Is the very thought of planning a barrier for you when it comes to investing? Or are you guilty of overanalysing and underacting? Wanita Isaacs investigates why, in our search for answers, we refuse to accept the simple ones. She also provides some useful tips to help us overcome these common barriers.
We have written numerous articles encouraging you to put a plan in place to give yourself the best chance of achieving your financial goals. But a plan on its own is not enough, and it counts for naught if you don't take any action.
A study recently conducted by the Brazilian Financial and Capital Markets Association (ANBIMA) revealed some useful insights into differences in our approaches to planning. The study asked 450 people between the ages of 18 and 70 years, across income bands, to plot their financial lives up to that point. Their responses revealed five personas that describe how different people engage with their lives and with money over time. The study was conducted on Brazilians (are they different to the rest of us?), but it rings true; you may recognise yourself or your family and friends among the personas outlined below.
Which persona are you?
1. The Builder: This type of person grows slowly and consistently, focusing on just each next step, rather than a distant goal, with no clear long-term plan. Changes in lifestyle and financial capacity are incremental.
2. The Carefree: There is no clear or direct upward trend with regards to lifestyle or finances. Instead, this type of person tends to respond to the changing directions their life takes from time to time. They see themselves as being "open to the flow of life".
3. The Chameleon: The key feature of this persona is the ability to find solutions to any scenario they find themselves in. Financially, this type of person would somehow make things work regardless of circumstance. Unlike the Carefree type, this persona "makes do", as opposed to actively moving in any direction or building financial capacity.
4. The Dreamer: These are people who are led by their dreams, but do not use structured plans to reach them. Instead, their dreams serve as motivation for forward movement, and motivation for action.
5. The Planner: This type calculates their goals and have a clear, structured plan to reach them. Each step taken is part of an overall plan towards set goals. When things change, the plan needs to change too.
Most people in the study, even the Planners, did not see money itself as a goal but rather as an enabler. We are not motivated to reach an amount, but rather we are motivated by important events and experiences. What this means practically is that rather than trying to figure out the exact amounts we need to reach specific financial goals, it may be better to simply get started and keep going.
Focus on the fact that the more you invest, the more freedom of choice you have in the future.
The simple answers are hard to hear
Planning anxiety is one of the main reasons we stall saving. Another reason is that when we look for answers, we don't like what we find. We are either overwhelmed into inaction, or we insist on shopping around until we find palatable answers to our questions.
Table 1, which we have published many times in various shapes and forms, serves as a useful example. It gives answers to a question we are asked time and again: "How much do I need to save by when?" The answers are provided in a simple way, but many investors find the numbers overwhelming. So, rather than get started, they ignore the problem that feels too big to solve, or they seek alternative calculators, different opinions or more tailored and complex plans.
Human behaviour often makes no rational sense. We overcomplicate things and stall, when simple, albeit less interesting answers may lead to the best outcomes. When asked why they delay saving, or saving more, many investors say they need to find time to sit down and plan properly. Yet the more complex planning seems, the more people are scared off from taking the steps needed to move their lives, and lifestyles, in the direction they want it to go in.
How to get started
We are all different, but research shows that what we have in common is that we are more likely to take action when we have a clear intention. Intent is different from a goal. It is less specific and means that, for example, you don't need to work out the rand amount needed to cover all costs for the rest of your child's school career with a budget that accounts for every cent. Rather, intent pushes you to save for an uncertain future that will have unpredictable costs - higher school fees, unexpected extracurricular activities and completely unforeseen expenses.
The further ahead you need to plan for, the more meaningless specific plans and numbers become. In a rapidly changing world it is impossible to know what your retirement in 20 or 30 years is going to be like, and the lifestyle you might need to finance. Investing, like much of life, is not an exact science. However, it does help to have a ballpark goal to aim for, like a target to keep you moving in the right direction. Its vagueness helps avoid the traps of overplanning and underacting.
A plan on its own is not enough, and it counts for naught if you don't take any action.
How to plan for different personas and possibilities
Regardless of your age or why you are investing, when you reach the point that you want or need to use your money, the size of your nest egg determines the choices you have available to you. Rather than procrastinating by trying to find the "right" or "best" way to reach concrete goals, we should focus on the fact that the more you invest, the more freedom of choice you have in the future.
Using the example of saving for retirement, in an ideal world, if you save the "right" amount, earn a reasonable return on your investment and wait until you are 65 to start drawing an income at recommended levels, our research suggests that you could sustainably live off your savings for 30 years. But if you had saved less, you will still be better off than not having saved anything at all.
The figures in Table 1 could be seen as targets, or benchmarks, and your plan could simply be to work towards them and perhaps beyond, knowing that the more you contribute towards your future, the more choice you have about what to do with it: when to leave your job, whether to start your business, what kind of home to live in, whether to travel, or whatever your lifestyle needs and wants may be.
Armed with the evidence that only one in five people is naturally a planner, and that converting all investors into planners is not a realistic approach, ANBIMA suggests we should all focus on investing rather than planning as our primary goal. A much simpler objective.