How to save money and still enjoy life
Published 29/09/2016 | 02:30
If you are under the age of 40, chances are you will be quite anxious about your long-term financial future.
Global political and economic uncertainty, rock-bottom interest rates and stuttering financial markets all combined with unsecure pension schemes and longer lifespans raise questions about just how much you should be saving.
The obvious solution may be to save like there's no tomorrow but, of course, how do you do that and continue to live for today?
"As with all extremes, of course, you can overdo things," said Sinead Cullen, pensions technical consultancy manager at Standard Life. "You want to strike a balance between saving and enjoying the fun things in life."
Susan Hayes-Culleton, financial advisor and author of 'The Positive Economist', said: "One can't ever have too much money, but I think there comes a point when somebody must look beyond saving to the wider financial planning spectrum."
A decent savings pot, she says, will give you peace of mind plus the ability to take advantage of an investment opportunity or even make an impulse purchase, not to mention financial immunity to sudden drops in income.
Needless to say, a lot depends on your own priorities in life, but there are some good rules of thumb and general points to remember when devising your own saving vs living formula.
Work out what goes out
Write down a list of all your outgoings, including mortgage, bills for gas, electricity, house insurance, medical insurance, fuel, motor tax, food, crèche, etc. You can use the budget calculator on consumerhelp.ie to help you. Once you've totted up then you can start deciding what to save and what to spend.
Start saving now
"Avoid engaging in catch-up saving later on - start now," said Ms Cullen. "Even if it's only €100 to €200 per month to start with. Keep increasing it by €50 to €100 per year until you're on track with your savings target."
Begin with a rainy-day fund
A good way to start the saving habit is to aim for a rainy-day fund. This is a readily-accessible cash fund that you can dip into for emergencies; for most people six months' worth of their salary is usually enough. "The benchmark can be six months living expenses, or the full repayment of your mortgage or some other point when you realise that you can handle most of the scenarios that you might find yourself in with your existing resources," said Ms Hayes-Culleton.
Move onto a pension
Depending on what age you are, you may have other saving priorities - holidays, a car, a house deposit etc - but starting a pension is still a no-brainer because of the tax relief on contributions. "Starting at €100- €200 per month into a pension only costs €60 to €120 per month net for higher rate tax payers," said Ms Cullen. "Even if it's a 20pc tax break, it is still costing just €80 to €160 to save €100 to €200 per month."
Ask your employer
Ask your employer about the company's pension scheme. Are they matching contributions? If so, then joining it is even more of a no-brainer than setting up a personal pension. It's free money.
Talk to a financial planner
If you're in your 30s or 40s, meeting with an independent financial advisor can help sharpen your savings focus. Ms Hayes-Culleton recommends sitting down with an independent financial planner (and someone who is fee-based, as opposed to commission-based) to identify the best financial plan for your life's goals.
Take more risk
The younger you are, the more investment risk you can afford to take, experts say. "They have more time to allow their investment grow and opt for higher risk options as they don't need guaranteed returns typically at this stage in their career," said Ms Cullen.
Ms Hayes-Culleton suggests looking at exchange-traded funds (ETFs). "These are low-cost, diverse funds which track all of the stocks that comprise an index. This is a method of gaining broad stock market exposure, while controlling costs and since they're listed on the stock market, you can sell this investment at any time."
It's not too late
If you're late to the retirement savings game, you can think about AVCs (additional voluntary contributions). These are 'rocket fuel' to boost your pension over time," said Ms Cullen. "Be one of the select few who uses them." Many millennials seem to be catching on to this, too. The recent survey by Standard Life revealed that 24-35 year olds are the biggest AVC savers, with 34pc of those surveyed saying they use them.
You can keep taking risks in retirement
By the time you reach retirement age, the pensions landscape is likely to be very different. The defined benefit pension fund will be a thing of the past, which means you will be carrying most of the investment risk on your pension.
At the moment, many recent retirees have decided not to put all of their money into annuities because interest rates are so low. They are choosing instead to invest in ARFs (Approved Retirement Funds), which allow you to continue investing even after retire. As folks live longer, pension experts say this option is likely to grow in popularity.