The founder of Personal Finance wrote this article 28 years ago. It’s still good advice today.
MARTIN SPRING
THERE WAS a time when planning personal finances was a straightforward affair.
The responsible salaried man spurned credit—except perhaps for a mortgage bond—and placed a specific monthly sum in a secure fixed-interest savings account. He protected his family with life insurance. He trusted his pension fund to take care of his old age, educated his children, and took pride in a wife who didn’t have to work.
Many of his principles are still sound.
But what about the person who subsidises an aged and bewildered relative trying to live on the shrinking real in-come from a ‘secure’ fixed deposit? Who sees their life cover and pension fund eroded by inflation to virtual irrelevance? Who saves for years to pay cash for a car that rockets in price every few months?
This person learns the hard way that times have changed. Because thrift, hard work, and regular saving habits no longer seem enough to guarantee the security and prosperity to which they feel entitled, the salary earner may be tempted to throw up their hands, live and spend for today—and leave the future in the lap of the gods … or the Government.
In fact, planning ahead is more important than ever. In the past, self-discipline was the quality you needed most. It still is. But now you also need imagination, flexibility, expert and unbiased advice—and constant vigilance in protecting what you already have.
A new Golden Age of prosperity is unlikely to dawn in our lifetime. So before going for high profits, you should aim to minimise your losses and secure your future. For this, a personal financial strategy is essential. Run your life as you would a business. Make as much provision as you sensibly can for redundancy, sickness, and social upheaval.
Make every cent work flat out for you. Also, plan for tax—you can’t escape it. But only pay what you must. And don’t be so busy earning money that you have no time to invest it wisely.
You can control your budget only when you have a clear idea of what you own—where your money comes from, and where it is going. You need to establish whether you are living within your means, and whether you habitually get value for money.
You should also know whether your debts are increasing or decreasing, whether you are in a position to cope with emergencies, educate your children, and provide for your family should you die or become disabled.
Start by listing all your assets—such as your house, your car, household goods, investments at their current value, paid-up values of life insurances, and retirement funds. Then set out your liabilities—outstanding mortgage, loans, HP payments, and overdrafts.
The difference between the two totals is, of course, your nett worth—and you’ll probably find you are a person of greater substance than you feared in your more pessimistic moments!
It is then time to establish how much you saved and spent over the past year—this will provide a realistic starting point for your budget. For this, you’ll appreciate the value of keeping financial records. ‘Doing the books’ every month isn’t very exciting, but it need take only an hour or so—with a personal computer, it can almost be fun!
Cash slips, cheque stubs (remember those?), and credit card statements will give you most of the information you need—keep them in a safe place even when you have finished your calculations, filed with all other relevant in-formation according to month and year. Once you have identified a pattern in your flow of funds, you can plan how to deploy them to your best advantage.
First, you must provide for the basic monthly working capital you need to meet your regular bills, such as food, mortgage, electricity, telephone, and repairs. Irregular or annual expenses should be totalled and divided by 12 and added to the monthly budget.
What you then have over from your income should be saved. Despite the hyper-inflation bogey, saving is still the only way to provide for the future. It’s how you save that counts.
Emergency cash
Savings should be carefully structured and allocated to the following categories:
- First, sufficient cash on call to cover emergencies—preferably the equivalent of three months’ salary.
- Medium-term savings to finance a holiday home, a farm, or a round-the-world cruise—whatever you may yearn for.
- Sufficient retirement savings to ensure you enjoy your later years and the extra leisure they afford—and don’t have to eke out an existence in an urban bedsit.
When planning these last savings, look realistically at your current pension fund in the light of inflation and any past broken service.
If you are saving independently for retirement, you should aim for a target of 176 months’ current income if you want to keep up your present living standards; 132 months if you are prepared to drop them by 25 per cent. That should allow you to protect yourself against inflation during your retirement years. Any spare cash you can then treat as speculative capital—money you can afford to lose.
Get into the habit of reviewing regularly what is happening to your money—such as changes in the value of your investments—and update your balance sheets.
A good rule-of-thumb for a lifelong savings plan is to save about two months’ salary out of every 12 over a 40-year period. There will be times when you save less—especially while your children are growing up—but once they have left home, you should increase your savings rate dramatically. This plan should ensure a reasonable level of future security.
But what if you just can’t save enough? First, see if you can’t increase your income. If the children are no longer small, your spouse might feel able to take a job or run a business from home. Or, if you have the energy, you could consider moonlighting!
Assuming there is no practical way you can bring more money in, the only solution is to limit the amount that goes out.
Your lifestyle
It’s up to you to decide what economies will cause the least disruption to your family, but it’s worth bearing in mind that cutting down on such things as meat or family holidays often causes a sense of deprivation out of proportion to the savings—and is, for that reason, often abandoned.
Look at more fundamental savings. You could live in a smaller house in a less fancy suburb and closer to your job—lower expenses all round. Or drive a more economical car. Such changes can often improve your lifestyle, and the savings achieved don’t need a constant renewal of sacrificial fervour!
When planning your budget, it’s important to involve the whole family. Make sure your spouse or partner knows what your resources are—and that they have personal funds at their disposal irrespective of whether they have a job. Teach your children the realities of money by giving them the experience of handling an allowance—and of running short!
Discuss major financial goals with your family, and how you can all contribute towards attaining them. They will be more co-operative when they know what’s going on—and what’s in it for them.
Above all, get out of the habit of living and spending according to future expectations. Once things could be relied upon to get better and better. Nowadays, anything can happen. Rather aim to live so that you could survive a salary drop of some 20 per cent.
Invest in skills
If you do get a raise, don’t budget for extras. At the current inflation rate and tax ‘bracket creep’, you may well be worse, not better, off. Today the sensible salaried person budgets and plans for survival.
Invest in a good education for your children, encouraging them to work for qualifications and skills that are practical, scarce, and internationally in demand. Look at acquiring new skills, or keep your existing skills well-oiled—but make sure that you invest in an expansion of your training and knowledge. They are your most valuable assets—which nobody can take away from you.
Good timing plays a big part in your financial plan. Time the major steps in your life for maximum financial advantage.
Don’t wait too long to have your children—if your family is complete by the time you are 30, you’ll have nearly 15 years after they leave home to save intensively for retirement. Avoid investment at peaks and selling in troughs. Even your retirement date can be selected in such a way that your retirement pay-out is subject to less tax.
Your financial plan will be successful only if you set objectives, analyse your resources and then deploy them to attain these objectives. Flexibility is the key—which is why you should review your plan regularly, making the necessary adjustments.
The range of possible future economic, political and personal scenarios is infinite—you can’t possibly hope to provide for every eventuality! But you can limit their adverse effects, and be many steps ahead of those who leave everything in the hands of fate.
First published in September 1994 as an introduction in Moneycraft, a booklet produced by Prescon Publishing Corporation.
