Financial Habits to Financial Freedom.

What are your Financial Goals? Seems quite scary, right? For some people, the goal could be to retire early or to achieve financial independence, save for a wedding or simply learn to live within their means. These are all fantastic goals that would certainly improve our lifestyles.

How do we actually go about achieving these big goals? We know that motivation or willpower alone is not enough. All you have to do is take a look at the goals we set ourselves every January. Come February, the goal to lose weight or stop smoking has gone out the window and we revert to what we have always done. What is most easy? After all, us humans are a lazy bunch.

What really helps us to achieve these goals is developing the right habits early and allowing these habits to compound over the long term. We need to reprogramme our brains to enjoy the habit of saving or spending less. Saving is often associated with sacrifice. Why not try to associate savings with freedom rather than limitation? Reducing our means today increases our purchasing power into the future. This is one of the key principles for us when working with our clients in developing financial plans.

Individuals can often spend too much time trying to engineer their own perfect financial plan -too much time in planning and not enough time in action. We would always advocate to incorporate the easier changes first on a more consistent basis. That is, to standardise your habits now and optimise later. As an example, why not start saving a small amount every month and once you have imbedded that habit into your life, start to look at some investment options which may be more prudent than saving into a low interest rate deposit account. See if you can be more tax efficient with your savings by setting up a pension. The key is to establish the initial habit of saving on a monthly basis.

It’s fair to say that we live in a delayed return environment. Our brains haven’t changed much over the past 200,000 years. We seek immediate gratification and we see this in our everyday lives. If I save money into my pension now, I will have enough to retire in 20 years’ time. However, our brains much prefer quick pay offs to long term ones.

As a rule of thumb, the more instant gratification you get from the purchase of a product or action you take, the more strongly you should question if it is aligned with your long term goals.

Let’s look at an example: You are in the market for a new car. You pop into your local Mercedes garage and come across the newest Mercedes E-220 Coupé right in the middle of the show room. We can’t help it. Our brains are telling us that this is the car, this is the car for my family.  It will provide you with immediate gratification. However, if we step back and think about the impact of those large car repayments over the next 5 years, we may walk out of the garage and reassess what is actually important to us. Maybe you could buy a second hand car with half the loan repayment and save the balance into your pension? Think of the impact of that one action over the long term. The delayed return is far greater than the instant gratification.

To conclude, I think there are some really simple steps we could take today which will improve our lives for the better into the future:

• Pay yourself first no matter what. Automate your savings into a savings account, pension or investment plan.
• If you are paying a high interest rate on your mortgage, switch mortgage or try and overpay by a small amount. It makes a big difference over the long term.
• Understand that our brains seek instant gratification when making a big purchase. Take a step back and reassess if this will impact on your long-term goals? Try and find a less costly alternative.
• Reprogramme your brain to view saving as a benefit rather than a sacrifice. Your future self will thank you for it.

Small changes today will make all the difference to your long term financial goals.

For more information, please contact Conor at comurray@invesco.ie or your Invesco consultant. Alternativley, you can contact us via the details below.