A close-up of someone walking on a path.

Why mental shortcuts could harm your financial decision-making skills

by Phil Clerkin on June 28, 2024

Every day you’ll take mental shortcuts, known as “heuristics”, to help you solve problems quickly. This can be incredibly useful in some circumstances and help you avoid becoming overwhelmed by decisions. Yet, when you’re making large decisions, including how to handle your finances, it could be harmful. 

Heuristics are necessary. Indeed, according to a report in Harvard Business Review, the average adult makes more than 30,000 decisions every day, from what you’ll eat to what you’ll say.

Gerald Zaltman, a Harvard Business School professor, suggests that 95% of our cognition occurs in the subconscious mind. He adds this is necessary – your brain would short-circuit if it had to weigh up each decision one by one. 

So, mental shortcuts are essential for functioning. However, this “autopilot mode” could lead to bias and decisions that aren’t right for you. Recognising which decisions would benefit from more careful analysis could help you seek out opportunities and identify potential risks you might have overlooked if you took a mental shortcut. 

4 mental shortcuts that may affect your financial decisions 

1. Anchoring effect

Anchoring effect is a cognitive bias where your view and decisions are fixed on a particular piece of information.

For example, if you read in the newspaper that a company is poised to grow and its value is above the current market valuation, you might fixate on this number. You may dismiss new information that suggests the initial figure was incorrect because you’ve anchored your view.

It’s a bias that could lead to you minimising potential risks or failing to adjust your view as circumstances change. 

Anchoring can be difficult to avoid, but taking time to review new information and the reliability of sources could help identify where it may affect your decisions. 

2. Herd mentality 

Herd mentality can affect many areas of your life, not just your financial decisions. 

The instinct that there’s safety in numbers could lead to you following the crowd even if it’s not the right option for you. You may simply believe that a large group of people can’t all be wrong, or that others have carried out research, so you can rely on their decision-making skills.

However, herd mentality overlooks the fact that a decision that may be right for one person isn’t necessarily the right option for another. 

If you hear a group of your friends are investing in a particular fund that they’re excited about, you might be tempted to do the same. Yet, perhaps they’re investing with a very different time frame or are taking more risk than is appropriate for you. 

Assessing financial opportunities with your circumstances in mind could help you avoid following the crowd.

3. Confirmation bias

Confirmation bias refers to the tendency to favour information that supports your beliefs and ignore the data that refutes them. 

Confirmation bias can be a challenge when you’re making financial decisions because it might mean you bypass key pieces of information simply because it doesn’t support your preconceived notions. So, it could mean steps to carry out research aren’t as valuable as you might expect. 

Not letting your views cloud how you view information can be challenging. Yet, taking a step back to weigh up the value of the information objectively could help you make better financial decisions. 

4. Familiarity bias

You might gain some comfort from sticking to what you know. However, familiarity bias could mean you miss out on opportunities and, in some cases, might even mean you’re taking more risk. 

For instance, from an investment perspective, it might mean that your portfolio is heavily invested in one geographical region or sector. While the familiar might feel “safer”, the lack of diversity in your investment could actually mean you’re taking more risk.

Similarly, many people choose to hold their money in a savings account where it could be falling in value in real terms once inflation is considered because they’re scared to invest.

According to a survey from interactive investor, 78% of UK adults don’t invest and a lack of knowledge is one of the key reasons. While investing isn’t right in all circumstances, some people may be neglecting to consider investing simply because saving is more familiar. 

Working with a financial planner could help you step out of your comfort zone to seize opportunities that are right for you. 

Working with a financial planner could help you view your finances from a different perspective  

Looking at your finances from a different perspective could help you identify where heuristics could be affecting your decision-making skills. A tailored financial plan could help you set out a path that’s right for you, based on your goals and circumstances, and may help you reduce the effect of bias.

If you’d like to arrange a meeting to discuss how we could support your goals, please get in touch.

Please note:

This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.

The value of your investments (and any income from them) can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance. 

Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.

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Phil ClerkinWhy mental shortcuts could harm your financial decision-making skills
A woman with her child on her knee holding a piggy bank.

The surprising effect your childhood has on your money mindset

by Phil Clerkin on June 28, 2024

Your relationship with money may play a huge role in how you handle financial decisions and your long-term security. Many factors affect your financial decisions, but you might be surprised by how much your childhood experiences still influence you today. 

The majority of parents recognise how important financial education is. Indeed, according to Nationwide, almost 9 in 10 parents to children aged between 8 and 13 say personal finance education would help their children better understand the value of money. 59% also agreed that personal finances were more important than maths. 

Yet, studies suggest these parents might be considering the positive effects of financial education too late.

Research: Money habits could be set by age 7

A 2013 study from Cambridge University indicated that financial habits are formed by the age of seven. The research suggests that children have often formed core behaviours by the age of seven which they will take into adulthood and could affect financial decisions for the rest of their lives. 

While skills like being able to count money are important for handling day-to-day finances, the study recognised that other factors affected money relationships, such as the ability to regulate emotions and think reflectively. 

Your approach to finances when you’re an adult might be just as much about your mindset as your financial knowledge.

For instance, you might understand the tax benefits of using a Stocks and Share ISA to invest in the future. However, letting emotions rule your decisions could mean you miss out on potential returns if you change your investment strategy during market volatility. 

In fact, a report in FTAdviser previously suggested that emotional decision-making costs investors at least 2% in foregone returns each year. Over your investment time frame, those lost opportunities could add up to a substantial sum.  

The Cambridge University research noted that once habits form, it can be difficult to reverse them later in life. However, it’s not impossible, so read on to find out more. 

4 practical ways to overcome potentially harmful money habits

1. Understand your money habits

If you want to improve your relationship with money, a good place to start might be to take some time to understand your habits.

When you’re making changes to your investment strategy, are you more likely to base your decisions on facts or emotions? If you received an unexpected lump sum, would you splurge or use it to support long-term goals?

Retrospectively examining your financial decisions could help you identify patterns in your behaviour. You might realise that while you’re good at managing your day-to-day budget, emotions are more likely to have an effect when you’re handling long-term investments. 

By understanding potentially harmful money habits, you’re in a better position to recognise when they could have an effect in the future. 

2. Review your finances regularly

Busy lives can make keeping on top of your finances difficult. Yet, carving out time to regularly review your short- and long-term finances could also help you spot where money habits are harming your wealth or ability to reach your goals. 

Seeing the effect money habits may be having on your finances may be useful when you’re trying to change your mindset. For example, if you’re often tempted to dip into your savings to cover non-essential expenses, seeing how it could affect your capacity to retire early, support loved ones, or overcome a financial shock could give you pause next time.  

3. Give yourself time when you’re making financial decisions 

Sometimes poor money decisions stem from not giving yourself enough time to think through your options or the long-term implications. So, next time you’re making a decision that could affect your financial future, don’t decide right away.

Allowing yourself a few days to think it through could mean emotions or other factors that were influencing your decision have subsided. It could help break negative money habits and start to form new ones. 

4. Work with a financial planner 

A financial planner doesn’t just help you navigate areas like tax liability or how to use a pension, we can help you manage your money more effectively too. 

Having a tailored financial plan in place can highlight how you may work towards your larger goals and the effect day-to-day decisions might have. It could help you overcome previously established money habits that could harm your long-term financial security. 

In addition, you have someone to talk to when you’re making large financial decisions. Discussing your options can be a useful way to process information and look at your options from a different perspective. It could lead to you making decisions that have a better long-term outcome. 

Contact us to arrange a meeting to talk about your finances 

If you’d like to discuss how we could help you manage your finances with your circumstances and goals in mind, please contact us. 

Please note:

This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.

The value of your investments (and any income from them) can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance. 

Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.

read more
Phil ClerkinThe surprising effect your childhood has on your money mindset
A woman sitting with a suitcase.

The value of financial planning: How it could help you achieve your aspirations

by Phil Clerkin on June 28, 2024

Often one of the biggest benefits of a bespoke financial plan is that it allows you to devise a blueprint to follow, with your goals placed at the centre. It’s a strategy that could help you focus on what you want to achieve in life and make working with a professional even more valuable to you.

Over the last few months, you’ve read about how a financial plan could help you grow your wealth and the value of non-tangible benefits, like feeling more confident about your finances. Now, read on to discover how financial planning might help you align your decisions with your aspirations. 

Your goals are the focus of your financial plan 

While you might think of financial planning as being about figures and growing your wealth, it goes far beyond this. Financial planning aims to help you reach your goals, whether you want to retire early, have the money to book holidays to exciting destinations or be in a position to offer support to your family. 

To achieve this aim, financial planning starts by understanding what your goals are. Having a clear idea about what your aspirations are could allow you to make decisions that enable you to turn them into a reality. So, defining what success means for you is often crucial. 

For example, you might start by saying your family is a priority and you want to offer them support. But what does this look like? Do you want to offer financial support, such as a deposit when they’re buying a home, or do you want to have greater freedom so you can look after your grandchildren?

As financial planners, we can help you define your life goals and understand what’s possible. 

Cashflow modelling could help you visualise the impact of your decisions 

One of the challenges of setting out how to reach your long-term goals is that it can be difficult to know whether the decisions you’re making will support or harm them.

Cashflow modelling can be used as an invaluable tool to help you visualise the impact decisions might have on your financial future and, so, on your goals. 

When using cashflow modelling you input data like the value of your assets now. You can then model how different decisions will affect the outcome. It’s a way of understanding how the decisions you make now could affect goals that are years away. 

If your goal is to retire early, you might update the information used for cashflow modelling to answer questions like:

  • Could I afford to retire five years earlier?
  • If I retire when I’m 55, what income could my pension sustainably provide?
  • Could I take a tax-free lump sum from my pension when I first retire and still be financially secure? 
  • How would increasing or decreasing my pension contributions affect the value of my pension pot at retirement?

Armed with the information cashflow modelling provides, you’re often in a better position to make financial decisions that reflect your aspirations. 

A financial plan may keep your goals on track as your circumstances change 

You might set out clear goals now, but as your circumstances and desires change, they may not be the same in five years.

A family illness might mean you decide to step away from work sooner than you expected to support them. Or an unexpected inheritance may mean you’re able to secure goals you previously thought were out of reach. 

By having an ongoing relationship with a financial planner and regular reviews, which will include reassessing your aspirations, we can help you adjust your plan, so it continues to suit your needs. 

It’s not just your goals that could lead to change either.

You might come across an investment opportunity and decide you want to divert some of the money to this. A financial plan could help you assess if it’s the right decision for you and how it might affect other parts of your plan.

For instance, could choosing a higher-risk investment rather than contributing to your pension place your comfortable retirement at risk? Or are you in a position where you can invest and still feel confident about your retirement?

By modelling opportunities or obstacles using cashflow modelling, working with a financial planner could help you understand the impact of making changes to your plans as opportunities arise.

Contact us to talk about how a financial plan could be valuable for you

As you’ve read over the last few months, a tailored financial plan could provide financial and non-financial benefits. If you’d like to explore how a financial plan could add value to your life, please contact us. 

In an initial meeting, we can discuss how we could work together to help you reach your goals. 

Please note:

This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.

The value of your investments (and any income from them) can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance. 

Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.

A pension is a long-term investment not normally accessible until 55 (57 from April 2028). The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Past performance is not a reliable indicator of future performance. 

The tax implications of pension withdrawals will be based on your individual circumstances. Thresholds, percentage rates, and tax legislation may change in subsequent Finance Acts.  

The Financial Conduct Authority does not regulate cashflow modelling.

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Phil ClerkinThe value of financial planning: How it could help you achieve your aspirations
Office workers walking down some stairs.

3 valuable pension lessons workers can learn from retirees’ regrets

by Phil Clerkin on May 29, 2024

2 in 5 UK retirees have retirement regrets, according to a Canada Life survey. If you’re saving towards your future, you could learn some valuable pension lessons and avoid repeating the same mistakes.

Securing the retirement you want often means thinking about this milestone many years before you celebrate it. One of the key challenges is balancing your financial needs and goals now with your long-term ones. Retirement regrets indicate it’s something many people struggle with.

So, if you’re still working and saving for retirement, here are three lessons you could learn from older generations. 

1. 17% of retirees wish they’d increased pension savings while working 

The Canada Life research suggests one of the biggest retirement regrets is simply not saving enough – 17% of those surveyed said they wished they’d increased their pension contributions. Similarly, 12% said they regret not making lifestyle adjustments earlier in life to allow them to save more for their later years.

While auto-enrolment means you’re likely to be paying into a pension if you’re an employee, simply paying the minimum contribution may lead to a pension pot that falls short of your expectations. 

Indeed, a report from the Phoenix Group, noted: “There is widespread consensus that current auto-enrolment contribution rates are unlikely to provide an adequate retirement income for most savers.”

The report advocates increasing the default pension contribution rate from 8% to 12%. While the current government hasn’t indicated that it plans to do this, you can choose to increase your contributions, and some employers also offer higher pension contributions as part of their benefit package.

As your pension is often invested and benefits from compounding over a long time frame, reviewing your contributions now could mean the extra money really starts to add up.

The report notes that changing the minimum contribution level to 12% now could lead to a typical 18-year-old today having an extra £96,000 in their pension at retirement. However, as the graph below shows, delaying by even five years could lead to significantly less. 

Source: Phoenix Group

Having a clear goal can be useful if you want to ensure you’re saving enough – how much do you need in your pension at retirement to live the lifestyle you want? From here you can work backwards to understand how much you need to contribute to your pension to make your goal more achievable.

Of course, setting a pension pot target isn’t always straightforward. You’ll often need to consider areas like life expectancy, inflation, and investment returns. Working with a financial planner could provide you with a tailored retirement plan that considers these factors. 

2. 43% regret not accessing advice or guidance

Separate research from Standard Life found that more than 4 in 10 retirees regret not accessing advice or guidance either at the point of retirement or when they were still working. The survey results found:

  • 51% wished they had more information about how to plan and prepare for their retirement
  • 42% said they should have sought advice or guidance to plan for their retirement
  • 37% said they should have sought advice or guidance before they accessed their pension savings.

You don’t have to be nearing retirement to benefit from professional financial advice. Seeking advice ahead of retiring could be useful throughout your career. 

A tailored retirement plan could help you assess what steps you may take to improve your financial wellbeing once you stop working, and regular reviews provide an opportunity to see if you’re on track and what adjustments you might make. 

3. 8% of retirees say they would have retired later than they did 

Perhaps surprisingly, the Canada Life survey revealed that 8% of retirees wish they’d retired later than they did. 

For some, this regret may come from wishing they’d delayed retirement so they could contribute to their pension for longer and enjoy greater financial security now. Yet, the report notes that others wished they’d worked for longer due to the potential mental health benefits. 

Work can provide a structure and sense of purpose that some people miss once they retire. Phasing into retirement by slowly reducing your hours or taking a less demanding role could help you strike a work-life balance that suits you.

Incorporating your lifestyle goals into your retirement plan, rather than simply focusing on the numbers, could be useful too. Considering how you’ll fill your days in retirement and what will continue to make you happy might mean you’re less likely to live with regrets. 

Get in touch to start planning for your retirement 

It’s never too soon to start thinking about your retirement. In fact, taking control of your retirement plan sooner could mean you have more options, enjoy the retirement you’re looking forward to, and offer peace of mind during your working life. Please contact us to arrange a meeting to discuss your retirement plan. 

Please note:

This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.

A pension is a long-term investment not normally accessible until 55 (57 from April 2028). The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Past performance is not a reliable indicator of future performance. 

The tax implications of pension withdrawals will be based on your individual circumstances. Thresholds, percentage rates, and tax legislation may change in subsequent Finance Acts.

read more
Phil Clerkin3 valuable pension lessons workers can learn from retirees’ regrets

Disclaimer: The information provided in our website blogs is accurate and up-to-date at the time of writing. However, please be aware that legislative changes and updates may occur after the publication date, which could potentially impact the accuracy of the information provided. We encourage readers to verify the current status of laws, regulations, and guidelines relevant to their specific circumstances. We do not assume any responsibility for inaccuracies or omissions that may arise due to changes in legislation or other factors beyond our control.

If you would like any clarification, or have any questions, please get in touch.

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