Establish Your Timescales
As with the school fees/house deposit example in the previous blog, timescales are a big part of putting your resources to the best use. If you know your timescales, at least approximately, then you can work back from there to make the application of your limited resources in the present a bit easier.
It’s worth putting an approximate date on anything which you want to prioritise saving and investing towards. So set a target retirement date – you might be out by ten years, but that’s OK, it’s a start. And anything is better than defaulting to state pension age.
If you have kids you can do the maths to work forward from the date of their birth to various possible events in their lives, like helping them with university costs or a house deposit at age 25 or whatever.
Let me give you permission to prioritise the more immediate or shorter-term needs. So much in personal finance is about deferring gratification and storing up treasure for the future, but it’s OK to think short-term sometimes. And when putting money away for a shorter-term need versus a longer-term one, you’re going to need to prioritise the shorter term in any case.
Check Your Asset Allocation
How your assets are put to work will also reflect your priorities and timescales. It’s been comprehensively proven that asset allocation, or the mix of your investments between asset classes and geographical locations, is the biggest factor in the variance of returns of your portfolio.
Asset allocation is also a factor in keeping risk and volatility in check. In short, good investing comes down to three things: Asset allocation, time, and good investor behaviour. We should therefore continually check to see if our asset allocation reflects our stated priorities.
If we have a short-term goal to have a certain sum of money on hand to spend or give away in, say, three years’ time and a long-term goal to retire at age 55, then it would serve us well to allocate for those two goals differently. Having one amorphous ‘blob’ of cash invested 100% in tech stocks isn’t smart when we need to partition some of that money off in three years.
I think we humans work well when we think in pots. Obviously we’re all different, but for me it makes sense to allocate different pots of money for different aims and to keep them fairly distinct, while also remaining flexible to cope with life’s inevitable changes.
When determining whether our finances are in balance or not, I think we should check to see if the allocation of our different pots is suited for the timescales involved. This should be part of an annual financial review in any case.
You can segregate and allocate using tax wrappers, or use different funds within tax wrappers for different things. Some providers let you have different accounts within your ISA, say, so you can have one tax wrapper with different accounts inside it and even name these according to the purpose of each pot.
You should regularly check your motivations and review your priorities; your achievement goals, your values and your desired legacy.
Tip the Balance Towards Today, Not One Day
Here’s your permission to focus on the short-term over the long term. There’s definitely truth to the statement that you might not live to see the fruits of your wealth-building labours. While that would suck very badly, it’s also very unlikely.
But folks, life is too short not to enjoy the moment. For me that’s why I’m not and never will be in the game of aggressively pursuing FIRE. I am enjoying the journey far too much to go without nice things in the short term just to pursue the freedom not to have to work one day.
I’ll gladly put that day off ten years if it means I get to enjoy holidays and more Apple gadgets in the short term. This is about priorities again – I don’t want to retire. I want to keep doing what I’m doing for a long time to come. Sure, I want to take more time off while I’m doing it, so I can enjoy the present, and I’m fortunate to be able to do that now.
If you have a choice whether to do something with your money that will provide enjoyment today versus providing for a bit more comfort in the future, I’d prioritise today every time.
This is pragmatic finance – enjoy things today without neglecting tomorrow. Most decisions in life and certainly in finance, are not binary – they don’t need to be either or. ‘I have a £2,000 unexpected windfall – should I spend it on a holiday or invest for the future?’
Answer: why not do both? Spend £1,500 on a holiday and invest £500 into your pension – the best of both worlds. Whether that split is like that, or £1,000 into both is up to you and is very much a judgement call.
Life is short. Enjoy the journey while also looking forward to the destination.
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