Unlocking the power of long-term thinking
Zaahir Khan explains how long-term thinking can be a powerful tool in financial decision-making
Try to remember what it was like when you were a child. Your dad gave you a small amount of money to spend on whatever you wanted. Your first instinct was to run straight to the corner shop to get yourself a packet of crisps to gobble up or grab the Sleeping Beauty Barbie from the toys aisle to complete your collection. You often thought of immediate gratification. Why wouldn’t you? You could always count on dad to give you some more cash to spend.
But as you grew into a teenager, if you were lucky enough, your income became more consistent. Maybe you started getting an allowance - as opposed to any amount of money you requested on the spot -on the proviso that it had to last the entire month. If you wanted to catch a movie at the cinema with friends and get popcorn, you had to think twice about buying that music CD. Because once that money ran out, you had to wait for the next month before your finances were replenished. You were forced to think in monthly terms.
For most adults, this is where the pinnacle of their financial planning ends: thinking monthly. It does make perfect sense though. If you’re in the working world, chances are you’d be receiving your salary on a monthly basis. You would then take that income and spend it according to your monthly needs: rent, groceries, electricity and, if there’s anything left, something to save or possibly splurge on that latest piece of tech. This cycle would repeat itself month after month because it’s logical and comfortable. While this type of thinking might be the most comfortable, it forces your monthly income to drive your thinking and planning, and you could potentially be stuck assigning 30-day cycles to your financial decision-making over a lifetime.
How do we break this cycle? One way is to think long term.
Long-term thinking is a very important benchmark that can be used to assess where you are in your life and where you intend to go. It’s no secret that potential employers often ask in interviews “Where do you see yourself in five years?” and equally, an employer is impressed when a job candidate asks “Where do you see the company going in five years?” The reason for this is that employers want evidence that a candidate is thinking long-term. There exists some form of holistic, goal-orientated thinking in this person’s character. It showcases the potential of an individual to be able to think beyond their current circumstances and plan for an unforeseeable, yet deterministic, outcome they desire.
There is no better subject to apply long-term thinking to than your finances.
The minute you start converting your R15 000 a month salary into R180 000 a year, you not only sound incredibly richer than before, but entirely new avenues of financial possibility open up for you. Having a long-term lens can change the way you view and ultimately make financial decisions. You force yourself to think about how a short-term action can affect a bigger plan. If you plan to make a massive financial commitment like purchasing a house, you know that you will need a large sum of money in the form of a deposit. One could argue that purchasing a house is a long-term plan as it can take 40 years to payoff. So, when you see the shiny new BMW in the showroom, you will be less inclined to making an uninformed financial decision to purchase it unless you know you can afford both because it doesn’t form part of your 40-year plan.
The same methodology is sometimes applied when urging yourself to quit smoking. Sure, R30 a day sounds measly but what of R900 a month? That’s almost R1 000 your nicotine addiction is costing you. Not to mention what happens if you start applying the long-term thinking methodology to it. R10 800 a year? R54 000 every five years?! It makes quitting, at least from a financial perspective, an easier decision to make.
That R900 a month, with an additional R100 from your kitty, could easily become a powerful savings tool if invested into a unit trust. If you quit five years ago and invested that R1 000 into the Prudential Inflation Plus Fund, assuming your distributions are all reinvested, it would amount to R73,518*(before taxes)! That’s a decent payment for quitting a bad habit!
You'll never be able to plan for every single financial eventuality that will occur over the course of your life, but teaching yourself to think in one- to three--year increments is a good place to start. Eventually, you’ll learn how to think in five-year cycles. This kind of life-altering decision-making prowess is not an easy process. It takes tremendous dedication and sacrifice. One tool you can use to assist yourself is learning to delay gratification by sacrificing the short-term benefits for a longer-term gain. Another is to make use of powerful savings tools like unit trusts. These tools force you to think long-term as their investment horizons are generally three to five years and, as you can see from the quitting smoking example, can be financially rewarding in the long run. Now that’s the power of long-term thinking.
Taking a long-term view is a critical element in the way Prudential manages unit trust investments for our clients. To learn more, contact your financial adviser or our Client Services Team on 0860 105 775 or at email@example.com.
*If you increase your contribution by 6% after every 12-month period (to take account of inflation) the ending value would be R81,944.