Defining a path without grades is a struggle. In fact, it’s one of the most common struggles I see in people years into the workforce.
When you are in education there was always a path. You go from one year to the next, learning a bit more (hopefully) every year. You have grades to know how you are doing. If you’re doing well, you’re encouraged to follow up on it. If you’re doing poorly, either improve or at some point give up on the subject.
Either way, the path is clear.
Everything is quite simple as you only need to look a year or two ahead of where you are.
Your path is simple because you need to pass every year as it comes, and make few decisions about where your path leads.
Then when you get to the next year, there are few options. Your path is simple.
Maybe you choose some subjects, or specialise, or when you finish education you look for work in a narrow area. The path is simple.
Your grades let you know how you’re doing so you have your options narrowed again. The way to is guided by grades, but these measures of success are set by someone else and given to you.
Then you leave education and go to work.
Suddenly the path is no longer clear, the grades are infrequent, unclear and often unhelpful.
You no longer have a simple path defined by pre-set years of steady progression. Now you have too many options and no path.
Do you stay in the same city or country? Do you look for a job in one company or a thousand others? Should you stay in a job for a few more years and hope for a promotion or try move to another company you might not like? Do you move in with your partner and get married? Do you have kids now, never or in five more years?
Rather than simply focussing on one thing now, you must define a path in your career, personal, financial, and relationship life. It’s easy to let one or more areas slip. Your plans used to be from year to year, but now you need to think decades ahead.
You also need to learn to grade yourself.
Are you successful if you have a great job, more money than you need, but you never settled down and had the family you wanted?
Are you a success if you travelled and saw the world, but you’ve no money in the bank and have no career in your thirties?
It’s harder to grade yourself when there are multiple counteracting goals and dreams. Often you can focus on one area to the detriment of others, until it’s too late and you’re already behind.
If this is something you struggle with you’re not alone.
You can define your own path, and choose your own methods of grading your progress.
You have to. Nobody else will.
When it comes to your finances there is a lot to consider. Balancing the different aspects of your money can be complicated and knowing when to make the next move is often tricky. One of the best ways of dealing with the complexity involved with your personal finances is to perform a financial health check every now and then. At least once a year you need to review your full financial situation and consider how you are doing across every aspect of your finances.
If you don’t know where to start, try answering the below:
Once you have performed your financial health check, you need to consider how everything looks in relation to the bigger picture. After you do this, you may have to change how you think about various aspects of your money.
When you are starting off, having €1,000 emergency fund is great. When you have a mortgage, kids, and a sick elderly parent it is probably not.
When you have built up a large level of assets, using a credit card might be a better emergency fund than money in the bank. Having built up €30,000 credit you can use if needed can be more efficient than sitting on €30,000 in a bank account earning 0.1% interest.
When you are saving for a house deposit, not having a pension might be fine. Not having a pension from age 40 without having significant assets is not.
When you have no assets not having a will is fine, but is foolish when you do.
If you have kids, you probably need life assurance. This is more important when you are younger. Less is needed later. The good thing is that it is cheaper when you are younger.
The main point of doing this exercise is to consider each aspect of your finances in relation to your overall financial health, how it matches your risk appetite and whether it helps you meet your goals.
Sometimes, or possibly every time you do this exercise you may need to level up your thinking. If you are actively improving your finances you will need to change different aspects to keep them in line with your current life stage.
Managing your money is all about trade-offs. If your main goal right now is to save up the cash for a house deposit, it can be okay to put other things on the back burner like pensions, investing and you might spend less on some areas to increase the rate you can save at. However, if you don’t have a large goal at this moment and you have a high savings rate, you need to consider how pensions and investing will help your current and future situation.
It’s easy to get mental blocks when you don’t stop to assess the overall all picture. The person you are when you leave school is different to the person you are 3 years into your first job, and is different to the person you are 10 years into the workforce with a house 2 children. By doing a full assessment and considering the bigger picture you keep a grip of how you are set for your current position, not where you were in the past.
You need to be thinking at the level you are at, and at the level you are going to.
Financial rules of thumb are a helpful way of keeping aligned to your goals. They allow you to save time and make quick decisions when you may not have the necessary information or time to decide. When in doubt, rely on your rule of thumb.
They are personal and change as your stage of life, financial status and goals change. Although there is room for exceptions, your financial rules of thumb give you a line of thinking that links in with your current situation and provides a baseline for decisions.
Below is a sample set of Financial Rules of Thumb for an ambitious person in their late 20s. For some, the logic is added to give an idea of why the rule is this way.
A mortgage should not last into retirement.
Get a fixed rate for the first 5 years. The early years of your mortgage will typically be a time of more change than when you are older. When you are going through transitions that can be financially challenging, you don’t want your mortgage payments fluctuating with interest rates. This is a straightforward way of lowering complexity and stress.
Refinance if mortgage rates drop by 1% or more.
Mortgage payments should not be more than 35% of your income.
Never act as guarantor on a loan.
Be wary of partnerships (friends, family, etc). Understand joint and severally liability.
Property is a long term investment. It takes roughly 5 years to not make a loss on selling. With the taxes and associated costs such as valuations, conveyancing, moving, stamp duty, legal fees, and insurance; buying property is more expensive than the ticket price. Considering this, you need time to recoup your investment.
Pay the minimum and borrow as much as they’ll give you, or go all cash. Paying 10% extra in a deposit does not give a large enough reduction in mortgage payments to outweigh the benefits of having extra cash in savings or investments. If you are going to be cash strapped in the first year of home ownership, you may be better off paying less down and taking on more debt. Mortgage debt is more favourable than most kinds of debt. A mortgage free property is the next best solution.
Interest-only loans are for investments or businesses, not individuals.
Pay credit card debt at month end.
No debt on depreciating assets. Consumer/non-productive debt should be avoided.
Don’t sign as a guarantor on a loan. Don’t tie your finances to someone else.
Insure what you can’t afford.
How much insurance is needed; Before 30 and no kids, low. After 30 with no assets or kids, low. Once you have kids, for first 20 years, high. After 30 with assets and debt, enough to cover debt if you intend on leaving the assets to someone in a will.
Save minimum 10% of income.
Emergency fund should be €1k minimum. If job looks riskier or possible risks more likely, go to 3-6 months of expenses in emergency fund.
Don’t hold too much cash, unless there is a goal that requires this such as buying a home.
Bank a raise. When you get an increase in income, increase monthly savings.
Set up a pension.
10% minimum contribution of income at all times. This includes company contributions. Over the course of your career, this will build and compound to be a nice sum. Although not the only thing needed for a retirement plan, setting up a pension early can make everything easier. Lots of tax benefits and time for investment growth work in your favour.
Put in max contribution the company will match. Not doing this is throwing away free money.
My retirement comes over my kids education/wedding/first home. Your children can save, borrow and delay certain events. When you get to retirement you may not be able to earn, borrow and time is not on your side anymore. You need to prioritise yourself.
Never touch retirement savings for anything except retirement.
Know your biggest risks (job security, health, kids, family)
If you have children or other dependents, you have a moral obligation to have life insurance.
Diversification. No more than 10% in a sector, no more than 5% in a stock.
Diversification doesn’t matter until 50k in assets. When you are starting to invest the numbers will start small and grow slowly unless you have a high income or other assets. Although it would be better to be diversified, you can overweight early due to one successful asset. Once you hit the 50k mark you need to rebalance and diversify.
If your job is exciting, your investments should be boring. If your job is boring, your investments can be exciting (but don’t have to be).
10% limit on play money. You may want to invest in individual stocks or investments. Your limit for this “play money” is 10%. This is for speculating, and trying to be a stock market genius. Otherwise, play it safe and diversify.
If in doubt, index.
Focus on costs. Low costs index are the default option for investing.
Property is not a passive investment.
Passive income takes time to build.
Think in portfolio terms. A common mistake people make is mentally segregating their investments, rather than thinking of all their assets and liabilities as part of one portfolio. The reason you need to think in terms of your total portfolio is to allow you to ensure you are: investing to meet your goals, within your risk tolerance, diversified across assets classes and sectors, not missing information that is important to the whole picture.
Check you tax is correct at the end of the year.
Use all your tax credits. Claim back anything applicable. Not doing this is throwing away free money.
One person can manage the money, but the other person needs to know the basics (where is it, how much, how to access, what is owed, etc). If you die and manage all the money, would your partner be worse off?
Before you get married do a full financial audit with your partner. Make sure you both know debt, savings, obligations, investments.
Be aware of counter-party risk (your partner and their family).
Hold appropriate insurance. If one of you fell ill or was in an accident, could you support the other?
Be ambitious in the early years. Every 12-24 months in a job, it’s either up or out. If you are planning on making waves you need to keep progressing. If you haven’t been promoted or progressed in your role internally, move somewhere to be challenged and advance.
Make your intentions known. “I want a promotion, pay rise, title. What do I need to do?”
Always be passively looking for jobs.
Improve your career at least every 2 years. You are stagnating if you haven’t: done a course, taken on a new project, joined a new professional network, got a promotion, learned a new skill, developed some performance improvements.
When to move jobs: more income, more desire (interesting role or promotion), shorter commute.
Income is not everything, but if in doubt, chase income.
Make a will when you reach 20k in assets.
Don’t live poor to give your kids an inheritance. They will appreciate if you live happier (unless they’re terrible).
Get an external advisor. This is someone to run decisions by as a sounding board. Doesn’t have to be professional, can be a friend, family member. Go to someone you trust or admire and ask their opinion, people love that. Professionals like financial planners, lawyers, and accountants can also be helpful as they have expertise, experience and are not emotionally attached.
Have 2 bank accounts in separate banks. If there is a tech glitch you still have funds accessible.
Be aware of counter-party risk. If you are the guarantor of a loan, you might have to pay the loan if the borrower defaults. If you have a business partnership you have full responsibility to pay back any loans, not just your share.
Have a plan A and B that are complementary. Plan A is your stretch goal that is not as easily achieved but will lead to huge success. Plan B is the highly likely, slow gradually improving journey down the well-worn path. Plan B is your default. Plan B is a successful and content life, and through careful planning is your worst-case scenario. Plan A should complement Plan B. If Plan A fails, you are left in a good position to go back into Plan B.
H.A.L.T. Don’t make big financial decisions when Hungry, Angry, Lonely, or Tired.
Want to take some of the stress from financial decisions? Create your own Financial Rules of Thumb in line with your goals and current financial status.
One of the most common mistakes I see with my clients, friends and young professionals is refusing free money.
This can be due to laziness, ignorance or disbelief. There is such a thing as a free lunch and you shouldn’t refuse a genuine opportunity of getting something for nothing. This isn’t a trick or a scam, free money really does exist any many ignore it.
When assessing a person’s finances, one of the first steps is to look for the low hanging fruit and this is often refusing free money. For the purposes of this conversation, I am counting discounts, reliefs, benefits in kind and already-paid expenses as free money.
Types of Free Money:
Employer contributions to pension. I’ve met people not signed up for a company pension where the company contributes 12.5% of their salary. If your company contributes to a pension and you haven’t signed up, you are refusing a pay rise. This is the most common and largest impact mistake I see!
Employer matching contribution. When your employer will match or double your contribution up to a set level. Eg. You pay 4%, they pay 8% extra. Same logic as above, you are refusing a pay rise.
Pension tax relief. Most people will benefit from having a pension. The tax relief is generous and lowers your effective tax rate.
Growth on pensions. Pensions are so great you also don’t get taxed on the investment growth.
Tax incentivised investments. Some investments are tax incentivised. Eg. Prize bonds, State Savings, National Solidarity Bond, SSIA. The tax benefit improves your net return.
Employer death in service benefit. Although this doesn’t directly affect you, it could be the most altruistic act you ever do. With this, if you die, something will be left to your loved ones. It can be multiple of your income (standard is 4-8 times your income) or a lump sum like €200k. Many companies will pay for this benefit but you need to sign up. Not signing up leaves nothing. Signing up could mean your loved ones have financial support if you were to die suddenly. If you have children, you have a moral obligation to do this.
Employers paying for education. This can increase your employability, career progression and income.
Paid leave. If you are not taking this, you need to take a hard look at yourself.
Maternity/paternity leave/force majeure leave. Paid or unpaid time off when needed can be a priceless benefit.
Educational allowance after redundancy. Although nobody would refuse their redundancy payment, many will not avail of the additional benefits that go with it. As above, this can increase your employability, career progression and income.
Benefits from employer. Preferential loans at banks, housing at universities, food and drink in restaurants, housing in live-in roles (gate lodge, apartment manager), entertainment, childcare.
Tax credits and reliefs. Taking advantage of every tax credit and relief available can save you hundreds or thousands a year, depending on your situation.
Rent a room relief. Renting out a room in your home could earn you tax free income. This can be a significant help, especially in the early years of a mortgage.
If you have some free money available you have not taken advantage of, now is the time to act.
Improving your finances can be tough, especially the start. To help you with this I’ve assembled an introduction to the fundamentals. I’ve put them in the order most people will approach them as a logical progression. There may be some variation or exceptions depending on your situation but if you are unsure, work your way down the list. The more you do the better you will be.
1. Spend less than you earn
The first and most important step in getting your finances in order is to spend less than you earn. Without a surplus of free cash, everything else you do will only help you so much. Although you can and will go periods of your life where you spend more than you make, in general, it’s worrying.
If you are already spending less than you earn, great start, you can continue as you are or try improve this situation by lowering your expenses, increasing the benefit you already have. Lowering your expenses is the most effective route for most people as with some effort you can start immediately. While improving your income can often be dependent on other parties, you can directly impact your personal spending today. The extra cash you get from lowering your expenses is now your money to put towards your goals. It’s like giving yourself a raise!
If you are not spending less than you earn, you need to change this soon. Look through your expenses, bank accounts, and debt. You need a full understanding of your situation to find the leaks in your ship. Once you have done a personal audit, start cutting unnecessary expenses and areas you don’t value but have been spending money on. If you’re unsure if you can go without something, lean on the side of cutting it out, and if life isn’t worth living anymore, reintroduce it.
If you are starting from a worse situation, you will have to be harder on yourself to start.
Here is a few ideas to start with:
Utilities - Compare and switch providers if you can get a better deal. Conserve energy by lowering consumption if possible. You don’t have to be able to walk around your home in a t-shirt in Winter, lower the heat and put on a jumper.
Cancel subscriptions - Cancel any unused or aspirational subscriptions. If you don’t use the gym, stop paying for it.
Debt - Restructure/consolidate debt if needed. Sell assets to pay off debt. If you can’t control yourself with a credit card, cancel it.
Social/Habitual spending - Drink less when going to bars and clubs, plan to go to free entry venues. If you get a coffee on the way to work, cut down or make it at home and take it with you.
Once you start cutting some expenses, you might even realise you don’t care about certain things that just became a habit, and others you want to continue regardless of the cost. That’s fine.
2. Build an Emergency Fund
An emergency fund is an easily accessible amount of cash ready to be used for unplanned expenses or minor emergencies. This can be intensely personal as you need to define what an emergency is to you. Is it broken dishwasher, a car repair, losing your job?
You need to define what you consider an emergency, so you don’t raid it for non-essentials.
Building an emergency fund gives you the peace of mind that the most likely issues you have will be easily dealt with because you have the cash ready.
According to the 2016 US Federal Reserve survey on Economic Well-being in US Households, the yearly report that shows the state of Americans personal finance, almost half of Americans can’t afford an unplanned $400 expenses with borrowing or selling something. That is pretty bleak, and we’re probably not far off in Ireland. Emergency funds stops that.
If you don’t currently have an emergency fund, start it now. Initially, try to build up €500, then €1,000 as that will cover most of the unplanned expenses that arise.
After you reach that level, you should do an assessment of what risks are likely for you, and the expenses you could face.
Basic risk assessment: how risky is my job, could I lose it tomorrow, can I get injured in work, do I have dependents, if broken what would need to be replaced immediately.
After this, some people will want 1 month of expenses and others will feel more comfortable with 6 months or a year of expenses.
3. Increase Your Income
After lowering your expenses, increasing your income will have the most impact on your wealth building. This can be harder to improve though as it can depend more on external factors like the state of your employer, salary levels in your industry, etc. so you need to plan for the mid and long term with this.
Can you work overtime? Not ideal as a long-term solution but good for a bump up if you’re trying to pay off debt or save for a goal.
What can you get a bonus for? Work towards sales or performance related bonuses. If your company has yearly or mid-year bonuses, how can you get this?
Improve your job. If you can improve your work, your team’s performance, your company’s results, you place yourself in a better place for pay increases, bonuses and promotions. Help your manager reach and beat their targets.
Make your intentions known. Although it sounds simple, many people never do this until they quit or move jobs. Make your intentions known to your managers. They’re not mind-readers. If you want a raise, promotion or bonus, make it clear to your manager and get specific targets needed to make it happen. Getting any of these is not an in the moment exercise. You need to have demonstrated your value and achieved success to be rewarded. Don’t just turn up and ask for more money because you are on time every day. Lead with your value, you get paid for last year’s performance.
Skill up. Get a respected qualification or accreditation that is desired in your industry.
Side Hustle or 2nd job. Unless this is just for a set period of time or while transitioning to a business, be careful. Like overtime, this should not be seen as a long-term solution.
Start a business. Don’t assume you can do better at this than working. Most businesses fail. If you make it work, you will receive a bigger proportion of the gains. If it fails, you are on the hook. Caveat emptor.
Don’t accept anyone else’s pace. Don’t set arbitrary timelines, go after what you want.
4. Set Goals
Having goals gives you a target. It gives you the ability to differentiate signal from noise and increase your work rate. When starting to improve your finances, you’ll probably have a lot of habits that are holding you back from reaching your goals. Set goals enable you to spot wasted energy, cutting unnecessary expenses and bad habits.
Write a list. Prioritise your goals. Set timelines, and consider trade-offs to reach this. After you write this down with timelines, you’ll get an idea of what is realistic and what is a stretch. Initially one or two stretch goals is fine, but you need the majority to be realistic. You may have to side-line some goals until you are in a better place. If it struggling to decide between some, ask yourself what is non-negotiable?
5. Increase Savings
Savings are like muscles. The bigger they are, the more you can lift. Even if you don’t have a set of goals right now, having savings gives you the ability to do what you want now, or sooner when you do have goals.
Savings gives you power and confidence. Many of the little financial worries that come up throughout different periods of life can be lessened by simply having money in the bank. If your job is less secure for a while, you can feel safer if you have a few months of expenses saved.
Savings also gives you power. Many people don’t have the confidence to turn down requests in work that go against their values. Asked to work the weekend at the last minute? Confidently say no, and go about your weekend plans, knowing your savings insulate you from the pressure to comply to unfair demands.
Build a few months of expenses in savings and increase your power.
6. Manage Risks
Insure against events you can’t pay for out of your regular cash flow. Don’t get insurance if you can cover the expense!
If you have kids or dependents you have a moral obligation to have life insurance.
There are also tons of non-insurance risk management moves. Have an Emergency Fund to cover likely, but unplanned expenses. Open two bank accounts so if there is an issue with one bank, you have access to cash in the other. Leave spare keys in your friend’s house.
List the risks you are most likely to experience or would have more adverse effects. Plan to mitigate these risks.
7. Set up a Pension
People are living older. The government pension will be paying less and later. Some question how long there will be a state pension. You need to set up a pension.
The tax benefits are sweet. Few things get near the level of tax benefits as pensions. If you are looking for low effort, high impact wealth building, set up a pension. If your employer contributes, take full advantage, this is free money!
8. Invest for Wealth
If you have gone through the above steps, you should have goals to meet and free cash to allocate. Start investing to meet your goals and separate your income from your time.
Investing allows you to diversify away from the risk of being solely reliant on your income to meet your goals.
9. Seek Counsel
Get external feedback. This can be friends, family, a co-worker or a professional. You need external feedback to give you an outside perspective on your issues. Unfortunately your point of view can blind you from obvious issues in your personal and professional life.
Seeking the counsel of a trusted advisor can help give you an unbiased view.
Get to work.
During this period you will be making some of your most important life decisions.
What career path to follow, whether to change jobs or wait for a promotion, when to start a family, should you buy that car, buy a home or keep renting, should you get married, how to get the money for that trip to Thailand.
It’s difficult having so many decisions to make when you are trying to get established. You’re trying to balance your career, home and social life and you’re doing so from what feels like a crappy starting place. You’re near the start (or bottom) of your career and you feel like you don’t have a lot in your favour right now.
Lucky for you, you’re probably wrong about that!
In the early years you have less set expenses. Most people’s default position is to spend whatever they earn and when you’re starting to work, or a few years into working you’re not earning all that much compared to what you later will as you advance in your career. Even if your starting point is weak, you have time to improve and a few changes can make a big difference.
Developing a few habits now can flip your reality in a short space of time, and put you on the path for wealth later. Aligning spending with values, lowering expenses, saving, learning to invest, working to get promotions and pay increases. Actively working on this can be life changing.
Although possible at any stage, learning about this now gives you a distinct advantage. Any improvement you make is with you for life. You are still malleable. Change gets more difficult as you age and you haven’t built the financial baggage of set expenses people pick up over time.
As you develop your money muscle your improvements compound. When you’ve lowered your expenses and increased your income, you realise you’ll reach your goals faster than planned. Setting bigger goals becomes the issue.
A few months of a small difference in behaviour, you have built decent savings and options unimaginable before. You can afford a nice holiday, have a small emergency fund so don’t need to borrow money for an unplanned expense, and can afford to not work for a while.
You have built a solid financial base to work from.
Just like trying to get in shape for the first time, learning about personal finance and money management starts slow, but the achievements accumulate on top of each other and the more you do, the easier it gets.
At Money Boot Camp we will show you how to build up your money muscles from zero to hero, while still in the formative years of your life. Making changes such as lowering your debt, getting a raise, choosing financial products, getting the right insurance, setting up a pension, investing, and all the other money moves you need to do can be tricky without the knowledge needed or having someone to guide you. You need to learn this stuff now while it can have the most benefit for you.
Financial literacy leads to reduced stress, better decision making and the ability to plan to meet your personal goals.
Money Boot Camp Ltd.
Call: 00353 (0)871225761