Forget about The Shining, The Exorcist or The Omen. If you want to look at something that will frighten the life out of you, take out your bank statements, and look at what you have been spending your money on for the last three months.
Or, how about you and your partner, have a money séance.
You’re going to take out a Ouija board and try to make contact with money that has departed your account. You want to communicate with the other side and find out where all your money has gone. It’s dead money you’re trying to summon, and dead money is money you have wasted buying stupid things, that may come back to haunt you.
Both your hands are on the planchette, and it begins to move. First it goes to C, and then O, and over to F and back again to F and it does the same thing with E. Your first ghost money is coffee. It begins to move again and this time it spells clothes, then lunches, then water, gym, late fees etc.
You both look at each other in disbelief, you just can’t believe what the money spirits are telling you. How could they have any impact on your finances. You thought it would be your mortgage or car loan repayment, not the daily €5 you spend on coffee.
I mean when you place the cost of a coffee against a mortgage repayment of, for example €1,500, or a car repayment of €500, it pales in comparison. You might do it once a day but it’s such a small expense, how could it have any impact on your bottom line?
But it can. There are small purchases we make every day unconsciously, which can add up to big money, and we don’t realise the impact they can have on our finances. We don’t put too much thought into them, but unconscious spending over a period of time can add up to quite an amount.
For example, let’s assume you buy a couple of coffees a day (maybe you prefer bottled water or magazines etc.) and they cost €5, over the course of a year, the amount you’ll spend is €1,825.
If you get a takeaway twice a week and they cost €25, that’s €2,600 gone in 12 months. And if you continued at that rate over a 10-year period, the amount of money you killed was €44,250.
Cutting back on one cup of coffee or one takeaway each week, could have a massive impact on other areas of your finances. If you applied the cost of one coffee per day as an overpayment on a €300,000 mortgage over 30 years, it would reduce the term by five years.
Cutting back on that one cup could save you 60 months of mortgage repayments which amount to c. €81,000. One less coffee would mean you could earn €32,000 less each year for five years, because your mortgage is repaid in full.
It can be hard work and won’t represent a quick big win. You need to play the long game before your efforts will pay off, but they will, you just need to stay committed to them.
Small indulgences make us happy. I really like coffee and it’s the one thing I wouldn’t cut back on, because I get pleasure from drinking it, but there are other areas I don’t enjoy, so it’s easy for me to give them up and use the money towards things I enjoy, like travel. We just need to find that balancing act of spending money on things we like now but not at the expense of our future either. They are not, mutually exclusive, the objective is to do both.
It’s important to find out how much you are spending on everything and once you realise you are spending €70 on coffee or whatever, you can determine if that sounds reasonable or not.
When you analyse your monthly spending, some numbers will stand out as being too much, and others maybe not enough, but whether you decide to cut back or not, will really depend on your situation. If you carry little or no debt, and are saving at a good rate, then you can eat out every day if you want to or have as many coffees as you want, the key to what you do is based on your current situation.
I will leave you with two final points.
The first is stating the obvious - of, course you can only reduce your outgoings by a certain amount each month and they can only ever fall to zero. However, your income is limitless and maybe you should focus on it as well because it can create a much bigger gap between your income and outgoings than cutting back on your expenditure.
Secondly, it’s rare that money suddenly vanishes. It’s usually drained away over long periods of time, in small amounts that are hardly noticeable.
It may not haunt you now, but it will when you have very little savings to live off, and your scraping to get by, when you’re older. Because all that money you spent in your 20’s and 30’s buying half-caf mochaccinos, and avocado toast, could mean you will be the very one on the other side of the counter serving them in your 60’s and 70’s to supplement the very small pension you have.
Liam Croke is MD of Harmonics Financial Ltd,
based in Plassey. He can be contacted at email@example.com or www.harmonics.ie