How do you manage your monthly income?
Posted by Nick Lawlor on November 25 2013 @ 12:05
Let’s be honest. There is absolutely nothing fun about putting money aside when you get paid, until of course when you get to spend it again.
This week I wanted to delve a little deeper into how to make sure you get the most from your savings which is one of the key elements of financial planning. When we look to our money to provide the life we desire, we have to think of the big picture. Yes the wages I am making monthly may well provide for all the bills this particular month but if you stand back and look at the things your income has to pay for in the next 10, 20 and indeed 50 years, then ask yourself the question, If the money I make this month is all gone at the end of this month, then what happens when the inevitable emergency comes along, when third level fees are re-introduced or when the states old age pension gets cut?
Saving money is of course difficult but the one thing I have learned over the years of trying to help people see the bigger picture is that if it’s gone before you see it, it is psychologically easier to save. It is in our nature to hit targets and to have goals. Our monthly income can be the same. After all the bills are paid, it is common to look at what’s left and see this number as your monthly spending target. It is amazing to think that any hard fought pay rise I ever received seems to be simply absorbed into the monthly spend, somewhere.
But how do you do it? Again we are faced with age old problem. Do we save in a deposit savings account offered by the local bank, do we seek out the nearest credit union, or do we get attracted by the post office savings schemes. Do we use a pension? “There is something about tax relief with those, isnt’ there?”
First things first. You have to start at the start and know what you are saving for. I always advise people to start saving for the thing that can happen tomorrow. Something that can happen this week or next is more important to save toward than something that can’t happen for 15 years. The car can break down tomorrow. Little Johnny can’t go to college at 3 years of age. Little Johnny can go to college in 15 years but you can’t retire at 45. Allow me to exclude the people reading this who have already retired at 45! My point is simply first things first.
The nice thing about short term savings is that if the emergency doesn’t happen well the emergency fund quickly converts into a great head start on your college fund. The key is getting started and getting started regularly. Once it’s gone, you won’t notice it as much and it becomes a great source of pride checking in on your savings from time to time. You’ll become reluctant to spend it as you know the effort that went into to saving it.
It’s really important to use the correct type of savings vehicle for each of these savings goals. You don’t use a pension savings account for your emergency fund, regardless of how attractive the tax relief is because you can’t get your cash out. Conversely you don’t use a credit union savings account for your retirement because you are wasting the tax relief available.
The best value tends to be found in the products designed for “further down the line”. A 30 day interest account pays a better interest rate than a demand account. A 5 year bond offers better value than a 30 day account and so on.
In summary, consider for a second that you were going on a yearlong holiday with a wedding after 3 months, a cruise after 6 months and emergency return home after 9 months. You will be given €60k which will be paid to you in €10k instalments at the beginning of the 1st 6 months. How do you split up you funds? Do you evenly spread the money our over the 12 months or do you spend it all as you get it. It’s amazing how many people will suggest, when using a simple example like this, that they would do the exact opposite of what they are doing in their everyday lives.
Nick Lawlor is the owner of Lawlor Financial Planning and is one of only a small number of Certified Financial Planners or CFP®’s operating in Ireland and is based in Keeper’s Cottage in Leixlip. Contact firstname.lastname@example.org or 0863161232 for a complimentary consultation. Nick Lawlor Financial Planning Ltd trading as Lawlor Financial Planning and Simplysave is regulated by the Central Bank of Ireland. Lawlor Financial Planning does not take responsibility for individual financial decisions made based on this article.