Summer or Winter?

Summer or Winter?
Now is the winter of our discontent ……. as the opening soliloquy of Shakespeare’s Richard III begins, as Richard, Duke of Gloucester forms his Machiavellian plans to take the crown. For many, their finances are a lifelong ‘winter’. This post is not aimed at those who need society’s support and help, but more at those who can help themselves! A good place to start is to identify the current level of reserves you hold. That is ‘cash’ that you don’t immediately need for day-to-day use, but those funds you can put by for emergencies or a specific future goal. The BBC reported recently that millions have less than £100 in savings. These people are at risk and this needs to change. However, starting saving can be difficult.

Newton’s Laws & Saving
The answer could be down to Physics. Newton’s First Law states that an object will remain at rest or in uniform motion in a straight line unless acted upon by an external force. Blimey! What’s that got to do with money? Well, this law applies to your finances too!

Getting something going and moving in the direction you want, can be hard work at the start, but it gets easier. The saying ‘the first million is the hardest’ is true, but equally true is that the first <strong£50 is even harder. This is because it requires a change in behaviour, emphasis, effort and will to make a change in your finances to start saving.

It’s essentially a choice. Your choice!The Universe is entropic. Everything falls to decline if efforts are not made to the contrary. It’s easy to spend all your money now and not bother putting anything aside for the future. The natural flow is money in, money out…. but if you want to plan effectively, you need to work against the flow, keeping a bit back from going out the door.

I was lucky. I grew up in a family, which whilst not wealthy, was thrifty. My parents didn’t spend all their income each month. They put back some money each month for emergencies, Christmas, holidays etc. It was hard for them to do this, very hard, but they did it and it got slowly easier over time. When I began work at 16, I was taken to one side after my first month’s pay was received and advised to ‘keep a bit back’. I’ve been doing this now for 30 years!

Why you need to save
For most people, it’s a good idea to have some money put aside for a rainy day. Putting some money away regularly is the best way of saving up for expensive things, like a holiday, car, or a wedding. It can also be a good way of making sure you have money to pay for emergencies such as needing to replace an expensive household item.

The quicker that debts can be repaid, the quicker that money can be directed towards longer-term goals. With people coming out of university with debt potentially of upwards of £50,000, it is understandable why people cannot get on the housing ladder and secondly why they cannot then save enough money. It is a massive challenge but one that people need to start or else we will have a generation of people that have significantly substandard standards of living in the later years.

You can use credit cards or take out a loan to pay for things like these, but this will cost you money and in some cases, could lead to debt problems if you don’t manage the repayments properly. You can also save money for the long-term, such as retirement. It can be difficult to think about doing this, especially when you’re young and retirement seems such a long way off. If you’ve got money to spare, it’s tempting to spend it on things you want to buy and do now.

But it’s a good idea to think about whether you’ll have enough to live on when you are older and no longer earning money. Think about the kind of lifestyle you want and how you are going to pay for it

You will need to sacrifice some spending now, to be able to have a comfortable retirement and lead the kind of life you want to in the future. The most common way to save for retirement is with a pension, but you can also invest your money in other ways to save for the future.

Cake & Eat it?
It would be very nice to have all our available income to spend every month. The fact is that some of that income needs to go towards providing a resource for when we are no longer working. This is the move towards financial independence. The larger the sums saved for the future, the larger and more sustainable resources we will have during the years when we are not working. The shorter the period that one works the more one needs to save in that time-frame. Early retirement can be an irrevocable mistake.

Therefore, the earlier that one retires, the more difficult it is to provide the necessary funding. One’s earnings threshold is typically higher during our older years and at that time this may be your peak opportunity to save as much as possible. Retiring early, will certainly put a stop to that.

Common reasons to save include:

• Emergency Funds – You’ll never know when the unexpected could occur. That’s why it’s unexpected! Not having an emergency fund will possibly interrupt the other plans you are making in your financial plan. You may find you need to tap into resources which are designated for other purposes, watching your plan implode in front of you. It’s not a pleasant experience. You might need money to help you pay for an urgent repair to your home like a boiler replacement, or if you need to replace an essential household item such as a washing machine or cooker.
• Leisure, entertainment & fun – Everything in balance.
• Financial Protection – What happens if you don’t have insurance and cannot work due to losing your job or accident or illness? Of course, you could take out some insurance but this alone may not be enough. In this situation, some accessible savings may just be the difference between survival and financial problems lasting for the rest of your life.
• Future Spending – For most people, they will never have more disposable income than when they are working. When retired, most people have much less disposable income and their ability to replace capital will reduce considerably. If you don’t save enough now, you will come to rue this choice later in life.
• Specific Purchases – You might want to save up for something specific in the future such as a wedding, a new car or your retirement. I remember the analogy of people saving in different pots for different reasons. This is a good one and you can open different savings accounts for different purposes. This is one part of being financial well-organised.

Challenges
Of course, it’s very easy to say you’ll start saving, but doing so may not be that easy.Before you start saving, you could consider what your available resources are and then set up a means to save the surplus.
However, I like the quote from the famous American investor, Warren Buffet ‘Do not save what is left after spending, but spend what is left after saving.’ It has a certain change in emphasis that may just be the necessary motivation needed to start saving. If you work from this perspective, you’ll have much more success.

What’s the difference between saving and investing?
I often hear these terms used interchangeably. When I refer to ‘saving’, I mean cash placed with a bank or building society. ‘Investing’ is used when referring to higher risk places to put your money to make it grow more than is potentially possible in cash, for example, stock & shares ISAs. Typically, investing is a long-term goal.

Further Thoughts

• Need or want? – Do you need to buy that? Or do you simply want it? There is very little we truly need. Air (that’s free), food, water, warmth. All the other stuff is a choice!
• Value for Money – Is there a more economical or better value alternative to what is proposed? Buying ‘the cheapest’ may be poor value and the item may need replacing sooner, which can end up costing you more. Buying ‘the most expensive’ may equally be poor value for money. Are you ‘paying for the name’?
• Small Changes – The long-term can be significantly affected by what you do every day. Small changes each day can make a big difference, but you’ve got to be patient. Rome wasn’t built in a day!
• What are your habits? – Get in the habit of regularly monitoring and prioritising short, medium and long-term financial goals.
• Herd Instinct – Don’t feel you need to follow the herd. Herd instinct can be fatal! Just because everyone else is doing ‘such and such’ doesn’t necessarily mean it’s right for you.
• Drip, drip, drip – If you’re saving regularly you should feel ‘slightly squeezed’. If you’ve got too much surplus income you won’t feel this. If you’ve got too little, you may need to cut back slightly. Be vigilant! If you can save more, do so.
• Think carefully! – Can you economise in the short-term to help save more for the long-term?

Don’t get left out in the cold this winter.

If you wish to take a step in the right direction with planning your finances, please feel to call us on 01626 833225 or email us at to find out more or to arrange an initial complimentary meeting.

A journey of a thousand miles begins with a single step – Lao Tzu.

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