I want to share a story with you.
It was prompted by a team discussion earlier today, when one of my colleagues shared a story of (presumably highly-paid) professionals needing to borrow money to pay a tax bill.
And a subsequent conversation about financial literacy.
The usual refrain is “we should be taught that in school”.
The bad news? We were. Kids today still are.
The fact we’ve forgotten it is the very problem, not that it wasn’t done in the first place.
But even that’s not enough.
Far, far too many of us have credit card balances that we carry month to month (at extortionate rates).
Far, far too many of us are using buy-now-pay-later services to mortgage a large chunk of the next pay cheque.
None of us think that’s a good idea.
(That is: We’re financially literate enough to know it’s a bad idea.)
But too many do it anyway.
So is it really a lack of financial literacy?
Look, I’m sure some more — and/or better — financial literacy classes at school would be useful.
But I reckon we’re missing the point.
As I’ve written before:
“ …financial literacy isn’t about the maths. Or, at least, not only about the maths. Yes, knowing a little about the power of compounding and the importance of (good) insurance is important.
“Instead, real financial literacy is about the psychology of money. Or just psychology in general. Knowing how to calculate compound returns isn’t the same as investing well. Knowing how to create a budget isn’t the same as sticking to it. Understanding the role of financial advisers and stockbrokers isn’t the same as embracing the power of incentives.”
We don’t need to tell people ‘Paying 20% interest on credit card debt is bad’.
Trust me, they know.
We don’t need to tell people ‘Saving for something is better than putting it on credit’.
They know that, too.
Yes, some people need access to better information.
Some need access to better tools.
But mostly, they need to be taught about the power (for good and evil) of behavioural psychology.
And the tips and tricks for making it work.
Some people are blessed with willpower to burn.
The rest of us need help.
Superannuation is the simplest example.
How many of us saved 10% of our incomes, before Super?
How many do, now?
All of us.
Just look around the world at the countries without a compulsory retirement savings scheme. Their future selves are looking down the barrel of a tough post-work life.
Australians, by comparison, are going to be — for the most part — in clover.
Do people in those other countries not realise they need to save for retirement?
Of course they do.
But a combination of excuses — real and imagined — keep them from doing it.
Impulsive shopping. The new car lease. Buying a house they can only just afford. Not wanting to give up the good things, now, for better things later.
And yes, some people simply don’t have the income.
By the way, I’m not preaching to you as someone who doesn’t have the same struggles.
I love a gadget. I love buying stuff online. And camping gear. Mostly camping gear.
I have the same issues.
I’d love a new car (Toyota, if you’re reading this, let’s talk sponsorship!) and would love to buy a bigger house on a big acreage.
But I’ve learned tricks to stop myself from overspending, and to help keep my financial impulses in check.
I pay myself first (I transfer my investment funds to a different account on payday).
I’ve trained myself to focus on what I’ll be able to do — and afford — in retirement, and made a game out of getting there.
And I’ve put (at least) the last 4 or 5 pay rises straight into my investment account so that I don’t suffer from ‘lifestyle creep’ — letting my standard of living rise thoughtlessly with my income.
Which brings me to my story. Well, not ‘my’ story, but the story I want to share with you.
It’s a tale I first heard from Motley Fool co-founder, David Gardner.
He was reading correspondence from a Motley Fool member, Dave Geck.
And it has some stupendously important advice for all of us.
I hope it helps you. Perhaps more importantly, I hope there’s someone you can pass it onto. I hope it helps.
Here’s an excerpt of Dave’s letter. He starts off talking about his employment in the military:
“Back in 1975, one of my instructors took a few minutes to talk about finances. He had a recommendation. He suggested that when we graduated, we take $5 out of our $625 per month that we were going to receive as second lieutenants.
“Take $5 out, and do so without fail, or changing the amount until you’re promoted from second lieutenant to first lieutenant. And then the instructor asked us, how much would we have? Well, knowing it would take two years until we were promoted, we quickly figured 24 times $5 plus interest would be about $125. He commented that yes, it would not be much, but the goal of the first two years was to develop the habit of saving. He then suggested that upon getting a raise — actually two raises, you got one for the promotion and you got one for two years of service — that we save half of the increase and use the rest to pay additional taxes and increase our standard of living. He pointed out that if we could make ends meet on a second lieutenant’s salary in our 24th month, then we could certainly make it during the 25th month on that amount plus half of the increase.
“He said to do this throughout our career, and we would have a sizable sum by the time we retired. It made sense to me. I did not have a career of military service, but I followed his advice with my civilian pay. When I was about 55, my wife and I went out with another couple and the husband asked if we’d saved anything yet for retirement. He said they were concerned as they had not yet started. I related the story of my instructor’s suggestion and said we were probably saving about 40% of my gross salary. They were shocked.
“The next day, I came home, and my wife greeted me with music to any husband’s ears. She said, “You’re right.” I had no idea of what she was speaking and was almost afraid to ask what I was right about. She said that when she heard my story, she thought it was quite an exaggeration to say we were saving 40% of my gross salary. She said she’d never added it up but did so that morning. We had some money going here and some going there. She was shocked to find out it added up to 42%. She said she would have believed 30%, but obviously not 40%.”
That, dear reader, is behavioural finance in action.
It is the very idea of a ‘nudge’ — in this case a simple ‘pre-commitment’ strategy to get temptation out of your way.
And Dave has captured it to perfection.
You reckon he doesn’t have friends and family who were earning close to what he was?
And if you asked them to save 40% of their income, do you reckon they would have told you all the reasons it was impossible?
Aren’t you just kinda thinking the same right now?
Again, I get it. Some people really, truly, can’t save anything — or any more than they’re already saving. I’m not talking to you.
But the rest of us?
I’m not asking you to live like a monk. I’m not suggesting you live on gruel and wear clothes with holes in them. (Yes, kids, there was a time when clothes didn’t come with designer holes already in them.)
But Dave’s example is instructive.
Wouldn’t you like to retire a little earlier? Have a little more in your retirement nest egg?
Wouldn’t you like to help your kids, or friends, learn that same habit?
Dave has given us the formula.
We just need to follow it.
(Because, the more you save, the more you can invest. We can — and will — help you with the latter, but you’ve gotta take care of the former!)