There are times when you may make mistakes without realising it. These mistakes could be due to blind spots, such as habits, assumptions, or risks that go unnoticed, and could affect your financial decisions.
Making mistakes is a part of life. However, because hidden mistakes often go unidentified, they may be repeated. Over time, the compounding effect of small mistakes could lead to a much larger negative impact.
Imagine you’ve started your first job and, to increase your day-to-day budget, you opt out of your workplace pension.
The first month of missed contributions might have little effect on the income you can expect in retirement. However, if you continue to skip pension contributions, you could find that your retirement is far less financially secure than you’d hoped, especially if you haven’t made other provisions.
Opting out of your pension due to a lack of information about the long-term effects could affect your lifestyle in the future.
Here are five ways you can spot financial blind spots and limit the effect they could have on your decisions.
1. Look beyond your budget to your behaviours
When you think about changing your money habits, examining where your money is going might come to mind first. While this is useful, looking beyond your budget to your behaviours could help you identify blind spots.
For example, are you more likely to splurge if you’ve been experiencing stress? Or is investment volatility likely to lead you to make knee-jerk decisions?
Understanding your financial behaviours could help you recognise when you might not be acting in your best interests due to a blind spot. It could give you the chance to step back and assess a situation before you make a decision.
2. Check the small details
Managing your finances often involves making big decisions. It can be easy to overlook the small details as a result.
When you review your pension, your focus might be on the annual returns. Yet, the fees you’re paying could also be important. Over time, paying higher fees on your pension could affect the value of your savings and the income you’ll receive once you retire.
Paying attention to the small details of your finances could make a big difference over time.
3. Assign your assets to goals
If the value of your assets is increasing, you might assume you’re on track. However, if you’ve not set out individual goals and understood how different assets will support them, it can be challenging to assess whether adjustments are needed.
A financial plan that balances short- and long-term goals can help you pinpoint blind spots. For example, you might have a savings account that you want to use to cover holiday expenses and provide financial help for your child when they go to university. If you haven’t calculated exactly how the savings will be broken down, it could mean you unexpectedly miss the mark.
4. Stress test your finances
Stress testing your finances can be one way to identify issues that blind spots might cause.
According to a PensionAge article (16 September 2024), almost three-quarters of Brits aren’t on track to retire with sufficient funds to maintain their current lifestyle. One of the reasons for this is that many do not consider factors that might affect their income needs, such as inflation or healthcare costs later in life.
Stress testing your finances can help you understand what might happen in different scenarios. In the above example, you might consider whether your income needs could be maintained if there were a period of high inflation, or how you’d cope if your income failed to keep pace with rising costs.
As well as retirement planning, stress testing could help you highlight other potential blind spots, such as determining if you have an appropriate financial safety net.
A financial planner could work with you to create a cashflow model, which might be valuable when you want to visualise the outcome of different scenarios.
5. Get an outside perspective
It can be difficult to identify blind spots yourself, even when you’re mindful of when they might occur. Working with a financial planner can offer you an outside perspective based on your objectives and circumstances.
Your financial planner can help you assess the small, important details and the bigger picture, so you’re in a better position to make decisions that are right for you. This approach could reveal what you may be overlooking.
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Please note: This article is for general information only and does not constitute advice. The information is aimed at individuals only.
The value of your investments (and any income from them) can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.
A pension is a long-term investment not normally accessible until 55 (57 from April 2028). The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Past performance is not a reliable indicator of future performance.
Workplace pensions are regulated by The Pensions Regulator.
The Financial Conduct Authority does not regulate cashflow modelling.