The best financial rule you could follow is to spend less than you earn and save the difference
AS outlined last week, I think a good exercise is to reflect on those good habits that perhaps you developed over the past year and a half. What do you have to do to maintain them?
And what were those bad habits you equally developed that you’d like to drop?
And one of those good habits, might have been an increase in your savings rate?
If you were lucky enough to have been able to ramp up your monthly savings, why can’t you maintain that new rate, and let it be your new normal?
You don’t have to get suckered back into a lower saving, high spending scenario, if that was the case pre Covid.
If you’ve been earning more than you can spend, and you have your emergency fund in place, and your debt, if any, is under control, why not consider directing some of this surplus money into your pension?
The likelihood is good that you’re not maxing out your contributions and that doesn’t mean you need to double or triple what you’re currently saving. You could bump them up by an extra 1% or 2% each year and you won’t feel that increase very much.
Don’t forget, the target you need to save, which includes employer contributions, is at least 15% of your annual income, if you want to build up a good retirement fund that will replace a large % of your pre-retirement income.
And if you’re not going to direct additional monies to your pension, it’s important to diversify and redirect extra cash into things like stocks, mutual funds, ETF’s, ESG funds and so on. That’s where your money will really get to work for you.
There is an opportunity lost by keeping excess money in cash, that over time could run into thousands’ that you are leaving behind. And even a low return e.g. 3% pa can create quite a differential from what you’re currently earning. So, once you’ve locked down your emergency fund, you need to redirect the surplus funds to equity type funds, otherwise they will continue to lose value.
And if you are going to continue to work from home, how will that impact your finances?
Can you earn less and save more? These are situations you need to think about and you may not know the answers right now but mapping out what they might look like from a financial perspective is the right thing to do.
And if you can continue to work remotely and that frees up some cash, I’d say have a plan for it.
Have a plan for it regardless of where you work, i.e. can it be used to pay off your mortgage quicker? Should you allocate it to your pension fund because it will fast forward retirement for you? Can you use them to pay down debt, or invest more?
There are lots of different options this extra cash can create for you, and I think you should take advantage of this opportunity and be very intentional with how you are going to put them to use.
We’re all more than fatigued from Covid, and there is an urge to get out and spend, of course there is, and you should, however it doesn’t mean you go mad either.
If there were times you did lose the run of yourself, that’s okay as well. We’re all just trying to do our best in these uncertain times, and stress can lead to spending more than we should. And it’s okay to splurge from time to time, but just remember and recognise that retail therapy creates only a short term high. Look for other things to do, to relieve the pressure than using your savings or buying things using debt.
And as other expenses come back into our monthly budgets, we’ll need to rein in our spending anyway, so always try to think about what really matters to you and where your money can make a difference and sometimes, it’s just sitting in an account doing nothing, because it brings you more peace of mind and happiness, than anything you can wear or eat or drive.
The urge to get out and spend will always be there, but if you’re not particularly intentional with your spending each month, I’d recommend you build an amount into your monthly budget that allows you to spend without guilt and without it impacting other areas of your finances either.
The best financial rule you could follow is to spend less than you earn and save the difference until you’ve accumulated an emergency fund.
And for those who followed this rule pre Covid, it may have been their saving grace if they suffered an income loss, because they had their emergency fund to fall back on. And if you were one of those who had to dip into it, that’s fine, that’s what it’s there for, but your focus is now to rebuild it again in the months and years ahead.
Covid showed how quickly our lives can be turned upside down, and it also showed from a financial perspective how important having an emergency fund in place is.
The emergency fund has often being dismissed as something that we can do without because we’ll never be out of work, or our employers will always cover our income if we are, and unfortunately people who adopted this mindset probably suffered or are suffering the most, because they had nothing to fall back on.
So, whether you had an emergency fund in place or it has taken a hit, your goal is to work towards building that fund back up. And starting off small is fine. Perhaps your short-term goal is to get to €1,000 as fast as you can.
Your ultimate goal is to have an emergency fund with somewhere between 3 to 6 months’ worth of your most important and must be paid living expenses i.e. mortgage/rent, food, utilities, insurance premiums, transport, clothing etc. And to begin with, set yourself small targets to aim towards rather than something big that feels overwhelming.
And creating a monthly budget will help towards re-building that emergency fund because you’ll be able to see where you need to, reign in spending and where those savings achieved can be re-directed to your emergency fund account.
Covid created a tale of two economies, those who were able to save a lot and those who struggled to make ends meet. And regardless of which category you fall under, I think Covid more than anything else, has forced us to think about what really matters to us.
And everyone’s situation is different and unique and Covid has affected us all in different ways, but right now I believe more than ever, is the time to rethink our financial situation and whilst it’s hard to predict what will happen next week not to mind the next few months, you can still be proactive, and think about what you should or could be doing to improve and optimise your finances or how you can get them back on track.
Liam Croke is MD of Harmonics Financial Ltd, based in Plassey. He can be contacted by emailing firstname.lastname@example.org or at www.harmonics.ie
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