Financial common sense is not common knowledge nor is it common practice! Many of us overspend each month and commit to big ticket items when we have no way to pay for them. We push the proverbial ‘can’ further down the road and convince ourselves than one day our ship will come in and all will be ok. There are many paths to travel along life’s highway however; there are very few paths that lead to financial freedom. I was taught to do well at school, go to a good university, get a degree and then a good corporate job for life would be waiting for me. The popular belief in the 80s was that one day I could retire with a good company and government pension. Unfortunately, the reality is now very different. It is now almost impossible to work for the same corporation for life. Many of the jobs are outsourced or downsized. The defined benefits (DB) pensions are now very rare and government pensions are being squeezed. The government does not have solutions for their own monetary problems therefore; they are unlikely to have the solutions for yours! With this backdrop, I would like to provide you some common sense for your euros and cents. Steps that have served me well over the years.
1. Ensure your rent or mortgage is less than 1/3rd of your take home pay. This establishes a good baseline budget. If more than 1/3rd then increase your income or move house! No other option. Do not break the 1/3rd rule!
2. At the beginning of every month, establish your budget. Plan where every € will be allocated throughout the month. The vast majority wait until the end of the month and are mystified where all the money went!
3. Live below your means. I know this does not sound cool – spend less than you make each month and do not sacrifice your long-term goals on the altar of short-term gratification. Cut unnecessary expenditure.
4. Plan for a surplus each month and put this to an emergency fund. This is a cash account with 3 months of expenses. This is your insurance policy if you lose your job/income.
5. Set goals for your finances. ‘Debt free by end of next year’, ‘have the deposit for my own home’, ‘20% of money to charity’ or ‘financially free by 40’. Whatever it is, have a long-term goal for your finances.
6. If you have a dependent partner or are married then consider life assurance and critical illness cover to protect your loved ones in the event of serious illness or death. This cover is very cost effective and will give you peace of mind.
7. Start to pay off any unsecured debt such as credit cards and loans. Pay off the lowest balances first or balances with crippling interest rates.
8. Create your balance sheet to measure how you are doing. List assets on one side and debts on the other side. Calculate your net worth. It may be negative but that is OK, at least you know where you are. Plan to increase your net worth by a minimum of €1 /month. You will not get rich but at least you will stop the drain on your finances and make small steady improvements.
9. Make your money work hard for you. Start by saving in tax efficient savings accounts or invest in high yielding shares, funds & bonds. When you have sufficient equity then use this for a deposit for your first home. If you already own your own home, then why not buy another and rent it out.
10. Calculate the minimum you need to cover all your expense. Invest in revenue producing assets such as property to provide a steady passive income. When this income is greater than your expenses then you are no longer reliant on your day job. You can work for a charity, NGO or retire on a beach somewhere.
Get a clear and concise picture of where you want to go and take the daily and monthly actions to fulfill your dreams.
Making Steps and Leaving Footprints…
(The thoughts expressed in this blog are my own and do not represent the views of my employer.)