As the new year begins, now’s a good time to focus on your financial planning. Many people put off their financial plans, saying, “I’ll deal with it later” but then never get around to it. Sound familiar? However, the true cost of waiting and delaying your plans could turn out to be the most expensive decision you will ever make. From missed tax allowances to the loss of compound interest, we look at why earlier planning could give you more financial freedom.
“Risk comes from not knowing what you are doing.”
Warren Buffet
When it comes to your financial planning, doing nothing at all may feel safe, but delays will quietly erode any positive outcomes. The real cost isn’t just tax; it’s lost options, lost flexibility, and missed planning windows.
Why do we delay our financial planning?
There are many reasons why people delay their financial plans. Certain behavioural biases and inertia can lead us to believe that we need to “wait for the right moment.” But that moment often never comes, and meanwhile, we’ve missed potentially lucrative opportunities.
Several behavioural finance concepts can shape the way we choose to manage our money:
- Herd behaviour: Moving along with the ‘herd’ is where people mimic the financial behaviours of others. It’s a common behaviour in the stock market and can lead to dramatic events and sell-offs.
- Emotional gap: This behaviour relates to decisions arising from emotions such as excitement, fear, anxiety or anger. It can hinder people’s ability to make rational choices about their financial planning.
- Self-attribution: This is where people lean towards making financial choices due to being overconfident in their knowledge. Even though they might have a natural flair for financial planning, their skill level can often fall short.
- Mental accounting: This is where people mentally allocate money to be used for specific purposes or from certain sources. Treating pots of money differently can lead to poor financial decisions on how to spend and invest it.
- Anchoring: This is an irrational bias towards attaching a spending level to a certain reference based on irrelevant information. Although it can help negotiate prices, it can often skew decision-making.
Various biases can determine our attitudes towards money. Confirmation bias is common when investors hold a held belief in an investment. Experiential bias can make an investor believe a financial event is likely to happen based on past experience. When people choose to invest in only what they know, this is called familiarity bias.
The hidden cost of waiting
As the financial markets are shaped by human behaviours, biases and global events, the cost of delaying your planning can be very expensive. You could be missing out on tax allowances and the loss of compound interest from savings accounts. Inflation erodes cash, so if you have money sitting in a low-interest account, this could be a wasted opportunity.
When it comes to investing, portfolio drift can occur when there are natural shifts in the financial markets that either change your asset allocation or classes. As a result, this could expose your portfolio to more risk than you are comfortable with.
A misaligned portfolio may need to be rebalanced to get back in line with your investment goals. You might also be able to take advantage of certain investment opportunities in changing markets.
Early planning gives you more financial freedom
Delaying your financial planning today could lead to greater pressures in the future. In later life, you may have fewer choices and find yourself in situations where you need to make rushed decisions. Therefore, the earlier you plan, the more opportunities you will have.
By building a structured financial plan earlier in life, you can plan ahead for big life events. You can create a Lifetime Wealth Forecast that factors in cash-flow planning with ongoing reviews, giving you accountability and momentum with your plans.
At Balance: Wealth Planning, we use a ‘bucket strategy’ approach where we split your money into different pots based on when you need it.
- 0 – 3 years: This is a short-term strategy, giving you access to money in the next few years. Your money is held in cash or low-risk assets, less affected by market shocks.
- 3 – 10 years: This is a medium-term strategy and involves taking on a little more risk.
- 10+ years: This is a long-term strategy that invests for growth, giving your money time to recover from market volatility. It also benefits from compound growth.
Chartered Financial Planners, Nottingham
The cost of doing nothing with your financial planning can have long-term repercussions, shaping how you live your life today and in the future. Without a plan in place, you could waste opportunities, and you could run out of money. Inaction often leads to lost investment growth, unnecessary tax bills, and financial uncertainty.
At Balance: Wealth Planning, our team will help you build a structured financial plan, which will give you more control and greater security over your money. Our financial planning process is tailored to your goals and values, so you can lead a more purposeful life.
Talk to us about your financial plan. Get in touch with our financial planning team.
Sources:
(Balance: Wealth website)
https://www.sarwa.co/blog/warren-buffett-quotes
https://www.investopedia.com/terms/b/behavioralfinance.asp
https://www.morganstanley.com/cs/pdf/619598-3174306-MSVA-Behavioral-Guide-r7.pdf
