Financial planning: Trick yourself to financial success

How do I stay on track?

Most economists assume we always make calm and rational financial decisions. But real life is messier and we humans are predictably irrational. We put an emotional value on money. Perceived losses hurt more than gains give pleasure; so we avoid risk. We tend to latch onto high numbers, increasing the chance of feeling a loss.  We herd together even when it is not in our best interests. It takes super-human powers to stay rational.  It is easier to trick yourself to financial success. Here are some nudges you can use to stay on course:

  1. Get some perspective

    It can be gut-wrenching if you learn your investments have lost more money than you earn in a year.  Anger, regret and fear can take over.  Has this ruined your retirement plans?  Should you switch to cash and wait till it all blows over? To beat inflation, most people who invest for the long-term need to hold a proportion of their wealth in the stock market.  These investments WILL drop in value every so often. If you have a financial plan, you should know how far your investments might fall and what the effects would be, so that when the stock market crashes you can stay calm. The real value of a financial planner is having someone who is impartial to contact when life is getting tough and you need a fresh perspective.

  2. Forget the Joneses

    We’ve all had to listen to someone (usually a man) drone on about a successful money venture (they never talk about failures).  These days you don’t have to be face-to-face, as most money bragging is done online. Because humans are social we often find ourselves thinking “Why aren’t I doing that?” or worse “Have I got it all wrong?”Keeping up with the Joneses is bad for you.  Mr Jones’ advice is unlikely to be right for you. If you find yourself worrying about what he is doing with his money recite: “I wouldn’t take this man’s medicine, so I won’t use his financial ideas.”

  3. Do your fire drill

    If you are invested in the stock market you should regularly remind yourself that your investment value WILL go down sometimes.  The best way to do this is an investment fire drill. Take the proportion of your investment invested in the stock market, halve it and take that sum away from the total.  Then ask yourself how you feel.  Be honest.  If this loss gives you real concern you should consider reducing the short-term risk in your portfolio.

  4. Turn down the noise

    Keeping a close eye on your current account to manage your spending is a good idea.  Doing the same with your long-term investment is not. It gives you a false sense of control, there is more chance of seeing a loss and this leads you to trade too much. Try to hold the right mix of investments for you in just one fund and look at it only once a year.  And turn off your news feed; it is noise not news.

  5. Hide or label your cash

    If you want to hang on to your money, hide it from your current account.  Set the date for your bills on or just after pay day.  If you can, make pension or ISA contributions direct from your salary. Make your savings mean something by labelling them with the goals you are saving for.  You are less likely to raid your holiday or new house pots to buy new shoes than if you have one large savings account.

  6. Think like a pilot

    The secret to personal financial success is to do the boring-but-important stuff regularly.  Over time it becomes a habit. The best way to do this is review your financial plan yearly.  Sailors and pilots get this instinctively.  Throughout a journey they go back to the plan, check to see they are on course and adjust accordingly.