The effects of short-term financial decisions
December 7, 2022

The ‘long-term’ approach to financial decisions

As individuals, we usually have a bias toward ‘now’ and the type of financial decisions that we make during that time. But at this time of year that bias changes in an important way and is to do with our length of focus. Our natural bias is to focus on the ‘short term’ financial decisions.

January as the ‘start of the year’ creates a macro environment that helps us take a longer-term view on our finances.

This presents an opportunity when it comes to our aspirations and the financial plans needed to achieve them. But do we take advantage of this? Why not use this ‘seasonal nudge’ to help your personal and financial planning.

In survival terms, a threat that is happening to us now is more important to focus upon, than one that is past, or one that might happen in the future.

The ‘now’ approach to financial decisions

Other behavioural biases draw us towards the ‘now’ financial decisions making. The availability bias means we focus more upon information that is readily available to us, and this applies to memory.

The recent past is more readily recalled than events that occurred longer ago. In terms of the future, the longer into the future we look the more uncertainty there is, especially with the current recession and cost of living crisis. But we are biased towards seeking certainty – it’s safer. So, we naturally tend to focus more upon the shorter term than the long term when it comes to making our financial decisions.

Behavioural biases and the impact on your finances

In our modern lives, we are still heavily influenced by these evolutionary behavioural biases. We spend less time focused upon longer term considerations, such as the income we may need in retirement, and more on what we need to spend today.

However, these natural biases tend to be a little less powerful at this time of year, which presents us all with opportunities. Before we get into what those opportunities are – what is it about this time of year that makes these biases less strong for a while?

Firstly, we are usually taking things a bit easier, and possibly experiencing a change of scene and routine. Hopefully, we are with our wider families more than our work colleagues. This tends to reduce our focus on our normal work and domestic day to day tasks and duties and can give us a different perspective.

Secondly, the influences and commentary that surrounds us, including all the media, is more aligned to having an annual focus. Reviews and reflections on the past year abound. We tend to make our resolutions and predictions for the next year rather than anticipating what is going to happen today, tomorrow or this week.

What opportunities does this temporary focus upon the longer term afford us?

Whilst this time of year is not traditionally one to think about longer term money matters, the very opposite might be true. It might just be the time to think about it a little more. Because the change of scene, routine and influences around you give you a longer-term perspective on your finances.

Therefore, you can more readily reflect upon your purpose, and your aspirations for yourself and your loved ones. And a big part of that is likely to be how your finances are organised for the longer term.

Don’t miss the opportunity to seize this time of year to help your financial betterment!

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