Did You See The Snake In Your Closet?

Did You See The Snake In Your Closet?

There is probably not a snake in your closet, certainly it would be strange here in Ireland. If you did however you would need to do something immediately. This is a very different situation to your financial plan. Your financial plan is not at all like the snake in your closet. There appears to be little danger, so you are inclined to leave it.

When you discuss financial planning with most people their eyes glaze over. Most will explain that they have not done any serious financial planning because it is too difficult, dull, or not urgent. Some think about it but for them it becomes too complicated.

Lots of people in Ireland have bits and pieces of financial plans. A pension here, a life policy there, and some sort of savings. What they have done is created a disjointed group of products. The effect of this is that they may have given up efficiency, ignored important aspects of their goals and certainly could have wasted both time and some money. The big one is time. You do not get this back.

Deep down the real reason people do not do financial planning it that they do not know “what it is for?”. This lack of understanding makes it impossible for them to calculate the future benefits against the immediate costs.

As a life centred financial planner, the most important part of our journey with clients start with the “what is it for?” We seek to understand their story, how they built your money, their best life and its many versions and what is their enough. From this starting point we build strategy. Having a pension is not a strategy it is a method to develop money to be spent in the future. Having money to spend in the future is the strategy and there are many ways to achieve that.

Selecting one method over another is a decision made at the tactical level. Your advisor can and should help you with tactics. These are however detailed, change frequently, and become evermore complex. This is an area of knowledge that you are unlikely to be able to keep abreast of or do not wish to spend a great deal of time on. Strategy should really be your focus as a client. You should own it and decide what is best for you.

So, if your advisor starts with tactics failure is highly likely. In my experience when clients and their advisors start with tactics, decisions will be driven by emotion and poorly informed methods to decide on a chosen course of action. Because of this approach I meet many prospective clients that are unhappy with their current advisor and blame them for the weak performance and poor outcomes.

If a proper strategy is the basis choosing a tactic then poor outcomes are less likely. When poor outcomes do occur, the experience is a sheard one and we along with the client can take corrective action. I see my role as like that of a co-pilot. My client is the Pilot deciding where we should be going. My job is to review all possible routes and explain the merits and dangers of each route. The client/Pilot decides which route is best suited to them and off we go on the flight together. As bad weather, tail winds or change is required I continue to advise my Pilot so that changes in our route can be made. In this way we travel on your journey with you.

You will see and hear that security and family safety are very commonly quoted needs for people. I agree but the problem with both is that they can be postponed. That is, they can easily be put off as there is no immediate danger or “snake” in the closet. In many cases solutions for these needs are put off for extremely long periods of time. By the time, the “snake”/problem is seen and recognised it can often be felt that it is too late to do anything about it. This is another reason to do nothing about a financial plan. Therefore, we ask, “what is it for?” If you understand that the question is asked as an indicator of “what it will allow you to do” and not “what the product does or prevents”, you will have a better understanding of its value. In this context you will know where it fits in with your strategy.

One last piece of human nature has a real impact on why people fail to do financial plans, comprehensive or simple. We as humans are programmed to seek instant gratification. We value something immediate far more highly than something in the distant future. This is called “Hyperbolic Discounting”. To explain here is an example.

Even though Sean knows that the chances of winning the lottery are very low he still enters every week. On his 35 th birthday surprise, surprise he wins €5,000,000. He goes to Dublin to collect his cheque. When he arrives, he is given 2 options. Option 1 is to receive €250,000 a year for the rest of his life. Option 2 is to collect €5,000,000 which he will receive in his bank account today. A quick calculation revels that Sean will be much better off if he lives beyond 55 years of age. (He has every intention of doing so.) In fact, if he reaches 85, he will have collected a total of €12,500,000. However, Sean thinks of all the things he can buy immediately and decides to opt for the €5,000,000 even when he knows it is a worse deal.

In real life we see that people use hyperbolic discounting in extreme ways. Often, we see that distant outcomes get valued at very close to zero. This reinforces the notion that saving for tomorrow is hard when spending for today is easy.

To combat this, it is important to break the journey down into smaller pieces. In human psychology there is a big value difference between saving €750 per month and having €1,000,000 for you to spend in 35 years. So, the best approach is to create a habit. Once you have decided to start a savings plan, whilst the first payment may feel hard, each subsequent payment will get easier and easier. The beauty of this approach is that once you have started to create one good habit creating a second and a third becomes easier as well. Savings habits lead to changing risky financial decisions and so on.

Financial planning is a strategy that you control. You decide “what it is for”. If this is understood to be worth more that the immediate cost, you will develop a plan. A life centred planner will help you with their knowledge and experience. They will work very hard with you on what you are trying to achieve. This could be a comfortable life after work, ensuring that your family can be taken care of if something happens to you, how you may pass on your business efficiently to your family or how best to share your estate with the ones you love. Do not wait until it is too late. The one thing that we cannot make back is time.


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