It is interesting how we think about our spending in different situations. The same purchase could be a necessity, a luxury, or an entitlement depending on where and when it takes place.
Lockdown has given us a different perspective on this. I was fortunate to have a short break in a nice Devon hotel this week with breakfast included.
Now, I habitually have porridge for breakfast, but when faced with the hotel’s full English it is hard not to have it and find ways to justify it to myself: ‘I’m on holiday’; ‘I’ve paid for it’; ‘I will lose out if I just have porridge’. This is despite the fact that I know that I actually prefer porridge now. I know that it is better for me long term, and that I will feel worse that morning if I eat a full fry-up. I don’t have these thoughts or conflicts any normal morning at home.
In the room, I had a free minibar, and again I felt a huge pressure to use it even if I didn’t want it or wouldn’t normally have those things. In the past, I can remember buying a drinks package on a cruise or an all-inclusive holiday and trying to ‘break even’ as quickly as possible.
In lockdown we swapped a coffee on the way to work for homemade; the chocolate bar on the way home for a biscuit with your cup of tea; going out for dinner for Deliveroo, Uber Eats and Just Eat. A completely new culture where you pay £7.50 rather than walk down to the chippy. I don’t know about you, but I didn’t get a starter when my dinner was delivered – yet when you go out to a restaurant the menu, the waiters and social pressure make you feel like you have to. The coffee shop you walk past is designed to entice you to buy one, as is the positioning of the chocolate bars in WH Smiths at the station.
In all these purchasing decisions, external and situational factors are playing a larger part than what we rationally know gives us pleasure and makes us happy. Thinking about yourself or your clients, who is controlling your spending decisions? Is it you? Or is it marketeers, peer pressure, social pressure or habit? Habit is powerful and called a ‘force’ of habit for a reason.
Households saved a fifth of their disposable income in the first quarter as the UK returned to lockdown, taking the saving ratio up to 19.9% because the shops, bars and restaurants were closed.
But as soon as we are entitled to go out, we find ourselves (at least for the early weeks) going out a lot more than we did before lockdown, possibly eating into all that money we saved whilst instructed to stay at home.
According to National Statistics, retail sales surged more than 8% in the three months to the end of May as restrictions loosened and we began spending some of the £230bn pounds saved up during lockdown.
Just because we can do something, it doesn’t mean that we should or that it will make us happy.
We will soon be entitled to do everything we did before but have been prevented from doing, and that may drive us to do it even more. Its like the Greater Freedom in Pensions: just because you are entitled to get all your money out at 55, doesn’t mean you should.
We used to say retirement was a seven-day weekend, and that holidays during your career were a trial run for retirement. Yet for many people, lockdown has been a trial run retirement that perhaps affords the best opportunity to think again about what we need, want and dream of having, now and in the future.
“Buy one give one” is a concept that has been around for a little while. At Dynamic Planner we plant trees via the Trees For Life initiative. Consumers are probably aware of the concept from the Vodafone campaign to end digital poverty. Basically, you are spending on something you need today and getting a little less because somebody else in a different situation is getting something they really need as a result of your purchase.
For nearly everything you spend today, there is an elderly person in a different situation who wants that thing too but hasn’t got your income to pay for it. Unlike most buy one give one schemes, this old person isn’t in a different place – they are in a different time. Of course, this person is you.
So what if you re-thought your spending decisions, made them your own and began better habits after lockdown?
For the sake of my own argument, I ran a 23-year-old through the Dynamic Planner Cashflow planning tool on average National Statistics data for income, current state retirement age, current auto-enrolment contribution rates etc, at our mid-risk profile 5 assumptions and current annuity rate of 3.7%, with escalation. The numbers have been rounded for simplicity.
By the way, contrary to popular misconceptions, they will be OK.
By cancelling their gym membership, average £40pcm, and saving the money whilst continuing to workout from home instead, their older self at NRA would have:
- An increase in assets of £38,000 in real terms or 11% more.
- Another £1,400 per annum in real terms (current annuity rate of 3.7%, with escalation)
By saving the money-grabbing a morning coffee each day, typical £3, and used office or home coffee instead their older self at NRA would have:
- An increase in assets of £78,000 in real terms or 22.5% more.
- Another £2,900 per annum in real terms (current annuity rate of 3.7%, with escalation)
- With that money your older self could buy over two and a half coffees a day.
If an average smoker gave up and saved the £3,300 pa that costs, at NRA their older self would have:
- An increase in assets of £260,000 in real terms or 74% more.
- Another £9,500 per annum in real terms (current annuity rate of 3.7%, with escalation)
- This eclipses the impact of the current 25% smoker rate annuity enhancement of £3,225 in this case.
When I looked into eating out, I discovered some interesting facts in this study.
By just reducing the number of times you ate out by 23 per annum (i.e. the people in house shares reducing from 68 to the average of 45), and saving the average meal cost of £50pp, their older self at NRA would have:
- An increase in assets of £90,000 in real terms or 26% more.
- Another £3,350 per annum in real terms (current annuity rate of 3.7%, with escalation)
- This would buy another 67 meals out per annum 30 more than the average retired person.
If you did all these things it might seem like a spartan existence, but would you actually be less happy?
By doing it all, their older self at NRA would have:
- An increase in assets of £420,000 in real terms or 120% more.
- Another £15,500 per annum in real terms (current annuity rate of 3.7%, with escalation)
As things normalise, we have an opportunity to reshape and reset our clients’ spending habits by engaging in cashflow planning and having a material impact on their savings.
Each of these changes has a bigger impact on the client outcome than going up a few risk levels, finding the funds with the best alpha or the cheapest platform.
Collating and presenting this information in modern cashflow planning tools like Dynamic Planner is easy, yet by using this data to explore the drivers behind a client’s spending and savings decisions, it’s the deeper conversations that advisers can have that can change people’s lives for the better.
Go on, buy your older self a decent lunch.
Chris Jones is proposition director at Dynamic Planner