No, I am not planning on turning this financial column into
one of health and lifestyle. But there are remarkable similarities
between dieting and saving. Both require an initial decision
to take positive action to achieve goals and both require
a long term commitment to succeed.
So why do they often fail?
Generally, they fail for two reasons. The first is lack of
preparation and understanding of what is required. The second
is the inability to maintain the commitment. I do not have
statistics for failed diets but looking at the huge numbers
of ads, the thriving weight loss business and the growing
obesity problem in developed and even some developing countries
it would appear evident that efforts to combat the problem
are not succeeding. In the world of finance it is also well
known that only a minority of those who enter contractual
savings schemes maintain the plans to maturity. Unofficial
estimates indicate that plans are maintained on average for
only seven years. At this point a plan is likely to return
only a small profit and the original savings target is never
met. Consequently, the hoped-for lump sum to pay for higher
education or a retirement free of financial worries never
materialises.
Why do people give up?
People give up for a number of reasons. Their circumstances
can change through marriage, additions to the family, change
of job, return to home country etc., any one of which may
force them to stop their regular contributions. It is an easy
choice. You do not feel any immediate hardship as you would
if you stopped paying your mortgage or the electricity bill!
Again, there could be a sudden need to raise capital for a
multitude of things. Also, some are disillusioned after a
few years if the value of the plan does not reflect the growth
in markets over the period. They do not appreciate that the
plans have little value in the early years but they generally
pick up over time and those who carry through to the end usually
enjoy terminal bonuses as well.
Are there alternatives to contractual plans?
There are, but historically they tend to be ineffective. I
have tried these and find that on average few are maintained
beyond the first year as people soon find other uses for a
lump sum that can be easily accessed without penalty. Such
plans are also fairly costly as they entail paying a full
bid-offer spread and offer no bonuses. Long term goals are
rarely met by such plans. They are also unpopular with institutions
and financial advisers as they take up a lot of administrative
time for little return. Building up cash in the bank is another
option but in reality, cash in the bank tends to get spent
and once again long term goals are not achieved.
So if contractual plans often fail should we still use them?
Let’s look at it this way. If you were living and working
in Europe, the US or Australia you would be contributing whether
you like it or not to some form of state pension plan and
almost certainly to an occupational plan as well. You would
have no choice; the contributions would be taken out of your
salary. You may have less money to spend but you will appreciate
the benefits later on. Expatriates however, live in a different
world. They tend to enjoy a higher standard of living but
in many cases are making no provision for retirement. Those
working for large companies are usually reasonably protected
as they will tend to have generous packages that enable them
one way or another to build up their wealth. Expatriates in
Bali however, with a few exceptions such as managers and senior
staff of large hotels, are generally here out of choice and
do not have a generous employment package. Many are living
comfortably but are neglecting long term planning. Unless
they can force themselves into a disciplined form of saving
they risk hardship in later life.
The way forward
Given the unpopularity of contractual plans and the lack of
success of totally flexible plans is there a real alternative?
One possibility is a hybrid solution. The life companies are
unlikely to come up one but financial advisers should be able
to create one by assembling a combination of contractual and
flexible. The contractual plan should be set at an amount
that is well within the client’s ability to pay over
the long term. It should be backed by ample cash in a reserve
account. A second savings plan may be started with a larger
savings amount but this would be totally flexible and could
be encashed at any time without penalty. As the comfort margin
grows, contributions to the long term plan can be gradually
increased. This is still not as good as if you were in your
home country making compulsory contributions but at least
it is more likely to succeed than by setting goals too high
initially or not seriously attempting to reach them at all.
At the end of the day, diets and savings plans do not really
fail. It is people who fail them. The challenge in both the
lifestyle and financial services industries is to create products
which ensure people succeed. Food for thought!
Colin Bloodworth is a senior financial adviser with Financial
Partners International. The views expressed are his own. If
you have any questions related to personal finance you may
contact him at 021 520 8099 or
colin.bloodworth@financial-partners.biz
