Making Cents: Brain surgery and electric gates

I RECEIVED a call from an old friend of mine last year and I hadn’t spoken to him in a few years.
And his opening sentence to me was:
‘Margaret (not her real name) sold her business for €250,000 (not the real amount) …..and oh yeah, I had brain surgery six months ago.’
This article is neither about his wife’s windfall nor his brain surgery which I’m happy to say he’s recovering very well from, it’s about how they were managing their finances. But the sale of a business and an illness were inextricably linked to what was going on with their finances and I’m going to tell you how that was.
When the business was sold, they believed that if they made some smart decisions with this new money, it could fast forward retirement and that was something both of them wanted to do. They knew they’d still have to work for another five years though but after that they’d be out the gate.
And when the funds landed in their account, they decided to leave them there until they came up with a plan as to what to do with it, so they were in no rush to do anything, but he did admit they were good to themselves with this newfound, but very hard-earned money.
The first thing they did was spend a week in France in a really nice hotel and then they carried out some really nice but expensive work on their property. And it wasn’t work that absolutely had or needed to be done, but it was nice to get a new door, install electric gates, get the back garden in shape etc.
Anyway, what’s very common with people like this is that when a lump sum lands in their account they begin to take less and less notice of how much they’re actually spending each month, because they don’t have to.
Until something happens that is.

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And that something came five months later in the form of a tumor. And the tumor was only delaying the inevitable because shortly before the diagnosis they both looked at their account balance and wondered how did they go through so much of the lump-sum, so quickly?
And the problem was an obvious one.
They were simply living way beyond their means and this new input of money from the sale of her business masked what was going on because it was just sitting in their current account, and they didn’t know just how much they were overspending because they had this big balance. They were living a lifestyle based on a couple earning €200,000, the problem however was, they were earning €140,000.
And they probably suspected that they were guilty of some overspending but perhaps not to the amount of c. €5,000 more each month. But thankfully they reached out for help, actually thankfully he reached out for help, because now they were contending with two big problems i.e. a health and money scare.
My advice to anyone who find themselves in a similar situation, i.e. where their income and outgoings just don’t match, and regardless of whatever else is going on in their life, is that unless you live below and within your means, financially you are going nowhere, and you are always going to struggle financially.
And what does living below and within your means, mean?
It means spending less than what you make.
And it’s a very boring and a very obvious statement but it’s true.
I mean if you spend all of your income each month, there’s no way you can achieve any of your short or long-term financial goals. You can have the best financial plan in the world but unless you create a surplus each month that can then be put towards whatever those goals are, you’re going nowhere. And if that’s the case there’s no point in even having a plan.
Which all means and it’s all very clichéd but again it’s true, when it’s said that it’s not how much you earn, it’s how much you save that matters.
If someone is earning €100,000 a year and is spending €100,000 a year, do you think they are financially better off than someone earning €40,000 but who spends €30,000 each year?
Of course they’re not, and I don’t want to labor the point but when you live below your means you’re just giving yourself the best chance of financial success, you just are.
Okay I want to get back and talk some more about my friend who contacted me.
We know that their problem was a combination of two things - (a) large once off expensive purchases along with (b) day-to-day overspending. And both were being financed by the sale of business monies. But here’s the thing, if they didn’t get a handle on their spending it was going to run out at some stage and that some stage, I calculated, was in about 14 months’ time. So, something needed to happen and that something was to either (a) earn €60,000 more or (b) spend €60,000 less.
And spending €600 less can be very difficult not to mind €60,000 but these were their numbers, and I knew this because I got them to write down exactly what they were spending their money on each month. And I quickly identified the blockage was coming from three areas which were accounting for 90% of their income, and they were (1) home expenses which included their mortgage (2) food, drinks and shopping and (3) large annual expenses.
And we could do something with their mortgage and reduce their monthly repayment by c. €493 by moving from a variable rate to a fixed one. Their actual spending on food could come down as well if they really wanted it to by another €500 but it was the amount they were spending on projects around their house that was a big problem.
They were spending an awful lot in this area each month and whilst they may not continue to spend it every year, it was something they and everyone else need to be mindful about for that matter.
And if you can’t earn any more to bridge an income and outgoing deficit, I believe you have to do consider doing two things, and they are:
-Keep major purchases reasonable and under control
-Know what you are spending your money on each month, and know how often you spend money as well
Keeping big ticket items your purchase, like a house, a car, and home improvements under control starts off by understanding how much you should spend on them. Because typically these areas are the ones that end up accounting for large percentages of your monthly expenses, just like the people I’m telling you about.
You don’t need to see an episode of room to improve to see how even a small home improvement project can get out of hand in a hurry.
If you want to spend money on making your house more functional for your family, that’s one thing but sometimes people spend money on things they think will add value to a property when in reality they really don’t.
And major purchases are hard to reverse, especially if you pay too much for them, particularly if you had to fund them through borrowings because the cost to service them is locking up a big chunk of your monthly income.
And large purchases are easy to see because they show up as a big lump sum withdrawal from your account or as a big fixed monthly expense. But day-to-day spending is often as big an issue for people as well.
Which is why I always recommend to people who are wondering where all this money is going to follow the money each month and just record what you’re spending it on, so you know what you’re up against. Because if you don’t know, it's next to impossible to identify whether you need to earn more or find out what are those areas you need to spend less on.
Living below your means isn’t easy but if you think of it as a way to saying yes to having money in the future then it might just be the trigger for you to consciously make the effort and to spend less than you earn, if you can that is.
And here’s another advantage to living below your means and this particular reason was feedback given to me from clients of mine who said that when they spent less than they earned, it gave them an option to work less or change their career altogether because that cushion they created between their income and their spending allowed them to earn less which means they could work in a less stressful environment, or work four days instead of five, or become self-employed or not be afraid of being made redundant etc. and they created options like this all because they decided to spend less than they earned.
Financial success, and that term will mean different things to different people, will happen when you make a conscious decision to live below your means. It’s a choice people have to make and tracking what you spend your money on and keeping major purchases at reasonable levels I think will help
And it doesn’t have to be complicated either and I’d say give both a try and see if it works for you.
I want to leave you with an update on the couple I was telling you about. And the prognosis I’m happy to tell you is really good with both his health and with their finances.
They’ve got their spending back under control and now they have regular conversations about money and one of them checks in on their account balance once a week. The stress they were under is much less now and thankfully they still have a nice lump sum left over that they’re not dipping into every month. And electric gates and Dermot Gavin type gardens seem much less important to them now given the health scare he had, and they look back and ask themselves, what were we thinking?

Liam Croke is MD of Harmonics Financial Ltd, based in Plassey. He can be contacted at liam@harmonics.ie or www.harmonics.ie