Risk: The Hidden Ones - BOD026

16:56Pete:And so that, with a 7 % investment return, would turn into£551 ,000. So you'd 5x your money pretty much. What? You'll have saved£108 ,000. Your£200 a month would have added up. But it will actually be... But it will be worth£551 ,000. So five times pretty much what you put aside. If you start at 30, you're still young, 10 years later. So now you're only saving for 35 years. Only, but yeah. Yeah. So instead of your£200 a month would add up to£84 ,000. Yeah, makes sense. And the value of it would be£280. Wow. So basically two and a half times. Sorry, no, that's utter nonsense. Three and a half times.

17:38Three and a half times.

17:39Pete:Instead of 5xing your money, it'd be three and a half times. Just in those 10 years. Just in 10 years. So you'd be£266 ,000 worse off. Wow. Wow. So start as early as you can. Even if it's just 50 quid a month, it's money. So in the context of inertia, it's easy to say, well, come on, I'm young. I'm just going to blow it and have a great time. I'm sort of down with that. You are only young ones. And again, we often talk about things not needing to be either or. You can kind of cut the difference. Yeah, it's finding a balance for sure. But starting early makes a huge, huge difference. What is the stat you've said before where it's like 50 % of the money you live off in retirement is made in your 20s or something like that?

18:19Pete:The value of your retirement, roughly half of it is, you know, is built by the money that you saved in your 20s because, that's a huge generalisation, but because it's had the longest a compound to build. That is incredible. All right, so, why do you think people do delay it? Young people. Do you think it's... Well, yeah, I mean, they might never have heard that, but I'm sure plenty of people listening to this and not suddenly go, right, immediately. I must go and do my pension. No, exactly, right? So why don't people do it? It's uber-duber boring. Well, it can be. You know, not everybody thinks so.

18:53Pete:But yes, obviously, there are a million calls on your time and resources. And some of them are a lot more fun. Many of them are a lot more fun than putting money into a pension that you can't access for another 30 years. Do you think the fact that it feels like you're locking money away, that it'll never come back? Yeah. Well, that's only for pensions. If you've got ISIS and things, you can. You can get it. But yeah, I'm sure that's a factor. I mean, it just makes sense that it is. And there's also lots of misinformation. Sure. You know, don't put that money away. The stock market is a gambling den.

19:24Pete:Pensions aren't worth the paper they're written on. These are the sort of things that get bandied around all the time, but usually by people who have either had a very bad experience, but usually out of ignorance. Yeah. So there's lots of reasons why. Do your own research. Make your own decision. Yeah. Which leads me on to my next one. Okay. If someone is sat listening to this, watching this, scared to make a decision, and that's why they're, you know, falling victim to inertia risk, they're just scared to make a wrong choice. Like Cam said in the Q &A how he was really scared to get started investing, wasn't he?

19:55Anyway, we seem to know that he's gone and done it, which is fantastic. But if someone is scared to make that kind of small mistake, what's worse, making a small mistake or never getting started?

20:07Pete:Never getting started. I think the best thing you can do is start small. Yeah. You just need, because you think, okay, if I put, say, 25, 50 quid a month away, we'd need to define what mistake is as well. It's actually hard to make, particularly early on, it's hard to make big, irreversible mistakes. Certainly not irreversible mistakes, yeah. And there's a lot of learning that you can do where there's less risk involved. So if you're in an investment decision which ends up not paying off, and you've got a mortgage and two kids, that's a much higher risk issue potentially than if you're young, free and single still living at home.

20:45Pete:So I think better to try and learn from some maybe missteps. That's because mistakes feels too strong. Yeah, it does really because it's hard to make too many mistakes. Yeah. And as Cam can attest, because he was obviously really, really nervous to get that started and he did it in about three clicks and he was like, I can't believe it took me so long, but he did it and that's all that matters. So, well done, Cam. Yeah, good job, Cam. Okay, the third one is opportunity cost risk. Now, this is the first one that I hadn't heard of before. Should have put this one in my keyword of the week, really.

21:16Pete:Opportunity cost risk. Yeah, sounds very much. So, what is it? Well, opportunity cost is if you make one decision versus another. Let's say you've got two choices. Yeah. If you choose option A, what is the cost of not choosing option B? Here's an example. Thank you. You've got that before me. Let's say you receive a nice little inheritance from your Auntie Mabel and it's 20 ,000 quid and you need a car. Are you telling me something? Have we got a secret Auntie Mabel? No. No, I know there's no money coming. All right. So let's say you've got 20 ,000 quid and you need a car. Yeah. You can buy a car for that 20 ,000.

21:50Yeah.

21:50Pete:Or you can invest it. Now that is a binary choice, right? Of course, you could buy a car for 5 ,000 and invest 15 or the other way around. But let's say in this hypothetical situation, you have to buy it for 20 grand. So you buy the car. Yeah. you've got a car, you can now get to work and all that sort of stuff. That's one thing. But you don't have an investment. Had you invested that£20 ,000 for X number of years at whatever percentage rate return, that£20 ,000 is almost certainly going to be six figures. And so in buying the car, you could argue that you've lost out on a very large amount of money.

22:23I think opportunity cost is a stupid name then. Should be like missed opportunity cost. Because when you say opportunity cost, I'm like, ooh.

22:31Pete:I know, opportunity sounds positive. Exactly. So that is a stupid name, finance people. You suck. You don't, I'm just being facetious. The fact is, there is an element of choosing one thing over another. You could always, you know, I mean, 20 grand on a car is actually quite a big thing. You could just say, well, actually, I look at my budget, I've got 100 quid a month extra, I'm just going to have another two takeaways a month. but in so doing you're giving up whatever that 100 quid a month could buy you if you put it into your pension right say and that let me just make it very clear that's all right yeah but you it's your freaking money right but the point is to be intentional about it and you say look okay actually why don't i have one extra takeaway and put 50 quid a month into my pension yeah whatever The effort is just make the conscious choice.

23:25Pete:Yeah, it's so important. It actually speaks to the next risk, this, actually, but we'll get to that rather than jump ahead. So are you saying that by every time I spend money, I'm giving something else up? I think about definition, because you could always spend it on something else. Yeah. You know, it's spending versus using. But it's not saying that the thing that you choose to do is bad. Oh, God, no. There is no bad. I mean, you know, maybe like heroin. That's not a smart use of money. No. You know, or, you know, trafficking people. It's hard to be like no judgment, but I do judge you if you traffic people.

24:00Pete:Yeah, do you know what I mean? Obviously, but for most... Strange choice, for example. You know, but so I think there's always choice. Yeah. You know, it's not on camera, but you're sitting next to two keyboards, which are a great joy to me. But I mean, that money could have gone into my pension, but I chose not to. Or to me. That didn't even enter my head. but you know so me and my sister and so I chose I chose to buy them for my own pleasure rather than put money into my pension yeah and that's fine because it was an active choice it was an active choice that's being intentional that's the point and you know life is really too freaking short it is short not to give yourself some joys definitely but just make sure the joys don't impact you negatively down the road as with all things in life nuance is important you've got the live like a monk put everything you can into your pensions and your investments.

24:53Pete:There's no joy in that. But then you're not going to want to live like, spend it all. No, no, you'll have too much in there. Exactly. The flip side to that is, you might never make it to retirement, so spend it all now. You might be dead tomorrow. Yeah, but you probably won't be. Those are sort of extreme outcomes. Exactly. Most of yours, most of us, will live a long life, probably well into our 80s, and we're probably not going to work that long. And so we need to enjoy our health. Not for me, anyway. you know we need to enjoy our youth and all the freedoms that that brings us particularly before we get sort of involved with families and responsibilities and all that but we need to not kind of neglect the one day the later life stuff so it's always balance balance there it is all right so what is the bigger financial danger is spending too much or not understanding what you're giving up yeah that's a tough one to answer i think um i think the lack of understanding is probably the bigger danger because then you tend to kind of drift and waft through life without being intentional yeah right so spending be intentional much maybe yeah temporary tattoos I'll cross my forehead yeah I just think yeah I would rather deliberately overspend than not know not really understand what's going on at all yeah because if you deliberately overspend you've only got yourself to blame I think so it's like okay you ended up not having anything to retire with that's your choice right but like not being sure and kind of wafting through life it's like that's not alright no and it's not no Yeah.

26:39That makes sense.

26:40Pete:Our audience are not doing that. No, because they're super cool and they listen to Bank of Dad. And they get free access to our merch. I'm kidding. We don't have merch yet. All right. So the next one is lifestyle inflation risk. All right. What happens when your spending rises every time your income rises? You know, you get a pay rise. Great. I've got more money in the bank every month. Yeah, great. I can enjoy myself more. Yeah. Buy more clothes. Go out more. Or whatever. Yeah. Upgrade the car. Yeah. So we call that lifestyle creep sometimes, you might have heard me call it, or lifestyle inflation.

27:13Pete:I like the word lifestyle creep because it feels like insidious. It kind of happens. It creeps up on you. It sneaks up on you. And it does because, again, it's a default position. It's not an intentional position. So if you get a pay rise and you think, right, okay, there is now£100 extra in my bank every month after tax and all that due to my pay rise. We've talked about setting a budget. So that suddenly is like, ooh, that£100 is available to budget. what am I going to do with it? That's being intentional and deliberate. Whereas if it's just like, you know, I've got an extra quid, a hundred pounds in my bank account this month, and yet still, when I get to the end of the month, there's nothing left.

27:50Pete:And it's just gone. That's lifestyle creep. And it's a risk because, believe me, it keeps going. Because, you know, if you're earning 30 grand, say, and you think, my God, if I earned 50 grand, I would just have everything I need and I'd have hundreds of pounds left over at the end of the month. I'm telling you it doesn't work. like that no because all of a sudden you'll be like no i will get the um tesco's finest as opposed to tesco's own yeah of course and then no i i am gonna get the better phone because i have earned that this month yeah i deserve that because i work hard and i've been rewarded with pay rise and then all of a sudden it's like do you know what i'm not gonna shop at tesco's anymore i'm gonna shop at sainsbury's and then after sainsbury's upgrade from tesco yeah it's more expensive oh fair enough i said i wouldn't know that sounds awful but yeah i wouldn't know because We don't have a waitrose if we don't.

28:38Pete:Definitely not. That was going to be my next one. After you've, you know, graduated from Sainsbury's, it's waitrose time. You know, like... Yeah, and after that, you just have somebody chop for you. Yeah. It just carries on. It's a fact of life unless you choose for it not to be, and that's about budgeting and being intentional. But honestly, it's insidious. I've got... I've seen... Spoken to people earning hundreds of thousands of pounds a year and still have nothing to show for it. But like you say, I suppose you just slightly get used to it Because nobody jumps from 20 grand to 85 grand. Rarely.

29:10Pete:It happens occasionally, but most people, their salaries go up sort of steadily, and that's why it's sneaky. So is there a point where that bigger salary stops making you richer? Well, yeah, because whether it makes you richer or not only comes down to what's left at the end of the month and what you do with it, isn't it? Or what you choose to do with it at the beginning of the month, as we say you should do with your budgeting. So you choose where that money goes. It's always your money once you pay the tax man and everything, but you have to decide where it goes. so if you don't do that it will just fritter away but you know if you earn more you have more to spend and that's okay that you yes and you should spend some of it on yourself let me just say look if you get any pay rise just split the difference enjoy half of the increase and put the other half away or increase your savings rate by the half as well so you know whatever with all these things that we call these the hidden risks I think if you're aware of them you can just say, actually, I've had a pay rise.

30:06Pete:Let me just be deliberate. I'm going to increase my ISA contribution by 30 quid a month. I'm going to enjoy the other 70. So I've made a choice. Yeah, I've made a choice. So how can someone enjoy their money without falling into inflation traps? Well, that's the answer, really. I think nobody wants to go through life never having any joy and you don't want to be budgeting and spending the same in 10 years' time as you are now because things will get more expensive. So if you spend the same, it means you'll be buying a lot less in 10 years' time. So your spending naturally rises because of inflation.

30:39Pete:You just need to not spend all of any increases. So the answer is to enjoy some of the increase because then you'll feel like, you know, it's reward. You'll feel like you've got the benefit of your hard work and the promotion and all that sort of stuff. But you'll also, your future self will also get a benefit. Okay. And the next one, the final risk. We are doing fantastically for time. We've been really succinct. Yeah, we are. It's normally in about 50 minutes by now. I know. So for me editing tomorrow, I'm really looking forward to this. Get on with it! Okay, so the last one is a teaser because we're actually going to do a full episode on this.

31:17The final risk is behavioural risk. Now, we have mentioned this before. This is what the Wanky Word of the Week is linked to. Why do smart people still make bad, in inverted commas, money decisions?

31:29Pete:Because money decisions are nothing really to do with intellect. It's about the fact that we are sort of squishy, organic, emotion-driven beings. And money has great power to evoke emotional responses. You know, we are... Money makes a lot of us scared. And, you know, I'm by no means a behavioral economist. But many people will know about the region of the brain called the amygdala. it's the sort of the oldest part of our brain, evolutionary speaking, it's the sort of, some people call it the lizard brain, right? Yeah. And that's essentially where your fight or flight response is, and fight or flight is, you know, any kind of threat puts us into fight or flight, right?

32:13Pete:And money just does that with alarming regularity. Well, yeah, when we read the Q &As in Meaningful Money, the amount of times it's like I'm fearful, I'm scared, I'm panicking about this. Yeah, or you ask somebody to ring their HMRC or their bank. Yeah, terrifying. And there's like a weird sort of like, I can feel my blood pressure rising through my shirt. It's like white coat syndrome, but money. I've done nothing wrong and yet I'm ringing the revenue. It's like when you go through an airport and you're like, did I pack my knives? Yeah, I'm going through security. I'm sure I didn't pack those detonators.

32:47Yeah. Did I pack my crack? No, no. never done crack or made any bombs in our lives but suddenly I'm there nervous

32:54Pete:you worry about it it's just yeah so money does that it sort of evokes emotional responses so it's nothing to do with intellect okay so how much of successful money management is maths and how much of it is psychology 5 % maths 95 % psychology really oh yeah and the maths is easy so do you think people's money do you think the fact that people manage money has an impact on their psychology and therefore how well they manage their money. Yeah, it's circular. Cyclical. Yeah, so their emotions impact how the decisions they make around money and then the money impacts their emotions. Yeah. And so it's very easy to spiral.

33:36Yeah, well, exactly. Money's in a good place. I'm managing money well. Yeah. I will manage my money well.

33:41Pete:Yeah, yeah. Shit, I'm in the red. Shit, this has happened. Oh, crap. Oh, credit cards. Oh, shit, it's spiraled. it's easy to spiral and the you know I've had conversations over the years about you know like what I do and people say oh I can never do that I'm rubbish at maths so I can teach you the maths of what I do in about 30 seconds flat it's basically how to do a percentage right for most conversations but I honestly my job is not about money at all it's about people that's why I like it and so an understanding of how we think and how we behave particularly around money is core to being a good financial advisor I think.

34:19Pete:It's not about flogging people pensions. No, that's certainly what Jackson's ethos is anyway. We're financial planners right and we have a long relationship with clients. Do you want to just explain why you clarified yourself as a planner? As opposed to an advisor? It's arguably semantics. It's the sort of thing that only advisors slash planners get uptight about but financial advice classically is about selling products. You have an amount of money, let me sell you an investment for which I get paid. Right. So that's financial advice in my world. Anyway, that's what I would call financial advice.

34:53Pete:Financial planning is very much who are you, what's important to you, where do you want to be? And in how many years time, tell me about your family, your jobs, your hopes, your fears, your aspirations. Let's get to know you and obviously where your finances are at and let's help you navigate the system to achieve what you want to achieve, avoid what you want to avoid and do all that and try and balance a million different things. it's human focused that's why I like it okay so I don't think we come across as high and mighty I really hope we don't but we especially yourself you are in a position you're in the knowledge aren't you you're in the know I should be but none of us are perfect nope especially I'm sure before you were a financial planner what is there an example you can think of of a time when you made a financial mistake say because you made a decision based on emotion rather than logic yeah i mean this is by no means a catastrophic sort of thing it was a blip along the way and it's very much since i've been an advisor so uh where i actually went against my own advice right so yeah so there is um a particular fund manager who rock star fund manager one of the most successful managers in history in the uk set up on his own and you know money flooded into him because of his reputation and how good he was at growing wealth and everything and I just thought I'd have a bite and against everything I believe about how investing should be done and so I put a very small portion I mean it was something very small it was sort of two or three grand so not insignificant but relatively small I'm pleased to say right?

36:31Pete:Yes. And basically lost a lot right so so the fact that you went with that oh he's good we know him we know his vibe yeah i'd like to say it was um just a punt but actually it wasn't it was like actually no i will try this and there was a bit of logic there maybe there may be a bit of logic but it's the fact that i went against my own sort of pretty fundamental beliefs about how investing should be done like buying the whole market and all that sort of stuff as opposed to this one this one guy yeah so whether there was emotional and I think there probably was a bit of emotion and it's like oh he's a superstar manager now he's going on his own he's got no constraints there's real money to be made here and actually he lost a lot because he ended up he wasn't fraudulent or anything he just ended up monumentally screwing up yeah well we're not perfect no exactly you know it made no logical sense really but there you go we all do it and it's nice to know that even you even you Pete 100 % yeah yeah we're all well we're all human right yeah alright Right, do you want to test me to see if I've got it?

37:33Pete:Okay, can we define opportunity cost? Oh, good Lord. Right, so opportunity cost is, if you're presented with two choices, opportunity cost is the cost of not doing whichever one you don't choose. Yeah, exactly. You choose A over B. What is the lost opportunity in not choosing B? The missed opportunity cost. Yeah, yeah. So inertia risk. Why do you think people delay stuff like investing? I'd say for our audience, the first thing being lack of teaching. But I would say the main one would be, I got time. Yeah, okay. Okay. Why, for folks in our audience, younger adults, why do they generally not feel the impact of inflation?

38:34Well, to feel the impact of inflation, you mainly feel that over time, right? So they haven't been working and earning for long enough to really see the inflation and like maybe their costs aren't so high so they're not seeing. Is that what you're reaching for?

38:51Pete:What else might go up as well as the cost of the money? Oh, their wage. Yeah. So usually it's the fact that they generally, they don't go up in tandem. Usually wages exceed inflation. Yeah. So you get more of a pay rise than the value of the stuff you're buying increases by. So that's essentially the answer, but I'll give you that. That's fine. And lifestyle creep is? Lifestyle creep is when, let's say you get a pay rise, your lifestyle kind of matches that pay rise without you kind of knowing. so you don't actually feel the benefit of the pay rise because you just spend it. Yes, exactly. So many of these things can be avoided.

39:28Pete:How? These sort of almost difficult to see risks and traps, they can be avoided by being what? Hashtag be intentional. Merch. I honestly think we need to make merch at this point. Can you please put in the comments if you would buy be intentional merch? Yeah, or maybe send one to somebody who sends in a question or whatever. Yes. We'll see. My cogs are turning now. Do you see how excited I've got about this? Anyway. You've got to design it. Have I got it or do you want to ask me some more? Yeah, no, I think you've got it. This is quite sort of, I'll say theoretical. It's not sort of very sort of factual.

40:06Pete:A lot of this is sort of conceptual. No, but it's making people... Conceptual, exactly. It's making people aware of something that they aren't aware of any, you know, before. so and then it's up to them what they do with it the point is we have made risks that they might not have been they might not have known of we brought it to the forefront of their minds what they do with it so hopefully it's been helpful cool yeah so the next episode is the final one on our risk series and it is a whole episode on behavioural risk where we're going to really dive deep into that last risk that we talked about if you enjoyed this episode please like subscribe give it a thumbs up if you're listening if you could leave a rating we would really really appreciate it questions if you've got any questions then send us an email hello at bankofdad.show loads coming in so we're going to need to do another Q &A soon aren't we yeah we've got yeah I've had a couple come in yeah okay and not loads then as I say I wouldn't say loads spoken like someone who doesn't manage the inbox yeah there you go I was thinking meaningful money we're getting millions into that one but it's only a matter of time do you know what we're slowly creeping towards 2 ,000 subs though on YouTube We're on 1.7.

41:14Oh, good. Thank you all. Appreciate it. So thank you all. If you aren't subscribed yet, do.

41:18Pete:Do it. And yes, perfect. And the other thing, I don't think we've mentioned anything that would be in the show notes. For a link? No, I don't think so. Not this time. But in case we have, as always, we will put any links we've mentioned in the show notes, which you can find at bankofdad.show forward slash episode 26. Cool. 26 episodes. Go on. Jobs are good. Amazing. So we will see you for the next episode on risk, behavioural risk specifically. And yeah, I hope you avoid hospital. Yeah, I'm not going back in there ever again. Cheers. See you next time.