How to save for retirement is everybody's dilemna.
Everybody knows that it is essential to provide for your old age, except of course those 'know-it-alls' that think that the state will provide for them or maybe they will not live that long.
Boy - those people have got a BIG shock coming their way - sooner than they think.
For the rest of us "normal" people we must plan for the future.
If you are already in a company pension plan, whereby your employer matches the contribution that you are prepared to put in - that's great. But chances are, even that will not be enough.
You need to save even more by way of a private Pension Plan. See SIPPs.
But it's not just about putting your hard-earned into Pension Plans. That, is just half of the story.
If you fully understand how tax efficient Pension Plans work - then you would want to stash as much away as is practicably possible. It's free money.
No matter what age you are now, but obviously, the younger you are the better, you need to plan. Talk to your significant other and arrange to have a cosy night in with a view to planning your financial future.
How many of your contemporaries have done that? Or even thought of doing that? At a guess - very few.
Imagine now that you had that conversation with your soul mate and you set aside one evening to really take a good, hard look at your finances.
What do you think should be brought to the party?
Answer! A pen and paper.
Yes, you need to take stock of where you are now and where you want to be in say, 5 years' time, 10 years' time, 20 years' time and so on.
The point is, don't just talk about it - get it written down. After all, it's a serious business.
Almost nobody does this. They are "too busy" living their day-to-day lives to stop and think.
A couple of hours discussing (planning) your financial future would be time well spent.
The old-fashioned way to do this would have been to grab a sheet of paper and draw a line down the middle. On the left hand side write: "income" and on the right hand side write: "expenditure."
Things have moved on a bit. It is quicker, and easier, to create a simple spreadsheet.
If both of you have an income source, then either make it a combined income/expenditure sheet or two separate ones. His and hers, or something similar.
Take a look at (part of) the very simple spreadsheet below:
The above is just a small snippet of the full spreadsheet to give you an idea.
Each section of this spreadsheet will be discussed in more detail in future blog posts. Keep an eye on the "What's New" section of this website.
What you need to make sure of is that your income exceeds, or at least is equal to, your expenditure.
Mr.Micauber in Charles Dickens' David Copperfield had a recipe for happiness:
"Annual income twenty pounds, annual expenditure nineteen [pounds] nineteen [shillings] and six [pence], result happiness. Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery."
Not many people abide by that simple lesson. Have we learned nothing?
If you want to save more, then it is obvious that you have to make sacrifices somewhere along the road? Right?
An alternative to scrimping and scraping is to have more money coming in.
In the spreadsheet above, all in-comings were listed as:
Salaries and wages are not necessarily constant. You may get paid overtime. Some industries and sectors allocate Bonuses for employees. Especially at certain times of the year.
Some individuals may have a second income. You often hear about people having 2 or 3 jobs.
Pension incomes are rare for all but the senior people.
Dividends are equally rare as an income source. On this website, it is recommended that any share dividends that you are entitled to, get invested directly back into the savings system, (Maximizing Einstein's 8th. Wonder).
For most people, the most likely source of increasing in-comings would be through a second income. That doesn't really mean finishing the day job and scrambling to get to another "cash in hand" position.
With the trend in online marketing becoming increasingly popular, more and more people are looking at making a second income from the likes of Amazon, or eBay, or building their own websites and profiting that way.
Keep your eye on the "What's New?" section of this website for regular up-dates on this, and other useful articles.
Covid-19 has contributed a great deal to peoples' thinking. Online sales have rocketed and high street sales plummeted.
Online sales were increasing even before Covid, the pandemic just accelerated the trend.
A very sad situation but it's going to be global and permanent. There will be many entrepreneurs born in the coming years as a result.
Whatever the world throws at us, we must adjust. Time will not stand still. Thousands will, at least in the short term, lose their jobs.
A second income is going to be a necessity rather than a luxury.
Unless you have at least one substantial, and secure, salary coming in every month, it will be essential that you look to a second income.
Increasing your in-comings is one side of the equation.
The other side of the equation is saving on your out-goings. This is much, much easier. Unless you are extremely frugal already, it is almost certain that you could make substantial savings on your expenditure.
But first, take a good look at your expenditure.
There are 4 types of expeniture:
1. Fixed Expenditure
2. Variable Expeniture
3. Intermittent Expendure
4. Discretionary (aka non-essential) Expenditure
1. Fixed Expenditure. In this category are the expenses that we all have to pay. They basically remain the same month after month. Expenses such as mortage/rent, bank loans, car payments etc.)
2. Varable Expenditures are those that do vary from month to month such as ultility bills, groceries, clothing etc.)
3. Intermittent Expenditures are those things that crop when we either don't want them (who does?) or when we can least afford them. Things like car expenses - you may have picked up a nail or screw on the road and so need a new tyre, or your pet needs some urgent help that isn't covered by your insurance. The list could be endless.
4. Discretionary Expenditure is avoidable. But most of us don't avoid it. Impulse purchases are not necessary but we all do it. How many times have you bought something only to get home and say to yourself: "Why did I buy this?" People buy non-essential items every day - it's human nature.
In the spreadsheet highlighted above, all expenditures were listed under categories. These categories were:
1. Household -
2. Everyday Costs -
3. Transport -
4. Entertainment -
5. Health -
6. Vacations -
7. Recreation -
8. Subscriptions -
9. Personal -
10. Financial -
11. Miscellaneous -
Wow! Into double figures. Scary - or what?
The lockdown during Covid-19 did us a favour. It forced us to save. There was no alternative. Nowhere to go. Nothing to spend your money on. If you were lucky enough to have any that is.
But the sobering thought is glaring. Seeing all your expenditure written down before your eyes is, well, eye-opening. It kinda puts things into persepctive.
The analogy is that we are like hamsters on a tread wheel.
Do you feel like there is always too much month left after the money?
The big question is: can you save money on any of the expenditures listed above? Your answer should be yes - to all of them. Discretionary expenditure we can all cut down on, if not cut out altogether.
There are millions of households in the U.K. that operate their budgets in negative territory. Debt throughout the western world is massive.
Pore over your expenditure spreadsheet and, for sure, you will find some savings. Utilities is an obvious one. There are 11 categories listed above, you could, if you wanted to, make savings on every one of them.
Ask yourself the question: "Do I have a credit card?"
What was your answer?
If you answered: "Yes" go to the back of the class (with one exception). The exception being, of course, if you pay off the balance, in full, every month. Not too many folk are that disciplined.
Believe it or not, but some debt is actually a "good" thing.
Right now, here in the U.K. the Bank of England has got interest rates down to 0.5%, any more cuts and they will be negative. Is there such a thing?
How can some types of debt be good? If they were good before, but with interest rates now at an all-time low, they are even better.
Your mortgage, for example, is "constructive" debt. Of course, you don't pay 0.5% interest on your mortgage (your lender has to make a profit) but you are buying an asset that appreciates, with other peoples' money.
Destructive debt is worse than bad - it can destroy you.
Number one tip: you gotta stay out of debt (mortgage excepted).
We all use cards with ever-increasing regularity, especially because of Covid-19, businesses like you to use cards instead of cash. But using a "card" should not always mean a "credit card."
Use a "debit card." If you are in credit at your bank.
If you buy online, you don't really have much choice. It's card, or card. Even with payment systems such as Paypal - you still have to deposit the money.
It's all easier said than done.
But in-comings have clearly got to beat out-goings if we are to survive.
Do your calcs at an early stage in life and plan. Set yourself a long term goal, several medium term goals, and many, many short term goals.
Jot it all down in a journal (or your computer) and review every 6 months or so.
Sometimes, we can't always have what we want and we have to lower our sights a little.
Dreaming is one thing - reality is another.
If there is one thing for you to take away from this web page it is this: stay out of debt.
Keep an eye out in the "What's New" box for up-dates of all of the above where we will make suggestions on how you can save money. The bottom line is: the more money you save, the more money you will be able to invest in your Self Invested Personal Pension.
The next article in this series can be found at: How To Finance Retirement