AS A CERTIFIED Financial Planner, I am often asked for my top personal finance tip.
However, I firmly believe that just like losing the half stone you might have acquired over the festive period, there really is no “silver bullet” solution.
I’m going to cut through the noise and reduce all the advice down to one really simple, easy to understand concept – if this forms the basis of your approach to personal finance, everything else should fall into place rather easily:
Spend less than you earn, and put the difference away for that rainy day!
It’s easy to say, but not that easy to implement. We always seem to be striving for the next shiny thing that’s just slightly beyond our reach! A new phone, sofa or car – it doesn’t matter what it is, we want it, and we want it now. It’s this type of over-reaching behaviour which is at the root of most personal finance problems.
Easy to say and hard to do, like many things in life! So how can we go about it? Let’s take five simple steps:
(1) Understand what’s coming in each week or each month
How much do you earn, and how frequently are you paid? Once you have a handle on this you can start to figure out how best to prioritise your cash-flow.
(2) Write down your ‘essential’ outgoings (and I do mean ‘essential’!)
The mortgage or rent payment, lighting and heating, food – all of the basics. Figure out what you spend on these areas, trying to minimise outgoings as far as possible. This represents your core weekly or monthly budget. Once that’s done, you can figure out what level of discretionary spending is affordable.
(3) Try to spread any large one-off payments more evenly across the year, as long as you’re not penalised for doing so
Things like the car or health insurance, that all seem to crop up in January – trying to spread these payments makes it easier to stick to a weekly or monthly budget, and many providers offer a free (or at least cost-effective!) monthly direct debit option.
(4) Ditch the credit card, especially if you struggle to pay it off every month
Credit cards facilitate the over-reaching and it’s easy to get caught out buying that one “must have” thing and then having to divert much needed cash-flow to cover interest and repayments for the next number of months. It means you’re always spending six or 12 months ahead of your earnings and you will never have the space and time to even out.
(5) Figure out what, if anything, is left over each month and divert this to 2 key areas
They key advice for most people is (1) build a rainy day fund and (2) save for the long term, perhaps using a pension plan or AVCs to your company pension scheme.
A rainy day fund is useful in a number of ways. In the first instance having a few quid on hand insulates you against some of the ‘shocks’ which can derail a tight weekly or monthly budget – such as the washing machine giving up the ghost, or the unexpected wedding invite to your long lost cousin’s wedding!
In the longer run, you can build up quite the nest egg via a pension plan which could be used to supplement the state pension in retirement, ensuring your standard of living doesn’t fall off a cliff when you hang up your working boots!
This last part is probably the most difficult step. It requires a significant dollop of discipline and willpower. We are becoming increasingly programmed for instant gratification and the thought of not buying those new shoes or delaying a night out with friends in favour of putting the money in a savings account or contributing to a retirement plan can be hard to swallow at the time.
However, you’ll thank yourself for it in the long run. Saving is a habit and once you acquire it, it’s a relatively easy habit to keep. Try and ensure that your savings are ‘pulled’ out of your monthly
income rather than relying on you to ‘push’ whatever might be left over in a given month. Setting up a regular direct debit is perhaps the most effective way to achieve this.
So make yourself a promise this year and don’t let that New Year’s resolution fall by the wayside. Approach your personal finances with the same gusto that you went for the turkey, ham and stuffing on Christmas Day and you can set yourself on the way to tackling those bad habits.
Making small changes can really add-up over the long run.
Stephen Barry is a Director of City Life Wealth Advisors a Cork based advisory practice that provides financial planning solutions and advice to its clients, assisting them with their financial goals throughout life. Stephen can be contacted on 021 4358533 or firstname.lastname@example.org.