From volatile markets to prolonged high inflation and higher taxes, investors have plenty of tricky issues to navigate right now. Nevertheless, an investor’s chief problem is highly likely to be themselves.
This was the conclusion of Benjamin Graham, who had lots to say about how our emotions can get in the way of effective financial decision-making (you’ll find many more gems in his seminal 1949 book The Intelligent Investor).
Most investors know where to find the override switch when markets are down and fear is stopping them from feeling greedy – indeed, you may have needed to pull it this week.
Over the years, plenty of IC articles will have urged you to make the most of tax breaks and devote more time to investment research and financial planning, all the while making sure you pay as little as possible in fees. To which I say Bravo! But people like us are in a minority.
I can’t and won’t pretend to hold a candle to the investment greats, but I know that some of these valuable habits need to be instilled in the next generation of investors and that is what I hope my book – What They Don’t Teach You About Money – can achieve.
Savings have been the first casualty of the cost of living crisis. People were chronically undersaving for retirement anyway, yet now rising numbers have stopped paying into their pensions, plenty of households lack a meaningful savings buffer and credit card debt is at record levels.
Further up the income scale, costlier household bills and mortgage payments are tearing a hole in the household budgets of people affluent enough never to have bothered much about budgeting before.
Time poor
Frightening times, but if we are to take any small positive from this, it’s that people are having to focus on their finances in ways they never have done before. Many may regret not having done so sooner – but it’s never too late. And harking back to Graham, admitting that we need some help can be the biggest barrier.
One of the perennial problems with managing money is that we all have far too much going on in our lives to focus on it properly. I once covered the story of a finance director of a listed company who had to resign after being declared bankrupt by HMRC — a fate he would have avoided if he had only opened the post!
Last year, an accountant admitted she had received a tax bill after her earnings pushed her over the £100,000 threshold (the point at which your personal allowance starts to be clawed back). Worse, she knew she could have avoided this by sacrificing more of her salary into her pension, but she was simply too busy to put the arrangements in place.
So why does this happen? In my experience, most people have dozens of money questions they secretly want to know the answers to, but (assuming they can’t afford to pay for independent financial advice) don’t know who to ask. We also don’t want to look stupid by admitting we don’t know the basics. This is especially the case for professionals who work in one area of the financial world, yet find this has not proved to be an advantage with their personal finances.
Other examples include people on six-figure salaries who have allowed every pay rise to inflate their lifestyle, and have virtually nothing in savings. Then there’s the high-earning self-employed professional who thought he was being diligent by setting his tax money aside into a stocks and shares Isa, yet had Tesla as the single holding.
Education is essential
As our finances come under more pressure, educating ourselves about money is no longer optional – it’s essential. Yet, as the title of my book attests, learning how to manage money is not something we are explicitly taught in schools, colleges, universities or the workplace.
My book is squarely aimed at younger people on less glitzy salaries. They have less capacity than older generations might have done to bounce back from big financial mistakes, yet are similarly tempted by easy credit, buy now, pay later and the allure of ‘shortcuts to wealth’ such as crypto and day trading.
The good news? They are much more open to learning about money, but social media apps such as TikTok and Instagram are where they go to educate themselves. The information on offer can be very hit-and-miss, but it is sought-after. The growth of personal finance content on these platforms has been huge, and the ability to be connected with hundreds if not thousands of people who share the same financial fears and challenges as they do should not be underestimated.
I have attempted to embody this spirit in the lessons I have to pass on. I freely admit my own mistakes (there have been plenty), and explain financial concepts in a way anyone can understand (for example, the tasty ‘free money’ of tax relief and employer pension contributions). I also include anonymous financial confessions of people who have overcome the odds to transform their own relationship with money.
In truth, the most important lessons have not changed much since Graham’s day. Spending less than you earn. Investing little and often. Getting compound interest to work for you, rather than against you. Making use of tax breaks, keeping costs to a minimum and developing an awareness of how our emotions affect our financial decisions.
Claer Barrett is the consumer editor of the Financial Times, and her first book What They Don’t Teach You About Money was released by Penguin Books on 16 March. Sign up for a free FT lunchtime webinar on Friday 21 April based on the themes of the book via FT.com/moneyevent
