Small steps to long-term financial wellbeing
When food was scarce and the danger of death was all around, surviving long enough to pass on their genes was the main objective of ancient humans and our brains developed accordingly.
But while the human race has made tremendous progress in eliminating food scarcity and danger to life, our brain hasn’t really changed much. This means we are hardwired to favour instant rewards over deferred gratification.
And when it comes to dealing with our money - weighing up spending, borrowing, saving, investing decisions – it means that the easiest course of action is to spend the money we have coming in on things which give us immediate – even if only fleeting – benefit or reward.
…the easiest course of action is to spend the money we have coming in on things which give us immediate benefit or reward
This often means we fail to save enough for other longer-term goals, the most expensive of which is accumulating enough financial resources for when we can’t or no longer want to work for money.
It’s true that a significant minority of people barely have enough money to meet their daily living expenses, and saving for the long-term is just not feasible for them right now. But the majority of people can afford to save more for their long-term (or reduce expensive debts to make space for that saving), but they fail to make it a priority and their lifestyle spending rises to consume all their income.
There’s always tomorrow
Part of the problem is that the future is, well, in the future. Being older and having to contemplate living off your financial resources seems so far away and for most people rather abstract. There’s always tomorrow isn’t there? And you’ve so many things that you need to spend your money on right now!
And thinking about being older (or old) isn’t something that most of us relish. But just as the title of the James Bond film put it, tomorrow never comes and it’s never the right time to start long-term saving.
Short term focus for long-term gains
But there is a way to balance living and enjoying life today, with the need to build long-term financial security and freedom of choice, by only focusing on the short term.
You need to think of your money in terms of three time periods as follows:
· Three-year life milestones
· One-year spending framework
· Monthly money habits
Three-year life milestones
Most people find thinking about their long-term financial situation difficult, but most have a rough idea of, or can at least contemplate, how they would like their life to be three years from now. It might be to buy a house or move home; start a family or have another child; get a promotion or better job; help an elderly relative get over an illness or manage a life transition.
Having a life milestone which is just within reach is more real than lofty but abstract ideas of being secure in later life.
Having a life milestone which is just within reach is more real than lofty but abstract ideas of being secure in later life, and you are likely to be more motivated to achieve it. But, and this is important, you need to keep asking yourself ‘Am I still being kind to my future self?’. Important life milestones always need to be formed in the context of this question. Think of it as your financial check and balance.
One-year spending framework
Developing and following a budget – what I prefer to call a Smart Spending Plan – for your BASIC, FUTURE and FUN spending, including those ad hoc/infrequent but inevitable expenses like car repairs, holidays and home maintenance, can only really be done over a 12-month period.
Think of your spending plan as a framework, rather than a straight-jacket. It’s your best guess of where you would like your money go before you spend it, rather than wonder, after the event, where your money went.
Monthly money habits
Developing regular money habits which are aligned with both your three-year life milestones and one-year spending framework is both within your grasp and has the potential to make a tangible difference to your financial situation.
If you overspend one month you can pull it back the next. And if you underspend in another month you can roll it forward to provide more flexibility in future months. Constant overspending each month will, however, accumulate to cause you to get more and more off track. Like an aeroplane that is a few degrees off course, eventually it will end up at a destination which is hundreds, if not thousands, of miles away from its intended destination.
You can listen to me explaining how to develop effective money habits on the FT Money podcast (my bit starts at 16:00).
Rinse and repeat
Thinking about your money in monthly, yearly and three yearly time frames enables you to feel more in control and to break down the necessary actions to achieve high financial wellbeing into more manageable and achievable actions.
By continually revising, renewing and repeating short-term actions, your long-term financial security will take care of itself.