How Your Attitude to Risk Can Affect your Financial Habits
The Psychology of Risk
I recently attended an incredibly interesting event with Investec Click & Invest, the subject was the psychology of risk. I love learning about anything and everything from the psychology world, particularly when its related to my specialist subject of finance!
It was a small round table event with a selection of financial journalists/bloggers and the team from Click & Invest. I was sat next to Jane Warren, the CEO of Click & Invest, and we had the most insightful and very personal conversation about our lives and how events from our past had shaped our attitudes and beliefs when it comes to money.
Survey Results
Click & Invest carried out some analysis of risk in a sample of 2007 UK consumers. The results are very telling, showing that 36% of British adults would rather keep their money in a savings account or cash ISA, and only 8% said they would invest in stocks and shares.
27% of people would not put money into investments because they were worried about risk. 22% of people surveyed felt that a savings account would be more secure with 21% saying they didn’t have the knowledge to invest their money. Putting money into investments, namely a stocks and shares ISA is deemed a very risky prospect for many people.
Achieving financial goals has a positive impact
For those that have taken on risk and made the decision to invest, it has enabled them to achieve their life goals quicker. 49% have been able to put aside more for a rainy day, 38% have used it to make home improvements (we used an £8k stocks and shares ISA balance to help with the costs of house extension a few years ago), while almost a third (30%) have been able to buy a house earlier. It has also positively helped their financial situation with over a quarter (28%) being able to take retirement earlier while 25% were able to pay off long term debts in a shorter period of time.
My Personal Risk Profile
We all filled in a detailed questionnaire asking us all sorts of questions about our levels of risk and we then had a 15-minute session with Corinne Sweet a psychologist who specialises in writing about money and the psychological side of it.
Corinne was such an intuitive person that very quickly worked out my attitude to risk. Turns out I am a risk taker. I will often jump into the unknown and into a risky situation with some research. She wrote this personal take away:
“A good balance of extraversion and introversion. However, you tend towards taking risks, not risk averse. You are spontaneous, with an impulsive side, but which is balanced by planning with an attention to detail side. You are people orientated and like to ask advice of people that you trust. Early trauma is a motivator and ironically allows you to take risks.”
I am a risk taker
I couldn’t agree more! Starting my business was a perfect example of this strategy. Starting Mrs Mummypenny was a calculated risk as I had some redundancy money to back me up and a strong business plan and advisors backing up the confidence in my business. I knew from day 1 that it would succeed, given hard work, focus and a bit of help from people in the right place.
We talked about why I have this attitude and it seems to go back to my parents dying when I was a teenager. They both died suddenly of heart attacks without warning. It immediately set the belief that things can end very suddenly so why not take a risk and try something different.
It has transferred into an attitude where if I want something now I will have it now, even if savings are not in place to pay for it. My entire adult life has been spent in consumer debt. I have always wanted things now, so things are bought on credit and then paid for afterwards.
Why should I have to wait months or years for something when I can have it now financed by a loan or a 0% credit card. Anything can happen, you can die waiting so why not have things now. The thing is, the more years you believe in this way of managing finance the more difficult it is to break the cycle. You are forever living in the past, paying for something you have already consumed.
But there is balance. I have also spent most of my adult life putting money every month into a stocks and shares ISA, starting at the age of 22. Only withdrawing it 14 years later to help with house renovation costs. It was a sensible decision with me investing a total of 4k which returned £8k when I came to withdraw it.
Changing my attitude to debt
I am currently working hard to pay off a big chunk of debt. The balance when calculated last April was 15.5k. Built up from a combination of wanting things straight away, a holiday to Las Vegas for my 40th birthday, a holiday to Spain for two weeks with the family. Also, a bit of funding the business during a time when it wasn’t making much money.
It took a huge mind shift change my attitude to money and to want to repay that money and aim to clear the full balance on credit cards.
The past year has been spent paying off the debt in big chunks, living frugally and earning as much money as possible. I have got the debt down to £6,250 (as at 1st April, all on one 0% credit card, 0% until April 2020) I am super proud of paying off nearly £10k during the past year. Its been hard, mainly to adapt to a very different way of thinking and to save for things rather than have it right now.
Turning to Savings and Investment
Now that the debt has got to a more manageable level I have turned my eye to savings and investing. I have an emergency saving pot set up for, well emergencies, but thankfully I am yet to dip into that! I also have a holiday saving fund to allow our summer holiday to be paid for, not put onto a credit card. For most of my adult life I have had a stocks and shares ISA only to shut it down last year as serious debt repayment took place. I have now set up another with a monthly direct debit set up to transfer money into it.
I feel in control of my money, comfortable that my debt will soon be repaid and that I am now putting away money for life’s luxuries and money into a stocks and shares ISA for the future.
A Stocks and Shares ISA from Click & Invest
Click & Invest offer a stocks and shares ISA and a General Investment Account. You can open an ISA or transfer your ISA from elsewhere. Fees are 0.65% on balances less than £100k, these are low fees compared to some other ISA providers I have looked at. So if you invest £10,000 your annual fee would be £125, there is a handy fee slider to help you understand your fees on the website. There are also very simple graphs showing you past performance the medium risk ‘measured’ strategy would have grown from £10.1k in Dec 2011 to £15.4k in Dec 2016. Be quick, the deadline for 2017/18 ISA transfer is 5th April! There is a £20k limit on investing new money into an ISA each year.
The views and opinions expressed within this article are those of Mrs Mummypenny and not of Investec Click & Invest. Please be aware that any form of investment can go up and down and the tax advantages of ISAs may change in the future and also depend on your individual circumstances. You may want to consider advice from a qualified IFA, just make sure they are recommended by a trusted friend and check their investment levels as some will only work with clients with an investment level of at least £150k. This post was written in collaboration with Investec Click & Invest
6 Responses
Great article Lynn! I’m a risk taker too – quite unusual for us accountants!!
Totally Em, I always knew accounting wasn’t the right job for me;-) Gives an amazing background for running a business though.
Not sure what results I’d get back, but I think I’m generally fairly risk averse!
I had to answer questions like on a scale of 1-10 how would you rate swimming with sharks, or crossing the road, or using a powertool!! But yes turns out Im a risk taker but tend to back up my risks with research. Like I had an amazing business plan when I set up Mrs Mummypenny Ltd;-)
A interesting article Lynn. Huge well done for paying off so much debt in a year!
Thanks Eileen. I am so happy that I have paid off that much money, cant wait to get rid of it completely. The mission is on to pay off as early as possible this year.