Your bank balance is the part of your finances you see every day. It’s also the smallest part – and mistaking it for the whole picture is where problems happen.
Checking your bank balance is unavoidable when you open your banking app, it updates the moment money moves and notifications pop up the instant a transaction happens. Through the month you will generally watch it fall and by the time the next payday arrives it’s often at its lowest, and then it climbs back up and the cycle begins again.
Going away from cash for a moment and thinking about how we observe our portfolios, we’re the first to encourage you to not watch your investments. On the basis that we only invest long-term money, it does its best work when it is left well alone, and checking in on your portfolio every few days is one of the surest ways to unsettle yourself. We often say that regularly checking your portfolio is a little like setting up a camera to watch a forest grow – there is nothing to see in the moment, and the watching does the trees no good at all.
But there is a side effect to that sound discipline, which is that while you are sensibly not looking at the big numbers – your pension, your stocks & shares ISAs, your invested portfolio, the long-term wealth that underpins your financial future – the one number you can still see, easily, on whatever device happens to be nearest, takes its place front and centre in our consciousness.
It is all too easy to allow your current account balance to become your barometer of financial security – and for almost all of the families we look after, it is one of the least reliable barometers they could have chosen. This is the idea we’re going to further explore in this insight – because I think it helps to explain a great deal of the financial worry that intelligent, well-prepared people can find themselves carrying around with them. Our day-to-day mood about money is so often shaped by the numbers you can see, far more than by what you actually have – and the gap between those two things is where a good financial planner can do some of their most valuable work.
“What you see is all there is”
The psychologist Daniel Kahneman spent his career studying how we make decisions, and one of his ideas is that “what you see is all there is.” The mind tends to build a story out of whatever information is in front of it, without trying too hard to account for everything that is missing. We rarely weigh up what we cannot see, and we can end up feeling as though it simply isn’t there.
A current account balance is about as visible as a number can be in personal finance. It is on your phone, in your pocket, refreshed several times a day. Your pension and wider investment portfolio, by contrast, are of course accessible at any time via a secure online portal – but you are coached not to look at it, for the good reasons outlined above. While some clients do check their portfolio weekly or monthly (yes, we can see how often you log in!), for many others it is a nice surprise each year when we share their Portfolio Report at our annual planning meeting – having not seen its value fluctuating since the year before.
Your investment portfolio’s job is to quietly compound over time out of sight. The equity in your home is tangible, and often substantial, but it does not send you a notification. So our mind does something very natural – it treats the one visible number as though it were the whole picture, and we set our feelings accordingly.
Three people, the same feeling
Let’s take a look at some anonymised client scenarios we have come across…
Consider someone who has stopped work a little before the age at which they can draw their pensions and received a cash lump sum as part of a redundancy package. Their salary has gone – but with the help of sound financial planning, there is no doubt that their total assets are sufficient to support their family’s desired lifestyle and all future planned expenses. With the redundancy payment, they’re holding £130,000 in cash over and above their usual cash buffer, which we can see will be spent over the next 18 months of living. That’s no time horizon to be investing for, so it’s agreed their first 18 months of retirement will be funded from their cash, with investment withdrawals starting from month 19.
With no new income arriving each month, every cost they have – the Ocado delivery, fuel, holiday bookings, fitness memberships etc – are all being met by their bank account. From a financial planning perspective, this is a sound approach… but let’s see what happens to the human mind. Well, after six months of retirement, all of the structure that a career created has been removed, and they have more time to look at their finances. Naturally they look at their bank balance, the easiest thing to track, and can see that cash dwindling – in fact £130,000 is down to £85,000 already – a scary drop – “surely this is going too soon”. Another three months pass and with the cash buffer down at £70,000 they consider deferring the family holiday that was in their financial plan. Thankfully, we check in with them and they share this outlook. It’s a conversation fuelled by concern and they’re actively interviewing for new roles – they felt compelled to return to work to stop the cash rot. This is where we are able to step in, remind them of the full picture and show them their whole financial plan onscreen. Everything taken into account, they have more than enough to not only spend at the rate we agreed nine months ago, but also that any future work is a choice and not a financial requirement. In fact, their invested portfolio has grown more than the cash they’ve spent in the period, and they have more now than they did nine months ago!
Within the space of a short conversation with their trusted adviser, the client regains financial composure after being reminded of the whole plan. This type of ‘financial reset’ can be needed more often than annually in early retirement, hence the nine-month check-in, however from experience we tend to see it happen less and less as someone gets further into retirement.
After that initial 18-month period, with cash levels back down to a sensible figure, we would then typically move to taking structured withdrawals from the portfolio, often a blend of GIA, ISA and Pension withdrawals to optimise the overall tax position. This will always feel more comfortable, as it ‘feels’ like income – although of course it is not – it is spending existing capital. In some cases, we may consider starting a low level income immediately to reduce the rate of cash expenditure, so that cash is depleted less quickly. While less efficient/optimal from an asset allocation perspective, it can be more comfortable – which does have value.
Now let’s consider a different scenario – we meet a couple who are comfortably retired, with a fully funded financial plan and comfortable enough. What if they told each other that £40,000 is a cash buffer they like to have, but actually one of them gets nervous if it’s less than £60,000 – they just didn’t feel they could say that in front of their partner for fear of having a different perspective. Well, any time the current account is below that private threshold they would likely feel a jolt, and no doubt they would consciously or unconsciously postpone trips, defer the kitchen remodel and tighten the purse strings. Their net worth is more than sufficient for all of those things, but their mood is set by their current account – and we need to be skilled as financial planners to create a safe environment for healthy money conversations. You may be surprised – but we’ve had scenarios just like this, where long-term happily married couples haven’t been completely open about how they feel about money until we facilitate the conversations.
Our third example is quite typical – consider someone working and earning well, whose current account is empty by the end of every month because life is expensive – their mortgage commitment and education fees are hefty. They’re making significant pension contributions via their workplace pension and large monthly investments to their stocks & shares ISAs – the financial future being secured for their family is very strong – but the number they see day to day is their bank balance. Without being prompted at our annual planning meetings to look at the wider picture, they may feel perpetually skint, which is not at all a fair reflection. The number they see says one thing but the numbers that matter say another… and it is entirely understandable that the one on the screen tends to win.
While these are three very different financial situations, the feelings are remarkably similar, and in each case they are being driven by the number that matters least.
The job is to make the rest of it visible
This is where the work happens, and it is more about clarity than cleverness.
A great deal of what we do at the start of a new client relationship is simply auditing what is where. We build the full picture – the cash, the pensions, the portfolio, the property, the protection that would step in if health ever failed – and then we project it forwards, layering in every decision a client expects to make and every assumption we believe is reasonable and conservative. When that whole picture is in one model, running forward through the years, and a professional is explaining it to you in plain English, great clarity arrives. The invisible becomes visible. Worries will ease, and new clients tend to leave their first planning meeting feeling much lighter.
Sadly we cannot bottle the feelings of serenity that outstanding financial planning creates – and what felt vivid and certain in the room can slip, over the following weeks, from short-term memory into long-term storage, and it loses some of its sharpness. Meanwhile the banking app refreshes its number after every transaction, without fail. An annual moment of clarity is being asked to compete against a daily drip of worry, and that is an unfair fight.
So we try to even it up. Every boosst client has an ‘alive’ document we call their ‘nutshell’ – a concise, friendly, written summary of everything they have and how it all fits together, so that the understanding from the meeting does not have to live in memory alone. They can return to it whenever the visible number starts to shout. For someone still building their wealth, the nutshell sets out how the cash position sits today, how their protection would respond to a health catastrophe, and why their cash buffer has been agreed at the level it has. For someone drawing on their wealth, the conversation is more deliberate still. We agree together the floor their cash should never fall below. If there is £70,000 of cash today and we have agreed it should not drop under £50,000, and we can see that a year of living – the bills, the running of the home, the holidays not yet paid for, the gifts they intend to make, the car they plan to buy – leaves a shortfall of £60,000 against the income arriving from pensions, then the plan has a clear and simple job. Either we arrange the £5,000 a month needed to top up that gap, or, if the intention all along was to run that cash down from £70,000 to £50,000, then there is really only a £30,000 shortfall to fund across the year, and the falling balance is not a warning at all. It is the plan working exactly as it should.
That is the difference. Once you know the floor, a falling number can stop being a threat and become simply a measurement. You are no longer watching your security erode. You are watching a plan unfold.
Your phone is not the whole picture
This isn’t intended to encourage you to bury your head in the sand, and nor is it a criticism of paying attention to your money. Attention is good – but the message here is that we often see it focused in the wrong area, where it triggers needless negative emotions about a situation that is, in truth, perfectly healthy.
The number on your banking app is designed to be seen. It is loud, and frequent, and very good at presenting itself as the whole story – when really it is only a small part of it. Your financial plan is your north star, not the balance on your phone, and the entire purpose of planning is to help the parts you cannot see feel as real as the part you can – so that you can get on with the business of living, which was always the point.
If the number you can see has been doing more of your worrying than it should, we should arrange an Intro Call to learn more about your life and whether boosst could be a good fit for your family.
Josh
boosst is an independent employee-owned financial planning business based in Bedfordshire. We work with around 500 families who want a plan that is built around their lives, not just their portfolios.