Author: Dacre Unsworth

Why an effective financial plan might involve spending more

When people think about financial wellbeing, they often link it to frugality or building wealth. Yet, an effective financial plan isn’t always about that, sometimes, it might make sense to spend more.

It can be difficult to get your head around. After all, as a child, you’re often taught that being sensible with money means putting it in a savings account rather than spending it. Yet, this approach only focuses on growing your wealth, rather than using it in a way that helps you reach your goals.

So, here are three scenarios where your financial plan might involve increasing your outgoings.

Spending more could help you reach lifestyle goals

At the heart of your financial plan should be your lifestyle goals – how do you want to use your time and what makes you happy?

To reach these goals, you might need to spend more. Perhaps you enjoy getting creative and want to attend regular art classes, or maybe you love to attend gigs across the country so want to boost your disposable income to see more of your favourite bands.

Of course, simply increasing your spending could lead to a shortfall later in life. This is why making it part of an effective financial plan is important.

Working with a financial planner could help you assess how the decisions you make today, including spending more to reach your lifestyle goals, could affect your future income.

You might find that you’re in a position to boost your disposable income to spend more on the things you enjoy.

If spending more to reach lifestyle goals could affect your long-term security, a financial plan may help you assess where compromises might be made so you can strike the right balance between enjoying your life now and being secure in the future.

Higher outgoings now could boost your future income

There might be times when spending more money now could boost your finances in the long run.

For instance, if you’re thinking about returning to education to pursue a career change, you might need to fund the costs yourself. Or, if you’re an aspiring entrepreneur, you may choose to increase spending to get your idea off the ground.

In both of these scenarios, you might hope that the initial outgoing will lead to a higher income and greater financial security in the future.

Making this decision part of your financial plan could help you assess if it’s the right option for you and understand the potential short- and long-term implications it may have on your finances.

You want to create a legacy during your lifetime

Often, when people speak of a legacy, it’s what they’ll leave behind when they pass away, but it might also be something you do during your lifetime. Indeed, there could be benefits to creating a living legacy.

Your loved ones might have a greater need for financial support now than they will in the future. For example, a helping hand to purchase a home when they want to start a family could be more useful in terms of creating long-term financial security than an inheritance later in life.

Alternatively, you might want to leave a legacy to a charitable cause during your lifetime.

Again, a benefit is that you have the potential to see the impact your gift will have. You might choose to support the charity in other ways too, such as acting as a trustee or organising a fundraiser.

If your estate could be liable for Inheritance Tax (IHT), creating a living legacy might be one way to reduce the potential bill. As well as reducing the value of your estate through gifting, if you leave more than 10% of your entire estate to charitable causes on your death, the IHT rate your estate is liable for would fall from 40% to 36%.

When gifting to reduce IHT, it’s important to note that not all gifts are immediately outside of your estate for IHT purposes. Indeed, some may be included in calculations for up to seven years after they were gifted. If you’d like to discuss how to pass on wealth tax-efficiently, please get in touch.

Contact us to talk about your financial plan

If you’d like to create a financial plan that’s tailored to your goals and circumstances, please get in touch. We could help you balance short-term spending with long-term aspirations so you can have confidence in your future.

Please note: This blog is for general information only and does not constitute financial advice, which should be based on your individual circumstances. The information is aimed at retail clients only.

The Financial Conduct Authority does not regulate tax planning or estate planning.

How past efforts and losses might affect your decisions today

Have you ever made a decision to continue with a course of action based on what you’ve already put into it? This bias, known as “sunk cost fallacy”, might mean you don’t make rational decisions and stick to a path that’s no longer right for you.

If you’ve been affected by the sunk cost fallacy, it doesn’t automatically mean you made a wrong decision. In fact, factors outside of your control could mean that what was once an excellent decision for you, no longer makes sense. However, by basing your next decision on what you’ve already done, you could hinder your ability to make the “right” choice now.

Feeling like you’ve already invested resources may mean you don’t want to turn away

The sunk cost fallacy refers to the resources you’ve lost and can’t get back. This loss might mean you’re less likely to assess alternative options, as you don’t want it to be in vain.

So, your past effort affects the decisions you’re making about the future.

The sunk cost fallacy is more likely to occur if you’ve already invested heavily in something. It doesn’t have to be a financial investment. The time you’ve poured into a project or the emotional energy you’ve dedicated to it could cloud your judgement too.

It’s often linked to other types of cognitive bias.

For example, loss aversion theory suggests you feel emotions connected with loss more keenly than those associated with winning. So, if you feel like you’ve lost resources, you might be more emotional, and less likely to focus on logic than you usually would.

Another bias sunk cost fallacy is often linked to is confirmation bias – where you seek out information that supports your preconceived idea. If you’ve already decided you want to proceed with a plan because you’ve invested in it already, you might start to prioritise data that suggests this is the right thing to do.

There are plenty of examples of the way sunk cost fallacy might affect you.

If you’re taking the lead on a project at work, you might be reluctant to change course, even if it’s clear it isn’t going to work as well as alternatives, because of the time you’ve already invested.

With your finances, you might refrain from selling an investment that no longer aligns with your financial plan because the share price has fallen recently so you feel like you’ll be “losing”.

4 useful steps that could help you avoid sunk costs affecting your decisions

1. Imagine it’s a new decision

While it’s difficult, try to look at the decision with a fresh perspective – if you hadn’t already sunk costs, how would you view the decision today?

Doing this could highlight where your past efforts might be influencing the decisions you’re making now.

2. Focus on the future

When you’re reassessing your decisions, look forward as well. For example, if you’re reviewing an investment, what are the expected returns and how much risk would you be taking? Looking forward, rather than back, could help focus your mind so you’re not dwelling on perceived losses.

3. Set goals

One effective way of avoiding the sunk cost fallacy is to set goals from the start. If you have a clear idea about what you want to achieve, you’re more likely to be able to evaluate whether sticking to a plan continues to be the right decision.

Taking an objective-based approach means you’re less likely to focus on the emotional side of decision-making, and, instead, pay attention to the expected outcomes.  Understanding how decisions might support long-term goals could mean you feel more confident when the evidence suggests a different course of action could be better suited to you.

4. Get an outside view

Sometimes it’s impossible to look at a decision you’ve made objectively, as you may be emotionally attached to it. This is where an outside perspective could be useful.

A person who isn’t thinking about the “losses” could help you see why you’re holding on to a decision that might no longer be right for you.

As a financial planner, we could act as an alternative perspective when you’re assessing financial decisions. If you’d like to talk to us, please get in touch.

Please note: This blog is for general information only and does not constitute financial advice, which should be based on your individual circumstances. 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.