and question any attitudes that don’t serve us well.

We’ll return to this topic in future. For now, note your thoughts on your attitudes to spending and managing money, planning your money for the longer term, personal life and ill health insurance – and investing.

7. How motivated are you to engage with money questions?

This is the big challenge, right?

The funny thing is that we’ve known since the 1970s (from psychologist Albert Bandura) that we tend to engage more in tasks where we feel ‘somewhat’ capable.

We don’t tend to accept invitations to play competitive tennis if we’ve never held a tennis racquet!

And the same applies in the world of personal finance.

We may have some financial goals, but achieving those goals efficiently (without wasting money) is hard without a sound plan.

The problem is that if we don’t know how or we don’t have someone to help us design a plan, we’re less likely to try and more likely to avoid talking about money altogether.

However, as we become more capable of doing some of the challenging tasks, we develop more interest and commit more strongly to them.

We also recover more quickly from setbacks – and re-frame our problems as tasks to be mastered.

So, unless you’re an expert in all money matters, note the topics you’d like to learn more about. 

As you can see, we’re committed to financial education, and we’re very keen to help.

8. What are your financial goals?

It can feel daunting to consider everything we might want for our longer-term future and create a Money-Life Map as we saw earlier.

That said, most of us have one goal in common: to build enough wealth to feel free to stop (or slow down from) work at some point.

So, if you’re not already retired, write down that freedom goal for starters. And note when you want it to start and the income you think you’ll need for the life you’ll want.

You can always ask a good financial planner to sense-check those numbers for you later. 

9. Do you have a life partner?

If you have a partner, you must decide if you want to plan your money together from the start.

You could begin by designing your plans separately to consider what matters to you personally – and then come together to build a joint plan from there.

Alternatively, you may wish to keep your longer-term money plans separate.

There’s no golden rule answer to this question – but whatever you decide, it helps to be open about your approach.

10. How is your physical health?

Our health affects various aspects of our lives, including the cost of insurance plans to provide for others in the event of our death or for ourselves if we lose income due to serious ill health.

These insurances are complex products on which it pays to take professional advice to ensure:

• You’re adequately insured against the risks you want to cover.
• The plans are set up correctly to deliver the right money to the right hands as quickly as possible in case of a claim. 
• You obtain a competitive price for these insurances. It surprises most people that these plans often cost less when arranged through an adviser than by going directly to insurers. So taking advice could save you time and money in this area.

11. What about your knowledge and skills?

Your work knowledge, skills, and experience are your income-generating assets, and you’ll want to maintain them if you plan to continue working for a while.

Your plans for future learning are crucial to your earnings.

So, outline your knowledge and skills and your thoughts on how you’d like to develop them.

12. What else matters to you?

Make a list of what you value most in life, including any activities or projects that fascinate you- or would do if you had more time for them.

Answering this question may lead you to add a point or two more to your money-life map.

Are you inspired to answer all those questions?

OK, we get it.

The personal accounting tasks around financial planning do not float many people’s boats!

This is one of many areas where financial planners add value to their clients’ lives, especially if you have money in several strategies, such as pensions, insurance, and investment funds.

Indeed, it’s pretty standard for new clients to take a bag full of financial documents to their first meeting with a planner – and ask for a neat list of them all!

Either way, getting everything listed in one place reduces the stress from uncertainty about what we own.

So, talk to a financial professional if you need that kind of help.

What do you know about the forecast problem?

If you doubted it before, we now hope you’re sure that you are unique (in many ways) – which means you need a unique plan for your financial life.

You do not want a one-size-fits-all plan (or guidance on how much to save for retirement) from a book, blog or video.

That said, it turns out that there’s a risk of overstating our uniqueness, which undermines our ability to plan.

One challenge we share is a poor ability to forecast how we’ll feel about significant future life events.

We might think we know what will delight or upset us, but our predictions are often wildly wrong.

If you’d like to learn more about why we have such a problem with forecasting our future reactions, you might want to read these two books.

The first is by Professor Dan Gilbert, a professor of psychology at Harvard University who is well known for his research into these areas.

The second is by Hal Hirshfield, a Marketing and Behavioural Decision Making Professor at UCLA – and described by Angela Duckworth as “one of today’s leading behavioural scientists”. 

Here, we’ll focus on some of the reasons it’s hard to make good, long-term decisions about money.

First, and despite the marketing efforts of leading pension firms in past years, the truth is that we didn’t evolve, like squirrels, to save for the future every year.

Still, according to Gilbert, we humans are unique in our ability to think ahead in a more deliberate way than other animals who are just using their instincts.

We can play thought experiments – to imagine futures that are different from today.

We don’t have to learn every life lesson through experience.

And that’s just as well because we don’t have to put a finger into a pencil sharpener to know that’s a bad idea. (That’s one of Gilbert’s analogies) 

So, yes, we can imagine.

You just imagined doing that – didn’t you?

It’s this future problem-solving ability that eventually led to the design of refrigerators to keep our food fresh!

Humans 1 – Squirrels 0.

Sadly, it took several more decades to work out that many of us need nudges (like auto-enrollment to pension schemes) to start squirrelling away money for our autumn and winter years.

Without nudges, we might undervalue long-term savings.

Some prefer to have £100 now to £110 in a year – or to a whole heap of money in 20 years’ time.

Some like to buy things today and pay later because that doesn’t seem to be as painful as paying now.

It just hurts when we become overwhelmed with debt-interest payments.

Or it hurts the next generation when Governments fall into this trap.

In short, some people are good at delaying gratification – but many prefer the bird in the hand to the two that live in the bush – with the squirrels.

This bias toward immediate gratification is a huge problem – because it undermines our efforts to eat healthily and exercise, too.

However, this is not our only mental challenge when planning our money.

We also struggle to forecast our emotions.

There’s no doubt that our brains are immensely powerful.

But they do not pay attention to everything happening in front of us in the present – and they do not have an infinite memory capacity.

So, when we go on our mental time travels to the past – or to imagine the future – our views are often hazy.

Those views depend on our moods, too. So, low moods cause us to remember and predict more negative events.

The places and people’s faces are not well-defined in our mind’s eye. So, we fill in the details with images and ideas that fit our story.

And those details may not be a good reflection of what was (or will be) true.

We can only say what we think our future will be like – but of course, we cannot know.

Our forecasts also go wrong because we use our present circumstances to assess what we think we’ll want in the future.

We know how this works.

If we’re hungry when grocery shopping, we buy far too much food – and we don’t stock up on the healthy options!

If we’re overworked now, we might dream of a life without any work – which might suit some, but it does not make everyone happy.

If it did, we would not see billionaires working into their 70s, 80s and 90s!

Similarly, our financial plans might go wrong if we base our future income needs on what we earn today.

This is a particular challenge for high earners – where the approach can make retirement funding look horribly expensive. And that’s been shown to put many young people off pension saving altogether.

So, we must take care when planning our financial futures and not assume that what we will want in the future can be forecast by what we want today.

A great plan does not require us to work long days for decades before taking a big break.

We may not have the energy, health or inclination to do what we dream of doing now – when we’re 20 or 40 years older!

A “plan for tomorrow and live for today” approach makes much more sense – to us.

In the future, it’s unlikely that our happiness will depend on the success or otherwise of a plan we made 20 years ago.

We’re generally more resilient (and kind to ourselves) than that, especially when the going gets tough.

And thank goodness we are.

The End of History Illusion!

So, our challenge is remembering our potential to cope with future events – and the many other ways we might change.

However, further research titled ‘The End of History Illusion’ (Quoidbach, Gilbert and Wilson 2013) reveals how hard this is.

It turns out that many of us tend to recognise that our values and preferences have changed a fair bit in the past 10 years – yet we do not expect to change much in the future!

The research shows that those in their 20s to their 40s are somewhat more susceptible to this illusion than those in their 50s and 60s.

But most of us (from young adults to grandparents) are affected.

In short, we’re prone to regard the present as a watershed moment  – when we’ve finally become the person we will be for the rest of our lives!

It sounds like a silly view of life to adopt – but this is how we tend to think.

Why?

We’re not sure, but it seems like a rational self-protection device to feel we’re ‘complete’, just as we are.

And it’s good to believe that – alongside the fact that we can change and grow into our futures, right?

We just need to remember that these forecasting errors can cause us to overpay (in many ways) for future indulgences – based solely on what we want today!

How do you balance these challenges?

So, we seem to have a paradox here.

We must remember we are unique because this reminds us to design unique financial plans for ourselves and those we care about.

However, we must also remember that we’re poor forecasters of how we will react to events and what we will want (to have, do or become) in the future.

So, let’s look at the first trick for overcoming the forecasting problem.

Balancing trick 1: Get some neighbourly advice.

If we remember that our reactions to life’s big events (becoming a parent, starting that job, leaving that job (or partner) or heading into retirement) will be similar to many others who’ve had those experiences, then perhaps we could:

1. Spend less time assuming that what we want for the future is set by what we want today.
2. Talk more to those who’ve recently been through the events we’re heading towards. 

The evidence (from Gilbert and others in ‘The Surprising Power of Neighborly Advice’ (2009)) suggests this is a smart move. 

It also seems wise to pay particular attention to those in the thick of the change we’re heading towards.

Those who dealt with an event decades ago will remember less about those times.

What’s more – their negative memories will have faded faster than the positive ones. So, they’ll see the distant past through hazy and rose-tinted spectacles!

Balancing trick 2: Exchange letters with your future self.

This is another proven* idea (outlined in Hershield’s book) to help us overcome the challenge that we see our future selves as strangers.

The idea is that you write a letter to your future self – and ask that person for a letter in reply.

The aim is to develop a conversation with this stranger!

Yes, we know it sounds odd, but Psychologists Yuta Chishima and Anne Willson have proven it to be effective. 

So, why not give it a try?

You could, for example, discuss your ideal retirement life – even if that’s likely to be twenty or thirty years from now.

Will your conversation reveal a desire (or a financial need) to continue part-time work into your later years?

Maybe it will – maybe it won’t. 

But you’ll only find out if you have the conversation – with your future self 😉

Bottom lines and next steps

In this two-part Insight, we’ve listed many factors that make us unique to make the case for designing your unique financial life plan.

And we urge you to remember that there are no financial plans (in books, blogs or videos) that are ready-made for you.

How could there be – if the author knows nothing about you and your goals?

Of course, it’s easy to find information online.

But understanding and wisdom do not come from random ideas, especially if you’ve got those from an untrustworthy source – and there are plenty of those online!

It’s tough to spot misleading adverts for high-risk financial products and scams.

And sadly, thousands discover this to their cost every year.

Guidance from friends and family can sometimes be helpful because these people should have your best interests at heart.

That said, strategies that worked for others in the past might not work for you from this point in time.

Asset valuations will have moved on. And that’s why the law requires a warning on all investment promotions – about ‘Past performance being no guide to future returns, etc.

You are quite different from those people, too, in all the ways we’ve explored in this series.

So, financial planners cannot work alone to create a financial plan for you.

They must create your plan with you because they need to understand your situation, your attitudes to money and your life goals.

If you talk with a planner about the questions we listed above, you’ll make a great start on your financial life plan.

So, we urge you to do that when you’re ready to start designing – or to refine your plan.

Thanks for dropping in.

Paul

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