9th January 2017

Plain English Finance: One resolution you can keep

Those of you who have followed our free email for a little while might remember a moderately pretentious but entirely truthful phrase that I’m quite fond of – that “repetition is the mother of all learning”.

At least this is my excuse for the fact that what follows in your first Plain English Finance email of 2017 is a gratuitous repeat of what I said in January 2016 and January 2015.   As such, please find below a slightly edited and tweaked version of what I wrote last year – and it is as true in January 2017 as it was in January 2016 and every other year before that:

“By this time in January, you have no doubt been bombarded with the usual blizzard of marketing and advertorial about everything from the sales in your local shops to new gym memberships via discounted holidays and faddy diets for a ‘new you’".

I have nothing whatsoever against the purchase of things you’ve been hankering for at a weighty discount (as long as the money for those purchases comes after a sensible allocation to your investment accounts of course!) and I am all for regular exercise and eating well (as best I can at least), but we all know how short-lived our New Year commitment to these things can be.

This year, there is one resolution you can (and should) make and keep - for the simple reason that if you take the necessary steps this month, you won’t need to do anything at all for a long time and it will be life-changing...

…and what is this easily kept New Year’s resolution?  It is quite simply that you commit to doing the relatively small amount of admin’ required to get your personal financial house in order once and for all.

It is not an exaggeration to say that most of us are sleepwalking into a genuinely impoverished old age.  

If you want to enjoy an income when you retire of only the UK’s average salary of around £27,000, you will need to have nearly £700,000 of investment assets when you retire. 

In addition, unless you are at or very near retirement already, you are going to get a truly derisory amount from the government when the time comes.  The state pension was set up in 1909 for people over the age of 70 when hardly anyone lived past 70 and those that did, didn’t live very long (average male life expectancy in 1900 was less than fifty years).  

Scientific consensus at present is that most children born today will live to 100 or more.  There is simply no way that the government can afford to fund people for forty years after they want to stop working.  This is why investment is even more important than ever, yet the average British person has only £30,000 saved at retirement (enough to buy them an income of less than £100 a month!).  75% of Americans have less than $30,000 at retirement.  This is nothing less than a huge global catastrophe that continues to unfold. 

None of us like hearing this stuff.

It makes us want to find some nearby sand-dune and do a very big ostrich but, as ever, the better option with anything stressful is to take action rather than turn into a large, flightless bird.  

The good news is that it actually isn’t nearly as hard to achieve that £700,000 number as most people think - if you’re willing to take the bull by the horns.  Succeeding in investment is 90% about boring admin rather than frightening rocket science, as so many people seem to fear. Once it is done, you can then enjoy the rest of your life, happy in the knowledge that you have your house in order (which really helps you sleep at night, that's for sure).

Another one of the reasons we all do an ostrich when it comes to saving and investing is that humans are hard-wired to give significant preference to the present and the near future over far-off events.  

This makes sense when you think about it:  For most of our history as a species, we didn’t live very long and certainly not to 60, 70, 80, 90 or even 100.  Resources in real time were scarce so we are biologically made to want to consume resources in the present at the expense of our future.  This didn’t matter if you were killed in battle or died of starvation in your thirties but it is a disaster if you want to live a healthy, happy and even leisured life for several decades after retirement and afford the costs of quality medical care to boot. 

Research also tells us that we are very bad at empathising with our future selves.  Psychologists have established that we are so bad at envisioning ourselves in the future, we think of that future self as an entirely different person.  As far as we are concerned psychologically, this makes saving and investment essentially a choice between spending money on what we want and on our loved ones today or giving it to a complete stranger many years from now. 

It is easy to see why so many of us fail at this game given how heavily the psychological cards are stacked against us.  So what can we do?  

The simple answer comes in three parts:  

1. Educate,
2. administrate and
3. automate.  

That is to say that all you need to do is acquire a little knowledge, do a little work (this month ideally) and then set up the relevant investment accounts (e.g. ISA, pension and so on) and a monthly standing order into those accounts...  This simple change will pay enormous dividends in pretty short order...

Before I sign off today - Regular readers will recall that I think one of the possible solutions to the saving and investment / pensions crisis I refer to above is a true explosion in wealth created by amazing and ground-breaking technological development.  I thought I might mention that I’ve just finished reading yet another fantastic book on this subject which gave me even more evidence that this may well be the case (good news for all of us).  If you want to start 2017 in a great mood and maximize your chance of feeling positive about your future then please do check out “The Inevitable:  Understanding the 12 technological forces that will shape our future.” by Kevin Kelly.  Kevin was one of the founders of ‘Wired’ magazine and has a great track record in this area.

That’s all for now!  I wish you a fantastic 2017 on all fronts…

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Business Development, Retirement, Andrew Craig, Plain English Finance