Most personal financial columns have a strong emphasis on investments. How do you get richer? How much can your money grow by? What are you worth? This is understandable as it is something that appeals to the greed element in most people but it is actually the wrong focus when it comes to money management.
Those who have either read the book or seen the various films or TV series of Jane Austen’s “Pride and Prejudice” might recall that Mr Darcy was seen as being attractive as a potential husband not necessarily because he was handsome but because he had an income of £10,000 a year. The emphasis then was not on being a millionaire but on having at least a sufficient income to live on.
When you reflect on the mayhem of the latter end of the Celtic Tiger and the chasing of capital gains rather than looking for an assurance on income you can’t help feel that for all our modern sophistication the old approach of having money in your pocket before looking for capital growth makes infinitely more sense.
So if you could sidestep the last decade and start all over again, what would you do different or more appropriately what should you have done differently?
When you are younger having a good stream of current income is reliant usually on earnings from an occupation or a business. When you are older, especially in retirement it will be dependent on having accumulated enough assets to provide an income when you can’t work anymore. Of course most people equate retirement monies with a pension fund whether it is provided personally or by the State. With the likely long term reduction in State benefits as well as many employer sponsored schemes facing cutbacks many people are facing an uncertain future, whether they recognise it or not. Indeed, this assumes that you have a pension scheme at all. Latest figures would seem to indicate that only 50% of the workforce actually has a pension. Even then the level of the pension can vary from being fully funded to being minimally funded.
So if your pension fund is of limited future value what can anyone do?
A key component of good financial management is the ability to control your costs. If you have ever run a business you will know this. Too much overhead and not enough income amounts to going bust. The speed of the insolvency is directly related to the degree of overspending. Family budgets are no different in that they require discipline, something that is dependent on the personal application of each individual.
In advising clients in recent years it has been eye-opening on what many deem to be basic expenses. In my view this is paying the mortgage or rent, putting food on the table, clothes on your backs of all and enough to support basic education for the children. Many who I have been advising in recent years have told me that this also includes tennis lessons for the children, golf club memberships, two holidays a year and changing the car every three years.
Without wishing to deprive anybody of what they desire the reality is that such superfluous overspending now, especially on non-essentials, jeopardises future income and the basic lifestyle of the future. It seems that the lessons of the fallout of the Celtic Tiger have not been learnt in some quarters. Don’t get me wrong, I don’t want to be seen as a Scrooge type character but the truth is many did not understand the full implications of their borrowing to fuel their overspending in the Noughties until it was too late. It really should be a case of once bitten, twice shy. Overspending just does not work.
On the other hand, simple accumulation whether through a bank account or a pension product can produce a substantial sum. Einstein is reputed to have declared that “the most powerful force in the universe is compound interest”. For example, a savings of a mere €23 a week earning only 3%p.a. over a 10 year period amounts to a tidy sum of €13,943 after 10 years and €32,762 over 20 years. If the growth rate was 6% then the figures become €16,375 and €46,200 respectively. Saving multiples of €23 on a weekly basis produces pro rata returns. The bottom line is that a consistent approach to savings can pay off and, as such, this can produce a significant future source of income.
Saving and spending are only part of the equation. Managing risk is key. One of the other lessons of the Celtic Tiger is that people chased the dreams of others by trying to copy the “Jones” in either purchasing property or gambling with “Contracts For Difference”. Many invested in assets with risks that they did not understand and in many cases compounded that risk with borrowed money. Very few stood back and really gave consideration as to their personal ability to absorb financial losses if the investments went pear shaped. These harsh lessons should not be forgotten. In essence, you should only gamble with what you can afford to lose. Otherwise you need to control risk and invest for the future.
But then what’s an appropriate level of risk. It varies from person to person and is influenced by issues such as time left to when money needs to be spent, tax circumstances, personal health and level of personal expenses.
To determine how all of these interact needs the skills of a financial planner who is capable of forensic analysis of your finances as well as painting a detailed personal picture of your future income and wealth. Only by focusing on your needs rather than the value or benefits of a financial product can you truly appreciate how your future income can be generated and protected.