This is an edited transcript of a workshop I did at a MyMoney Event for IPSE. Discussing how to understand your money better, getting people to think about beliefs they have regarding money and how money ties into their Financial Wellbeing and some tips on how to improve them. This event was for freelancers and the self-employed.
Past performance is not a reliable indicator of future performance. Investors should remember that the value of an investment and the income received from an investment can go down as well as up, and they may not get back the amount they invested.
This article doesn’t constitute financial advice which will be unique to each individual. I would recommend consulting an independent financial adviser before acting on any information in this article.
SEX OR MONEY
There was a study done in 2015 for about 15,000 people, and they found that people were seven times more likely to discuss how many sexual partners they've had, and whether they have a sexually transmitted disease, than tell you how much they earned last year? So people don't want to talk about money because maybe they're uncomfortable talking kind of around it.
It seems to be the last taboo. They also found 27% of people are absolutely terrified about dealing with their money, and one in seven would rather have a dental procedure than deal with their money. So it's
that thing we just don't kind of want to talk about it.
BELIEFS
So some of the beliefs that people kind of have around money.
All these kind of beliefs that are formed with people, and they can impact on some of the decisions that make around it. So almost kind of self-perpetuating, if you think, "I'm not good with money" then it's
almost self-perpetuating and then you do things that sort of reinforce it.
So it's quite useful to kind of understand some of the beliefs that you may have around money, and how you act if that perhaps was your belief. So if you did have a belief, say, I'm just not good with money, and you flipped on his head and say, "Well, I am good with money, kind of how would you act, what would you do?
Because they're not truths. They're just the kind of the beliefs that we hold. And I had one, for me, I kind of equate success with houses. So the bigger the house, the more successful you are. And it never really occurred to me until about a year ago, why I always thought, oh, you have to buy a bigger house, a bigger house, until someone kind of pointed it out. So I think it's quite useful to understand some of the beliefs that people have.
TWO QUESTIONS TO ASK YOURSELF
Two questions I like to ask my clients when I speak to them.
Because that's generally what's going to form your belief system and how you deal with money now. So it's probably a couple of things just to ask yourself when you get home, just have kind of think about it, because again, it's one of those things we don't ever really question ourselves or it's unusual if we are, and it's often unusual that we talk to our partners or significant others about it.
HAVE THE CONVERSATION
I had a client that I saw recently, and I went to see them they didn't want to move house, it was absolutely off the table. They're going to do a loft extension and they were going to borrow some money to do it. And at the end the meeting and they were about to go on holiday. I said, "Have a glass of wine and have a chat about what you want the future to look like." And I came back and said, "Well, has anything changed?" And they went, "Yeah, we're not doing the loft extension because we want to move in five years, potentially into the countryside, but hopefully to somewhere with a beach.”
I said, "Okay, well that's quite a big kind of change. How did that come about?" And they said, "To be honest, it was the first time we talked about it, like literally the first time we had a conversation." They have kids, they've been together for years. They'd never actually sat down and went, "Well, what does the next five, 10 years look like? What do we want out of it?" It's just that thing, you just kind of get on with things, or you're kind of trying to avoid an argument, perhaps, with the other half on that.
FEELINGS AROUND MONEY
I always say with money, it's not just black and white, it's all the emotions that go around with it. So that can be greed, fear, guilt, worry, stress, joy, happiness, whatever it may be. It's different for different people and it's always useful to kind of have a handle on why you do certain things and some of the feelings that you have around money.
Burying your head in the sand about it's only going to lead you to feeling more sort of stressful and kind of more worried about it. So even just getting kind of a handle on what you've got can be quite useful.
WHAT’S IMPORTANT ABOUT MONEY TO YOU?
This is a question that I often ask. What's important about money to you? Then generally what happens with that, when we first ask that, we get security and freedom.
Those are generally the two people sort of gravitate to. I think because it's kind of an easy answer to a difficult question or an uncomfortable question. So whether you do it by yourself when you get home or with your partner, ask yourself that question. What's important about money to you? And then just keep drilling down like that kid that asks why all the time. Why is that, why is that, why is that?
i.e. what's important about freedom? What's important about security? It can really get to the bottom of what's the money for, because until you know where you're trying to get to, how do you know what you need to do?
“Money's the fuel, it's not the destination."
Unless you know where you're going, you're not going to know what you're going to need, how much going to need when you retire, what you should be doing with your money. It's really important to get a handle of why you're earning? Why did you go contracting or freelancing? What is the money actually for? Because then that can sort of lead through to your decisions.
Once you've got your values around money, then you can relate decisions that you make back to it. So for me, experiences with my kids is a big one. So I can reframe financial decisions to does it tie with my values. So say, if you were spending £1,000 a month on a sports car, and you said traveling abroad was important to you and you weren't doing it, there'd be a disconnect between them. Equally it might be that money's important to you so you can spend £1,000 on your sports car, but as long as you kind of know, you can do it.
FINANCIAL WELLBEING
A hot topic at the moment. Certainly financial wellbeing which employers are really keen on it. So getting people in to talk about it, getting a lot of support because they know loss of productivity, people off with stress, days off. Freelancers, you have the same money worries, but you're in it by yourself, and there's nothing for you to improve your wellbeing on that. So unfortunately it's on you to deal with it.
Five key elements for people who say that have financial wellbeing
So it's one of the things, you've got the difficulty, you've got IR35 coming down the road, taxation, products that aren't really designed for flexible working. You've got all that. And the fact is, if you can't work, you're not going to get paid. It's not like if you're off with an employed role, then at least you can get paid for that day. So it's on you to take control of that wellbeing, unfortunately.
EARN MORE MONEY?
So is the key essentially just to earn more money? The research shows, actually that's not the case. So Salary Finance do a lot of work with employers, and they found that basically at the low end and the top end, they have the same percentage of people worried about their money. So whether they were earning £10,000 or £100,000 46% of people were still worried about their money.
So I think there's an assumption, "Well, if I earn more money, then I'm going to be in a better position, I'm going to have better financial wellbeing." But I think we all know about lottery winners that have won the lottery and then blown it all, got divorced. My favourite story is there's a guy in America who won $50 million on the lottery and within two years he was bankrupt, divorced, and estranged from his children. And what was really odd about this guy is when he won the lottery, he was worth seven million pounds.
You’d think he could handle it. "Well, he's got experience, he's obviously built up some money." Completely ruined his life. So often you think it's kind of like, "Well, if I manage my money better." That guy had seven million pounds already and it completely ruined his life getting that extra. So it's that phrase, "If you make a good income each year and you spend it all, you're not getting wealthier, you're just living high."
TIPS TO IMPROVE FINANCIAL WELLBEING
One of the main things in terms of improving financial wellbeing is to get control of your spending, that budgeting. How much is actually going out? How much do you need? What are you spending your money on? General idea being, if you spend less than you earn, you're going to be happier. So if you earn lots of money and you spend it all or keep getting into debt, have that lifestyle creep, you're not going to actually improve your financial wellbeing.
GET ORGANISED
Ring up and find out about any pensions that you may have. How much is actually in there? Whatever assets you have, what's in your bank account, what liabilities you have, what debts? If you've got credit cards, what's the minimum payment, what interest rate are you paying? How much are you actually paying a month? What's your loan, how long does it run through for?
Then you can essentially have a little net worth statement. So assets in one column, liabilities in the other, and it gives you that starting point. You know where you're at, at the very least. And a lot of certainty comes from that.
SPENDING PLAN
The spending plan. One of the things that I always get people to do when I go see them is do a budget or at least write down what they're spending. And it can be quite eye-opening just doing that exercise. It normally comes out, "Well, I didn't know we were spending that on this," or, "We didn't know we were doing that." It just gives you, again, an idea ... budgeting equals awareness, so if you know what's going out, you know how much you need to bring in. You know what you can do. You know we potentially can save.
Have a spending plan, potentially having a couple. So maybe like a base one. I need to earn that amount, and that's kind of my base level. And then having one where for months where you maybe earn more, so you can still benefit from it. Make sure you don't get that lifestyle creep, or spend more in the months that you're not earning as much. It's a kind of good way of getting control over it, because the problem you've got is your income's lumpy (as freelancers). It's not the same every month. It's not even the same every week. So it's kind of like how do you deal with that side of things.
Spending strategy, a very simple one.
CONFIDENCE FUND
Confidence fund, emergency fund, three to six months, staple. It means that you don't have to maybe take all the jobs that you've got, or you can be a bit more picky and choosy over the stuff that you're doing.
I call it confidence fund, because it gives you that. People who have it just have a lot more confidence over what they're doing, they're less stressed, they're less worried, because they know if they're not working for a bit, they can do the things that they want. They can maybe take a month or two off. They've got that safety net, which is kind of important to people in that form. It all sort of ties in with that security that people want to feel around money.
PROTECTION
Protect yourself. So if you've got family, children, life insurance. The big one that people don't generally protect themselves against is a loss of income. So if they're not able to work due to accident or sickness. So if you're employed, you might get six months full pay, six months half pay. If you're freelancers, you don't get that. So an income protection policy's something that can pay out if you're unable to work.
Now obviously if you're a couple of years, say, away from retirement and you've built up sufficient assets, you're not going to need that, but for people starting out it’s employee ben the employee benefits that people have and that they've given up.
Even an employed person should have an income protection policy that kicks in, because you are essentially your golden goose. You're the owner. That's going to have the most impact. So if you lose that income, what effect does that kind of have on you? Now, again, circumstances, if you've got a partner that earns good money and can help cover the expenses, you may not need it, you may need less. But it's definitely protect yourself is probably kind of one of the key things.
SAVE & INVEST
Save and invest for the future. Even if it's a small amount of £50, whatever it will be. Just get started. It's habit-forming. You can automate it. So you just set up so it goes, and within your spending plan, pay yourself first,. don't sort of say, "What's left." Build it into your plan, so one of the first thing that goes, as soon as you get paid, it goes straight out. And if you've got another spending plan, you could agree, "Well, if I earn X, I'll save a little bit more." If you write it down, the more likely you are to do it.
It ties into the values, what you're doing it for? They did a kind of study with low income houses and they showed people a picture of their kids beforehand, and those people saved 250% more than people who didn't have that trigger because they associate, "Oh I know why I'm doing it." So it's really key to get kind of a handle on what's the money for.
INVEST IN YOURSELF
Invest in yourself. The more money you can earn, obviously the better, as long as you avoid that kind of lifestyle creep. So that training, reinvestment. Again where the confidence fund can come in. You might be able to take some time out because you've got that money behind you, and if you increase your hourly rate by 20 pounds an hour over the course of a year, that's going to make kind of a big difference. And I think they kind of covered that off downstairs, around that. But that's absolutely a key one. So if you can get paid more, obviously it should improve your wellbeing.
So speak to the people that you work with, companies you work with and say, "Well, what extra value could I add to ... what can I do to get paid more?"
SUMMARY
INVESTMENT JOURNEY EMOJI FORM – click here
In video are all the emotions that investors go through, from euphoria to fear, panic. And then basically back again. And then a successful investment just essentially leaves it alone, is quite calm, and just rides out and it all comes down to how long are you going to be invested for, what're your timeframes, what's the goal with the money, where you're trying to get to?
Typically what people do is they buy when it's high and everyone's euphoric, and then they sell when it's low, and just keep repeating that, and it's not a way to really built wealth. If you can be quite boring, that's the key to be successful investment. You do it and you diversify your portfolio, and you leave alone.
"Too many people spend money they have not earned to buy things they do not want to impress people they do not like" - Will Smith
