One of the reasons why people find investing harder than they should is that human beings are hard-wired to focus on the here and now. We’re much more concerned about immediate threats than longer-term dangers such as failing to save enough money for retirement.

In this video, Professor Arman Eshraghi, an expert in behavioural finance at Cardiff Business School, explains how to develop a more disciplined approach to investing for the future.

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Video transcript:

Human beings are hard-wired to focus on the present.

We’re finely attuned to the immediate threats around us. What we’re not quite so good at is dealing with long-term dangers, like not saving enough money for retirement. Professor Arman Eshraghi is an expert in behavioural finance.

He says: “When it comes to events that happen in the long-term, whether it’s going into retirement, etc. we don’t plan for them sufficiently because we don’t see them as sufficiently close.”

Thankfully, help is at hand in the form of financial technology, sometimes called fintech for short. The technology enables us to automate our retirement saving, so we put aside a set amount each and every month without even thinking about it.

Arman Eshraghi says: “Fintech applications basically can allow you to automate your decision to invest in the markets without much thinking, so you really make a decision once, you make a commitment once, and then effectively, the process of investment gets automated — let’s say, every 20th of the month.”

Starting to save early for retirement is very important. But we should also increase the amount we put away each month as our income goes up.

Committing to increasing our pension contributions as time goes by is another very valuable discipline.

Arman Eshraghi says: “Research by some economists in the US shows that there are techniques like “save more tomorrow”, so this is Richard Thaler, for example, who has talked about “saving more tomorrow”, which effectively means that you make the decision to invest a base level and then, effectively, you add to it a little bit every month. And without noticing the pain, let’s say. And then over time, this grows into a significant amount of investment which would then hopefully be a source of income for the long-term and for retirement.”

So, don’t give yourself an excuse to spend money that you should be saving for retirement. If you haven’t done it yet, automate your investing now.

It’s easy to do, and in the years ahead, you’ll be very glad you did it.

Picture: Aaron Burden (via Unsplash)

It’s been said that you’re more likely to change your spouse than your bank. But, as you run the ruler over your personal finances, ask yourself whether your bank has been doing the right thing by you.

There’s plenty of research that shows we suffer from “inertia” when it comes to switching financial services, even though this could save us – or earn us – significant sums.

Think about it: When interest rates fall, does your bank pass on the full extent of those rate cuts so your mortgage is cheaper? When interest rates rise, do you get the full benefit with a commensurately higher rate on your savings? Have you been stung by the auto-renewal of a term deposit onto a below-par rate?

I’d be prepared to wager that the rate on your credit card (or cards) hasn’t fallen anywhere near as far as official interest rates in recent years. Some cards are still charging around 18 per cent, even though official interest rates are at rock bottom.

That credit card is probably with the same bank as your mortgage, and your savings account, and your debit card … need I go on? That’s part of the problem: banks and other financial service providers know the more products you have with them, the less likely it is you’ll shop around. 

In Australia, the Productivity Commission has identified “bundling” as an impediment to competition. Another study found that loyal, existing borrowers were paying interest rates on average of 32 basis points higher than those for new borrowers –  a “loyalty tax” worth billions of dollars in additional profits to banks.

It probably wasn’t so much that these borrowers were feeling “loyalty” but more likely that they were worried switching would be costly or difficult, or would just plain mess up their direct debits. Or maybe it was just a case of “better the devil you know”.

So, make a list and check it twice:

What are your top three needs from a bank?

Are you a borrower or a saver? Is a bank’s home loan rate or savings rate more important to you? Think about what really matters to you.

Is physical location important?

If you never go into a bank these days, why do you feel compelled to stick with your bricks-and-mortar institution? Make sure to check out the offerings of online-only banks.

How important is customer service?

I earn a good interest rate on my savings with an online bank, but heaven forbit I need to talk to someone on a weekend…

Compare rates.

Remember that “loyalty tax”? Keep up to date with changing rates and remember that you can haggle with your existing bank – get them to match new offers.

Compare fees.

That includes monthly “service” fees, ATM fees, and charges for overdrawing or declined payments.

Compare your values

I can’t begin to count the number of banking scandals in recent years. At what point would you take your money away from a big bank and put it somewhere like a smaller bank or credit union?

Picture: Steve Smith (via Unsplash)