Every time we approach the end of a fiscal year, there are some sleeping heads that wake up in the uncertainty of whether they made those tax-saving investments on time.
No one is happy paying taxes they could have saved. But when it comes to taking action, it happens at the last minute. It’s not just taxes, but other money actions like investing and paying bills that are faced at the last minute.
Some say that as long as the job gets done, it’s not a problem. Although it may seem like the job is done, a last-minute action means that the efficiency of the results suffers.
Example of this: We start earning at about age 25, but wait until age 40 to start investing for retirement. By doing so, we’ve missed 15 years of compounded returns that could have gone into the retirement pot. In numbers, this means you could have had an extra one €4.8 crore in your retirement pot by the time you are 60, would you have given yourself a head start with a monthly investment of €10,000 in equity at age 25 (assuming this investment ceases at age 40 and is compounded over the next 20 years).
The benefit of investing early is no secret, and neither is saving €10,000 a month is a tough task and yet we only get started when the responsibility becomes too great to ignore or avoid.
Why is it so easy to put off that constructive money action like investing?
Most money decisions other than spending have no immediate emotional impact. The investment you make, whether it’s tax savings or your retirement, won’t affect your mood the moment you make it. The benefit of tax savings only becomes visible over a certain period of time and the benefit of the investment itself only becomes apparent years later.
It is easier to spend on a new phone instead of investing that amount. The new phone has an inherent advantage; it can give you instant pleasure.
The human mind by default craves pleasure and avoids pain.
There is no obvious pleasure in making the tax-saving investment in April as opposed to December, but there is instant pleasure in buying a new phone. You get the new phone, there’s excitement and an endorphin rush. People around you want to see it, talk about it, more endorphin rush – the opportunity cost of not making that investment is too soon forgotten.
On a larger canvas, the same thing happens with investments in your retirement cat. At 25, we are too busy experiencing the joys of spending. The fear of failing financial well-being only comes much later when expenses around dependents, health and lifestyle increase. By the time you realize that your income isn’t going to increase forever and you don’t want to work after a certain age, you’ve already lost 10-15 good years of accrued savings and compounded returns.
How can you overcome this emotional bias?
The pain and pleasure principle that governs humans suggests that timing also matters. The brain does not perceive distant pain as seriously as immediate pain and the same goes for pleasure. When it comes to starting your investment journey early, the pain of not doing it is far away, while the pleasure of using that money elsewhere is immediate.
Instant pleasure is much easier to perceive than distant pain.
Hence, investment takes a backseat to direct spending.
What you have to recognize early on is that the pot of money is limited for most of us, so how we use it matters. Unless you focus on growing the weed, you won’t be able to achieve a state of financial well-being, which has as much to do with your lifestyle as it does with your future.
A little awareness, a little discipline, and a big dose of automation can help you overcome the prejudices of avoiding pain and embracing instant pleasure.
Awareness is needed to understand that the benefits of investing early rather than leaving it to the last minute far outweigh the pain of taking action today. To build this awareness will help you visualize and maybe even outline that distant goal you are investing towards; perception will now be closer and feel more like reality. Also visualize yourself getting older or eventually becoming superfluous in your job.
The next step is to consider how much you could potentially save and invest in a month without disrupting your current lifestyle too much. There is always room to save, and discipline is needed there.
Finally, automate action so there is no emotional interference. Let the important investments happen on autopilot, don’t give yourself the chance to disrupt the process. The best way to do this is by investing regularly in debt and equity funds through systematic investment plans that automatically invest money from your account on a date of your choosing. You just need to take the first step to set it up. the first step is best taken when you are at the peak of your visualization and awareness.
What should you do?
It takes no effort to let instant pleasure take over your money decisions and actions. Instant pleasure, however, hardly ever lasts as long as you expect. When it fades and you realize you need to do more with your money, it leads to last minute decision making that is never enough.
Why not use your resources in such a way as to balance the joy of now with the well-being of your future; think of it as your ability to stretch instant pleasure from your money decisions many years into the future.
Visualize, plan and automate your long-term investments, instead of leaving it at the last minute; the benefits go to your future financial being which along with your present cannot be ignored.
Lisa Pallavi Barbora is a financial coach and founder of moneypuzzle.in
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