I was giving a presentation to a group of people last week about money matters and after the session people came up to ask me individual questions about their finances.
One I thought would resonate with some readers came from a young lady, who said that when it came to her finances, she could only compare them to a juggling act - lots of balls in the air at the same but she just wasn’t sure which areas were more important than others.
She said she felt a bit overwhelmed because she didn't know which ones she should prioritise. For example she heard me talking about overpaying on her mortgage and how good that was, so should she put as much as she can toward doing that?
But because there is only so much money available each month, something would have to suffer as a consequence, so should she overpay on her mortgage and stop making pension contributions?
She also told me she was due a bonus in a couple of months and should she use it to repay some debt she had outstanding, or should she do nothing with it and just deposit it in an account that can be used as her emergency fund because up until now she didn’t have one.
So, lots of different questions and I guess if you were to ask people for advice, they would each probably tell you to do something differently. Because of this, people tend to try cover all bases and put some money into an emergency fund and some against their debt etc.
Putting money into a bit of this and a bit of that is what people do who don’t know any better, but the result of carrying out this strategy is that progress is slow - very slow. So slow that it can discourage saving
Some people might be surprised to learn that if I was asked to prioritise the six most important financial categories, number one is an area that some people think should be their very last, because they think it is not an area that requires immediate attention, but they are so wrong.
I believe your financial priority number one should be saving for retirement.
The most common mistake I see people make is waiting to save but you really do need to begin at the end. Because unless you are confident you are going to win the lotto, inherit big money or work with a company for the next 40 years that has a defined benefit pension, then you should make this your top priority.
The standard of living you can expect in your retirement years is completely down to you.
The current state contributory pension is just under €1,000 per month, and who knows what that will become in the future. The key to having a comfortable standard of living when you are older is to start saving early, in fact the earlier the better.
Procrastinating by even a small number of years could make the difference between having a comfortable lifestyle when you retire as opposed to scraping by, so don’t put it off and don’t fool yourself into thinking you will be able to catch up, because you won’t.
If you have children, and you want to help put them through college, don’t make the mistake of saving for college ahead of saving for your retirement. Think of it this way: if you don’t save enough for retirement, you could become a financial burden on your children in later years, and I have seen this happen more times than I care to remember.
A student can always get a job to help with their costs, they may qualify for a grant or they may get a loan themselves, but there are no loans to pay for your retirement expenses.
After getting your pension savings in place, priority number two in my book, would be to build up your emergency fund.
This is your safety net and is used if an accident, illness or redundancy takes hold where you need to replace an income lost or reduced. Having this type of fund will help stop you from getting into debt and will give you great peace of mind.
Your starting point is to accumulate one month’s worth of income in your account as fast as you can, then work toward having at least three months in place if you are renting, have only your mouth to feed and you are in stable employment with the safety net of always being able to return to your parents’ house should the worst happen.
Aim to save six months if you are single, and have a mortgage in place, and the same amount if you are married in a two income household where both of you are considered to be in unstable jobs or work in an industry which is prone to volatility/redundancies
Priority number three is to tackle debt. And the type of debt you tackle first is important. Don’t worry about paying off low interest debt like mortgages yet.
Focus on what some experts refer to as dangerous debt and examples of this would be high interest credit cards or any debt with rates in the double digits.
Debt is the enemy of savings because they are a constant drain on your resources so focus on the debt that is costing you the most first, and once that is paid off, move on to the next loan if you have one which has the next highest interest.
Priority number four should be having the right insurances in place, number five is aiming to pay your mortgage off early and finally number six is to save for future college expenses, and next week I will cover these last three areas in more detail.
Liam Croke is MD of Harmonics Financial Ltd,
based in Plassey. He can be contacted at firstname.lastname@example.org or www.harmonics.ie