I MEET a lot of people every week and it amazes me just how many of them have conspired to make an absolute mess of their finances.
They come from all different professions, pay grades and ages, but they all have one reason in common for their messed-up finances and that is ... themselves.
I find there are two reasons why people struggle financially. The first are those who couldn’t avoid what happened to them — they lost their job or business, they suffered an illness or accident that prevented them working.
The second group, which has 10 times as many people, contains those who choose to neglect their finances. Neglecting your finances is avoiding your situation altogether, hoping it will magically go away or improve. These people have a total disregard for the reality of their situation.
That sad thing is that their situation could have been, for the large part, prevented — but like anything else, if you leave it too late it makes it much more difficult to rectify.
It’s a bit like studying for an exam: if you do nothing all term and only begin studying because the exam is next week, you put enormous pressure on yourself and end up failing or not achieving what you wanted.
If you were proactive and paid attention to your studies, the outcome would have been much better – the same principles apply to your finances.
I am going to outline for you now, four areas that peopleneglect, and hopefully you will learn not make the same mistakes.
Ignoring the future
A lot of people, particularly younger people, live very much in the present and think that because they are young, they have plenty of time to get around to saving and putting money into a pension.
They are interested in living in the now, but if a person in their 50s or 60s were to talk to their younger self, I bet they would say to them not to delay. Because, as you get older, other things will take hold of your money like mortgages, childcare, loans etc and what money you thought you might have isn’t there any more.
Unfortunately people delay starting a pension because they think they can catch up at a later date by increasing the amount they contribute each month or by trying to get better returns. The biggest risk to your future annual income and quality of life is delaying starting a pension – the sooner you start the better.
No Rainy Day Fund
At some stage it will rain and you will want an umbrella to shelter yourself, and that is exactly what an emergency/rainy day fund does.
I meet people all the time who are months in arrears because they never had money to fall back on and any lines of credit they might have had are now exhausted and they have nothing.
Borrowing too much
Some people get carried away themselves buying or building a property that they simply cannot afford. I remember about six months ago, I received a call from a woman asking if she could meet me for some advice, as she had an issue with her mortgage. To cut a long story short, she owed around €650,000, her monthly repayment was €4,014 and she was nine months in arrears.
Fighting back the tears, she explained how five years earlier she was living in a lovely four-bed detached property in a really nice neighbourhood. She owed €150,000 and her monthly repayments were very comfortable. She was, in fact, overpaying on that mortgage and hoped to be debt-free in less than eight years.
Then insanity took over and she bought this absolute mansion of a house, and of course the bank facilitated the purchase. Her business began to suffer as did her income and within a short space of time she was unable to repay the mortgage and it fell into arrears.
A big, fancy house is no good to you if your quality of life suffers, and you are hostage to a mortgage for the rest of your life.
Spending more than they earn
I read another great quote recently where someone said that “these days an income is something you can’t live without, or within”.
This appears to be true, because again I come across so many people who spend more than they make. But could they actually tell me what it is they spend their money on? No chance.
In many situations, at the end of the month when someone is in their overdraft - something that happens to them every month - they automatically believe they are not earning enough money.
They think the shortfall is down to not having enough income when in reality it isn’t an income problem, it’s a money management one.
When I meet people who have an emergency fund in place, and drive a six- or seven-year-old car they own outright that runs perfectly fine, who follow a monthly budget, carry no high-charging debt and contribute to a pension plan, believe me they are less stressed, more relaxed and in full control of their finances.
And it isn’t because they earn more money than anyone else or don’t enjoy themselves because they don’t spend money, they do. But what they do differently is that they take responsibility for their finances, they are proactive, want to learn how to improve their situation, and take an active interest in their financial situation – you should do the same.
Liam Croke is MD of Harmonics Financial Ltd,
based in Plassey. He can be contacted at firstname.lastname@example.org or www.harmonics.ie