If you fail to plan, you’re letting your future self down. Our irrational behaviour, risk aversion and poor motivation often causes us to fall short with our financial plans. But stick with us as we unpack these last few financial pitfalls. Let’s turn things around. Because… failing to plan is planning to fail.

1. A quick recap
2. Irrational behaviour
3. Risk aversion
4. Lack of motivation
5. Failing to plan is planning to fail
6. Embracing strategy over emotion
7. We’ve reached the end… but wait

We need to continue (and finish) our discussion on the most common pitfalls that get us into financial trouble. But before that, let’s quickly recap pitfalls 1 – 4. Remember, we need to have an awareness of these pitfalls before we get into the nitty gritty of behavioural biases.

We started with financial illiteracy and the scarily low number of adults in South Africa who know what terms like inflation and compound interest actually mean. What’s more, this lack of understanding can be seen across the entire spectrum of education and household income levels throughout the country.

The 3 most basic terms that you need to understand are inflation, compound interest and the time value of money. Once you’ve got to grips with these 3, you can start to understand the long-term impact of the financial decisions that you make today and be better prepared.

Next up, we looked at overconsumption or lifestyle creep. This is when you start to spend more on non-essential items or luxuries. The more you spend on non-essentials, the less you have to put into savings or to spend on essential items.

Not the best strategy for financial growth.

We then covered being debt burdened. It’s scary how easy it is to get into debt these days and how completely overwhelming that can be if you don’t have a handle on your spend for non-essential items. Around 70 to 80% of disposable income in South Africa goes to debt.

The most important thing I can say here is that you need to make sure you understand the type of debt you have, that you can afford it, and that you steer clear of dodgy debt with very high interest rates!

Finally, we talked about having insufficient savings. This is usually the double-whammy combination of lifestyle creep and having too much debt. Most people don’t even realise that they don’t have enough savings to cover their essential expenses until it’s too late.

I know, it can sound like it’s all doom and gloom – but it’s not! We’re here to try and help nudge you into better financial decisions – and yes, that is exactly why we’re called Nudging Financial Behaviour! If you start changing your money habits now, you can start to save far more efficiently.

OK, enough of my soap box – let’s get into the rest of the list of pitfalls. In this post, we are talking about irrational behaviour as a whole, risk aversion, lack of motivation and poor planning (remember “failing to plan is planning to fail”, I’m going to keep repeating it).

Feel free to rather watch this episode on our Youtube channel or listen to it on your favourite podcast platform. Don’t forget to like and subscribe.

We’ve already spoken a bit about irrational behaviour and decision-making thanks to the biases we discussed in an earlier post. So, for this pitfall – irrational behaviour – we’re referring back to that. And these biases are pretty much what the rest of the series is going to be diving into (there’s a lot to it).

For now, let’s just look at the emotional reactions that can have a major impact on our financial decision making. These tend to be overconfidence, fear and greed. When these come into play, it’s very easy to make poor choices that result in financial losses or problems and inhibit your financial success.

All of these irrational behaviours are very normal reactions and emotions for human beings, and you shouldn’t beat yourself up about having them. What I’d like to suggest though, is that you take time before making important financial decisions to stop and consider whether you’re making a snap decision… or if you’ve properly interrogated the facts before you make a move.

It’s so easy to move your investments because of fear due to a downturn in the markets rather than looking at the facts and figures in front of you and making a rational choice.

OK, there’s going to be a lot more on this in the next post and the one after that, and the one after that… so let’s move on for now. Let’s talk about something else… risk aversion.

Risk is something that you’ll hear a lot about when it comes to investing. Most financial planners will immediately get you to fill out a risk-assessment questionnaire either before you even meet or right at the beginning of your first meeting. What they’re looking for is how well you can handle risk because this will play a big part in your investment decisions. The risk you can handle will influence what assets you can invest in… and that will influence what returns you’ll be able to earn and ultimately… your lifestyle.

Financial advisors – Feel free to watch this video where I explain a little study I did on risk assessment questionnaires and some things for you to consider in your interaction with your clients.

It’s an “older” video, but it’s still a goodie!

We’re all risk averse to some degree. It’s no fun exposing yourself to potential loss, even if the potential for gains in the longer term are high. However, some people can handle more risk than others, and often, that enables them to make more money through riskier investments.

Risk tolerance is a personal thing and is usually influenced by socio-economic factors for each individual, as well as things like age, gender, marital status and personality type. For example, the older you get, the lower your risk tolerance becomes because you have less time to wait out your investment and see long-term benefits. When you’re married with dependents, you tend to be more circumspect with your money and your investments because you know that there are people who depend on you – unlike someone who is single and has no children.

Personality type is another big one. Those with higher self-esteem are often willing to take on more risk (and may be borderline overconfident on top of that). But people with higher self-esteem can also deal far better with the anxiety that comes with watching their investments rise and fall.

As always, it comes down to managing those emotions of ours.

Of course, your financial capacity will also play a large role. The more money you have, naturally, the easier it’s going to be for you to take on risk.

So, as you can see, while your ability to handle risk is essential to generate wealth, there are so many little things that limit our ability to handle that risk.

Often, the best way to go about it is to rather flip it around and say…. What lifestyle do you want to have? What returns do you need to earn to live that lifestyle? What assets do you need to invest in to earn those returns? And finally, what associated risk is then required from you?

Right, time to move on and talk about the very human quality of not always being able to follow through on good intentions – it’s the lack of motivation.

So many of us – myself included – struggle with a lack of self-control and can be very good at procrastinating. Temptation is everywhere. And besides – you only live once, right?

True, you do only live once, but don’t you want to be able to afford to live well throughout your life? The problem with procrastinating with saving and spending behaviour is that the later you change, the less you gain. Remember what we discussed in a previous post about sunscreen? Waiting until you’re getting ready to retire is going to make it a lot harder. You need to do the work long before the sun damage begins to show.

BUT- please – those of you who might be a little later on in life, this doesn’t mean it’s too late for you. It’s never too late to start!

We chatted to Dirk Groeneveld, a certified financial planner at Client Care, about this constant struggle between what we want NOW vs what we want LATER.

“It’s important to find a balance between living life now and providing for the later self as well. The 35 year old self has got to remember that the decisions they make today is going to affect the 65 and the 75 year old self as well. So not all on the one side or all on the other side. But living all for today is going to get you into trouble later on.”

If you’re lacking the motivation to save now (and it doesn’t have to be a lot, even the smallest amount can make a difference) you need to find the most tempting carrot you can and dangle it in front of your nose every day. This is a lot easier for short-term savings goals – print out a picture of the holiday destination you’re saving for and stick it on the wall so you see it every day. Maybe it’s a great jacket, or a new computer… These all make for great motivation.

But… what about long-term savings goals? This carrot needs to be a summation of what you dream your financial future to look like. Maybe it’s being able to buy a camper van and road trip whenever and wherever once you retire? Maybe it’s being able to send your kids to university?

The thing with this is that you need to remind yourself of your future financial goals. When we don’t do that, we get too easily caught up in the smaller and less important things we think we want today. In business, management project plan to manage their team and resources. But are we doing the same in our personal lives?

You have to keep choosing your financial future over getting the latest gadget or newest fashions. Over time, these changes will become easier because you’ll have broken the habit of always going for the instant gratification.

But… you will have to keep dangling that carrot!

As Benjamin Franklin said, “failing to plan is planning to fail”. If you don’t have a plan to reach your savings goal, you’re just putting away money without any idea of whether or not it’s enough, or when or if you’re going to reach your goal.

I did a study a couple of years ago that showed that most people do not have a plan for how they’re going to reach their savings goal. And for those that do, most do not stick to it (in fact, only 17% of respondents were able to stick to their retirement plans).

This is not ideal. You need to have a budget and work out how much your goal actually is and how much you need to save monthly in order to reach it when you want to reach it.

What I like about this final pitfall we’re discussing is that it’s actually the most promising one because it’s the one that is easily targeted…. and if done correctly, it can create a positive knock-on effect for all the other pitfalls. But by failing to plan, you’re missing out.

It’s one thing to understand the risks and pitfalls in financial decision-making and quite another to plan to avoid them strategically. Many individuals fail to create a structured financial plan, often swayed by fear and greed and emotional biases like overconfidence. 

These emotional responses not only cloud judgment but can derail long-term financial goals. An effective strategy involves methodical planning and constantly reevaluating one’s financial status and goals. Within banking and investment processes, tools like Evolve Bank BaaS can help remove some of the emotional impulses with financial decision-making. By focusing on clear, measurable objectives and revisiting these goals regularly, you can maintain a course that aligns more closely with your overall financial aspirations.

We’ve reached the end of our financial pitfalls. It wasn’t the easiest subject matter, I know. It’s not easy to look at these 8 and realise how we’re all guilty of falling into these traps to some degree. But thank you so much for pushing through. You’re not going to regret it.

Like we’ve said before, just remember that you’re not alone. Once you start recognising these flaws, you can take control of them. But failing to plan is planning to fail. So, think about having a plan to succeed.

In the next post we’ll begin our discussion on the biases that impact our behaviour and our ability to make rational decisions. Chat then.

• Welcome to the podcast – An introduction to our host, Dr Gizelle Willows, and the content you can expect from Season 1.

• Financial literacy – Don’t be financially illiterate. Allow us to take you through some quick explanations and examples on inflation and compound interest.

• How to manage your debt – Lifestyle creep and easily available debt can easily lead to overconsumption and insufficient savings. Let us help you learn how to manage your debt.

• System 1 & System 2 -This post unpacks the workings of our brain, commonly referred to as System 1 and System 2 thinking. We chat to Dr Daniel Crosby to get some further insight.

• The overconfident investor – We need to discuss the overconfident investor. He makes some poor investing decisions. But fear not, we’re here to help!

• The social media echo chamber – The rise of social media and fake news is impacted by confirmation bias. It’s known as the social media echo chamber effect.

• Narrow framing – Narrow framing, the compromise effect, glossing, and the enabling frame. We need frames to make sense of the world. But they cause problems.

• The anchored trader – Anchors tie us down and can have serious consequences for investors and traders. Don’t be the anchored trader.

• Behavioural biases unpacked – We wrap up Season 1 of the podcast and hear about all of the behavioural biases that each of our interview guests have fallen prey to.