Nice round numbers aren’t always nice.
*Article by Financial Coach Rebecca Pritchard
When you think of saving for a car, having a safety net in the bank, or buying a property, it’s likely you’ll have an idea of how to go about it. You’ll also have a figure in mind, a ‘nice round number’, that you ‘feel’ is the ‘right amount’.
But if you dig further, you might find that the approach you’re fixated on, and the amount you’re hooked on, are completely irrelevant to how you could achieve those goals.
I call these ‘anchors’.
Anchors are a type of cognitive bias, and reflect our tendency to rely on the first piece of information we hear on a subject when we make decisions.
Those anchors could be formed through third-party information (your mate thinks cars over $20K are bad investments, your dad says $100K is a safe savings back up, your cousin spent $1 million on a townhouse), and could have no actual connection to what’s right for you.
I’ve been thinking about how many ‘anchors’ we have, where they come from, and how much they impact us. I see, in my role as a financial coach to millennials, that attachment to our anchors, without questioning their origins and relevance, can lead to poor decisions, and without question can steer us off track from our goals.
Take the million dollar townhouse example. Thanks to your cousin, you think a million must be a ‘good amount’, so it becomes your anchor, and you hunt for houses for $1 million, a little more and a little less. But it could be that the right house for you is actually in the $700,000 to $800,000 bracket, and you’re over-spending pointlessly.
Back to those ‘nice round numbers’, which my members love, but are the bane of my existence!
My members will say, ‘I need more personal spending each week’. I’ll say, ‘OK, how much do you need?’ They’ll answer, ‘$100 per week’, so I’ll ask, ‘How did you get to that number?’ and they’ll often say, ‘one hundred sounds nice and tidy’.
But when we look closer, they might only need another $67 to cover their rising costs, so the other $33 would get wasted. That’s $1700 a year!
The problem is that it’s the number that sticks in their head first, and everything is decided around that, rather than putting the goal first, then landing on the right number.
Getting off course
Recently an anchor nearly derailed a member’s life plan. He’s an investment banker, and told me he wanted a net wealth of $10 million (wouldn’t we all?!).
I asked him why, why, why, why, why, just like when we looked at the ‘five whys’ in Are you really making the right progress?
‘I’d like to know that one day I could give in my notice and I’m cool,’ he said. He wanted a passive income close to his current wage.
We did the numbers and on a modest return, with about $5 million invested, not $10 million, he could have around a $300,000 passive income. By looking at the goal first, we realised he needed $5 million less, and could throw in the towel years earlier.
Can you recognise your anchors? Do you have clarity on your goals, and know what you need to do to reach them?
Lining up goals and strategies
You’re kidding yourself if you think you’re above anchors. We just aren’t aware of them. But if we can learn to recognise them, we can shake free.
Ask yourself, what am I basing this belief, timeframe, or plan on? Is it the first thing I heard, or something that is more aligned to my goals?
It helps to write two lists:
- All of your goals
- All of the strategies to reach those goals.
Then, work out how they’re aligned. You might say, my strategy is to save $2000 a month, but then you look at your goals and realise that you need to save $3000 a month to reach them.
It’s also important to think about the balance between ideas that excite you, and what’s practical. If you’re genuinely excited by property, investing, or saving cash, for example, then that should form a part of your strategy — but only if it’s right for you.
Seeing another way
I worked through this approach with a member who was planning to buy a ‘stepping stone house’ before building her dream home in 5 years.
I challenged her. Why a stepping stone house? (Buying a house for such a short term is MENTAL). And, why that particular time frame?
She wanted space for her kids to play, was anchored to the idea that she should own the home she lives in, and thought 5 years sounded about right.
I did the numbers and realised that if she could rent out her current house instead of selling it, rent a bigger house with a garden to live in, and keep saving for her dream property, she could actually have more funds to buy the right home within three or four years.
Getting back to our goals
Some decisions, such as investing in property, play out over years. We want to be able to put our hand on our heart and say, I looked at all the options, and it was, or it wasn’t, the right thing for me. No buyer’s regret, no FOMO, but confidence in our actions.
If we can challenge that first ‘go to’ information, and instead have our goals as our anchors, and be open to new ways to reach them, we can make better decisions. We can stay on track towards the things that we truly care about!
Take a few minutes to reflect on this, what has been anchoring you?