How to get super savvy about your personal finances
Many of our New Year resolutions may be financial in nature, such as setting up a new savings account, paying off more of your debt, switching service providers for better value.
But as we emerge from the recession into what will hopefully be a more prosperous era, many of us may want to look harder at how we manage our money.
“Over a last few difficult years, for many, immediate financial security was the priority. However, as the economy improves, we need to take a longer-term view of our financial needs,” said Ciaran Phelan, CEO of the Irish Brokers Association. “In other words, we need to start saving for tomorrow.”
So, whether it’s a pension or a college fund for your kids, you can take more of a risk with your money when investing for the long-term so that you achieve returns that beat inflation, he says.
He suggests reassessing your financial priorities by contacting your advisor or broker and agree a fresh plan with reviewable goals. “A disciplined approach to savings will yield rewards and give you the peace of mind that you are funding towards your future financial security,” said Mr Phelan.
But you can go further still and achieve real financial independence and control this year, according to Susan HayesCulleton, a financial analyst, trainer and author of the Savvy Women’s Guide to Financial Freedom and The Positive Economist.
One of the first steps you can take is to work out a budget or, at least keep a money diary.
“Establish a budget habit by logging in your expenses daily. Group them by category in a spreadsheet,” she says. “From a €1 cup of tea on the go to your once-every-six-weeks haircut, everything should be accounted for. It’s easier if you do it every day.”
Another strategy is to change your perspective on saving by thinking in terms of what Ms HayesCulleton calls “opportunity cost”. “Instead of seeing saving as denying yourself things, or renouncing, imagine what you will do with the money you save,” she says. For example, if you usually buy a €2.50 takeaway coffee every day on your way to work, think about how the €40 a month you would save by not buying that daily coffee could put towards something more meaningful and a long-term benefit, such as the family holiday.
You can go further than in terms of re-thinking your attitude to money by becoming aware of “the biases and untested assumptions that are holding you back,” says Ms HayesCulleton. “Many of us might be in line for a pay rise this year, but the chances are we will get acclimatised to that pay rise in no time,” she says. “They won’t necessarily feel that increase in their wages after a couple of months.”
“Many of us were once students who had very little or no money, but today, a lot of us, we don’t feel any different to back then, even though we’re earning money. I think that’s just because, in some cases, we are just not able to handle more money and, while we become acclimatised to having more and spending more, we don’t actually ever feel that we’re moving up the ladder.”
We all say we’d love to win a sum of €50k, but many of us would actually feel uncomfortable, even guilty, about having such a large sum of money in our bank account, she says, with the temptation to go out and spend it hard to resist. The same might apply to a modest savings fund of €10,000 that would usefully serve as a rainy-day account for emergencies than as a deposit on a new car you don’t need.
If you want to earn more money, there are a myriad of ways to do it besides asking your boss for a raise, she adds, such as selling unwanted items online or at a garage sale, getting paid for something that saves others time and money, or starting a side business.
“Make sure you overlook no way of increasing your income, by looking for the place where these three things meet: what you’re particularly good at; what you can do for other people; and what they’re willing to pay you for.”
As well as getting information from reliable sources such as the Revenue (tax breaks and credits), the National Consumer Agency’s Consumerhelp.ie (financial product comparisons) and the Citizens Information website (benefits and grants), Ms HayesCulleton also suggests finding a way to be held “accountable” for any changes you make to your financial affairs or to make your financial resolutions stick, such as having a “board meeting” with your partner every two weeks to review.
“Or you might ask a friend to check in with you regularly and ask you whether you’re actually doing what you said you would do.”