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10 Rules for Financial Well-Being

Author
Phil Farrelly QFA RPA SIA CFP
Certified Financial Planner | Mason Wealth Management

Spend less than you earn 

This may seem like an obvious statement.  Many people have no idea how much they are spending each month and then they wonder why they are getting further into debt.  Spend no more than you are earning.

A simple money management technique is to open 2 separate bank accounts. A spending account and a bills bank account.  Add up all your fixed costs that have to be paid each month (include utility costs, direct debits, bank loans, mortgage, life assurance, sky sports etc).  Lodge your salary into the “bills” bank account.  Total up all the above known monthly outgoings.  The remaining balance of your net income is what is left to spend each month.  That amount should be transferred to your “spending” account.  At any given time, you can see clearly what you have left to spend before the next payday.

Pay yourself first

In the New York Times bestseller, The Automatic Millionaire, the author David Bach explains that people should ‘pay themselves first’ every month. By this he means that everyone should set aside savings every month – either pension or investment – by direct debit.  This is called automatic savings.  Rather than leaving all this to chance, Bach suggests that you should ‘pay yourself first ‘  i.e. see the savings as a monthly expense that must be made as soon as you get your paycheck.  The key to ‘paying yourself first’ is that it will be automatic.  You will not have to do anything each month.  If your savings are not automatic, we all know it will simply never happen.

Have an emergency fund.

You really need to have 3 months net income set aside in an emergency fund that can be accessed at short notice.  This money should not be invested in the markets and should simply be placed on deposit.  Having an emergency fund protects you in the event that you lose your job or have some sort of medical emergency

Protect yourself and your family by taking out sufficient life cover and income protection cover

Catastrophic events like early death or permanent disability can happen to anyone.  It’s all very well having great money management processes in place, however, if you die prematurely or suffer a life-changing disability, this will have a huge impact on your family.

Life assurance represents great value for money and is quite inexpensive especially for younger lives.   For example, a 40-year-old male, a non-smoker, could take out life cover of €500,000 over 20 years for as little as €50.46 per month.  Income protection cover is just as important.   If you are self employed or a business owner, how will you get paid if you are unable to work?   This cover can replace your income in the event that you are unable to work due to any accident, sickness or disability.   The cost of this cover can generally be funded by the business with no BIK implications for you.

Employ a financial planner to create a financial plan for you

Benjamin Franklin once said ‘if you fail to plan you are planning to fail’  (or was it  Roy Keane!).  Anyone serious about their financial well-being should really employ a Financial Planner to create a financial plan.   Mason Wealth Management have created hundreds of financial plans over the years.   We sit down with our clients to find out ‘how much money they need for the rest of their life’.

Many people have income, assets and investments but no idea what it all means, or what sort of financial future awaits.   Having an insight into how much you need can be enlightening –  it will also put you in control.  The key to a financial plan is that it must be reviewed every year.  Creating a ‘once off’ plan and not reviewing it is pointless.   It must also be a joint effort between the client and the financial planner.

Invest the maximum amount permitted into your pension fund

Investing money in a pension fund is one of the smartest financial decisions you can make.   There are many reasons why this is true including the following

  1. Tax relief on premiums being invested
  2. The fund grows tax free – the government take no tax on any profits made
  3. You can take significant tax free cash at retirement

If you are an employee, try and encourage your Employer to make a pension contribution for you.  We call this ‘free money.’   If yourself and your employer are making pension contributions, this will have a huge impact on the size of your pension fund at retirement.

Do not ignore inflation

Inflation can be the silent killer.  If you are trying to fund for future retirement, do not forget that the purchasing power of your money will be much lower at that time, due to the effects of inflation.

The CSO tell us that a basket of products purchased in 1975 for €100 would cost €674.20 today.  This is an increase of 574% during this period.  Your financial planner will factor in the effects of inflation in your plan to ensure that your fund is sufficient.

However, Inflation can be good news if you are living off rental income.  Rental income can be increased by 4% p.a. now.  If inflation is running at c. 2% p.a. you are in a good place.

Spare a thought for the pensioner living off a pension or annuity that is not increasing in line with inflation.  The purchasing power of his/her money is reducing each year as prices increase.  The inflation threat is ever increasing as people are living longer-  be warned.

Invest in the markets –  not in cash

Apart from emergency funds that we talked about earlier, if you have additional money that you want to earn a return on, do not leave it in cash.  With bank deposit rates at almost zero and inflation running at 1%- 2% p.a. the purchasing power of your money is being reduced every year.  However, you must follow a number of simple rules which include the following

  • Stay in the market long term –  5-7 years minimum
  • Do not try and time the market
  • Build a diversified portfolio giving access to many asset classes
  • Rebalance every year
  • Keep an eye on costs

Pay off debt

Pay off debt as soon as you can –  especially credit card debt.  It always amazes me when I see clients who have money sitting in a bank deposit account and at the same time they have credit card debt that they are not reducing.   The bank are paying them little or nothing in respect of deposit interest and at the same time charging them 22.10% APR (17th October 2018 BOI) on their credit card balance.

Pay attention to fees and charges

If you are investing money over the long term pay attention to fees and charges.   As an investor you have no control over markets, however, you do have control over the charges and fees that are levied.    Over the long term excessive fees can really eat into the overall return that you will achieve.  Consider the example of a €50,000 investment over 30 years.  Option A has a charge of 1% p.a. and option B has a charge of 1.5% p.a.  Even though both funds grew at 5% p.a., there was a difference of €21830 in the final payout.