Every so often I come across a new client who is searching for the magic elixir of finance – the quick fix to all their financial woes. What they are really seeking is a quick and easy way to make more money without taking risk or putting in time.
Unfortunately financial management on a personal level and the advice that is needed is not sexy or glamorous. In fact, it’s plain dull and boring. Nevertheless with over 25 years as a professional financial adviser, here are some tips that might help you put some shape on your personal finances. All of them may not be capable of being implemented immediately and some will take a long time – years even – to make a serious impact on your financial well-being.
1. Always hold a least nine months’ expenditure in an accessible savings account This is because you never know when curve balls hit you. It might be a loss of earnings through redundancy or ill health. If you are self employed it may mean not paying yourself just to keep the business ticking over. Don’t just think of paying the mortgage, cover the necessary food and utility bills as well as the ad hoc expenses such as back to school or even Christmas expenses. Not having cash may force you to sell stock market related investments when they may be suffering a temporary fall in value.
2. Save at least 20 per cent of your income each year and start early Accumulating a fund whether it is a pension or personal savings over a long time is easier than trying to save a lot over a short time. This is because you get the compounding effect of investment return over a longer term.
3. Repay debt as quickly as possible Use current low interest rates to ramp up your repayments. While some might argue that there is an opportunity to be gained by investing rather than paying off debt, the truth is that once you clear the debt you are accountable to no-one. How many people would like to be in that position now!
4. Know how much you are spending and keep it in check Too many people spend just because they are liquid, rather than because they are solvent. How many people in the Celtic Tiger era continued to spend just because they had access to credit cards and overdraft?
5. If it looks too good to be true it probably is Don’t get sucked into other people’s hype. This is probably the most recurrent situation I have come across in all my years of giving financial advice. Everybody wants to believe that they have got the magic touch or have a golden opportunity. If an investment is offering very high rates of risk free return, it is either a scam or the advice comes from an illiterate financial adviser – there is always a catch but most people don’t find out until they lose their money.
6. Risk and reward are related There are no low-risk, high-return investments. More of point 5 above.
7. Stock market volatility is not the same as risk In general terms, stockmarkets have fallen about one third of the time, spend another third recovering and then look to make new highs thereafter. Unfortunately we never know how long each dip and rise lasts but you should always make sure that you don’t turn a temporary fall in value into a permanent loss of capital by selling when things look bad. The markets fell by 50% in the six months following the Lehmans debacle and then spent the next four years climbing up to the previous high. Averaging investment times are hard to gauge at the outset which is why most investments need at least seven years commitment.
8. The news is not your friend For every time you that you hear ‘billions wiped off share values’ remember that eventually there will be ‘billions added to share values’. The latter point does not sell as much newsprint as bad news!
9. Invest in business Owning a part share in a well diversified basket of world class equities is likely to provide the highest inflation adjusted returns over twenty years or more, compared with low or negative real returns from fixed income or cash deposits.
10. Keep it simple If you don’t understand how an investment is supposed to work, then avoid it like the plague. Investing is simple. Anything that requires a mini telephone directory sized document to explain all the caveats is really screaming at you that it is high risk.