I enjoy reading the ‘Fame and Fortune’ column in the weekend money section, although when you read celebrities money stories you soon realise that fame and fortune do not always sit well together.
A recent column featured professional psychic Sally Morgan who has appeared on television with her own shows, although her clairvoyance skills do not seem to have helped her to see the future of her finances. She admits to having had £1.5 million in the bank at one time, yet at age 69 she has no pension or long-term financial strategy and has never saved money, but gives waiters tips of £50 a time and gives money to various charities. Her priorities are "to continue to work hard", which as she admits to having ‘not one’ investment apart from her home, is probably something she won't have much choice over if she wishes to maintain her lifestyle.
What gets in the way of people saving money? Well, there’s a clue in the article. When asked, “What would you change about the financial world?” Sally replies that, “the greed and excess are so overwhelming, and I know that because I talk to billionaires......... and they’re all greedy, every single one of them” (my italics).
This seems a rather damning indictment of the huge philanthropic endeavours of some of the wealthier members of society. I guess that you need a certain greedy streak to become a billionaire, but people like Bill Gates have given vast sums to charity over long periods of time. So what else is going on here?
I touched on this in my recent article and webinar about George Kinder’s ‘Seven Stages of Money Maturity’. Stage Three, Knowledge, is concerned with not only acquiring the basic money management skills that make for a happy life, but also understanding the virtue of money. This promotes the concept that money is intrinsically good, because it delivers personal freedom in a way that no other mechanism could achieve, and it implies integrity in our dealings with each other and confidence in our financial systems.
If you believe the opposite of this, that money is intrinsically bad, and that people who have money are overwhelmingly greedy (every single one of them!) then it’s not surprising that you fail to cultivate a savings habit. Who would want to turn into one of those people?
Yet the ability to save money is at the heart of financial success and, dare I say, personal happiness. That’s because it requires a person to take responsibility for their finances, to exercise deferred gratification (forgoing a purchase today in order to achieve something more important tomorrow), and because it builds a platform within which wealth can grow.
Level One Savings
The first level of savings success is to accumulate an adequate emergency fund. Our usual advice is to aim for an amount equal to at least three months net spending, although you may prefer a higher amount if your income is uncertain or erratic. Having this behind you means that, should you lose your job or be unable to work for a period, you won’t be relying on food banks the following week. Did you know that over half of the UK working population don’t have enough savings to survive beyond their next payday?
How much to save?
My strong advice is to save at least 10% of your net income. Many people wince when I mention this figure, wondering how they will ever be able to achieve such a sum. The reality is that, if you suddenly had to take a 10% pay cut you would find a way to survive. Take that cut now and get on the road to financial freedom.
Saving for the Longer Term
As your savings build, you then start to consider how to get better returns on your money, especially in these times of ultra-low interest rates. You need to consider investments as well as savings, and we suggest splitting these into short (up to 5 years), medium (5 to 10 years) and long-term savings (10+ years). Short-term money might go into a high interest bank account, medium term to, say, a stocks and shares ISA with immediate access, and long-term savings might be invested into a pension, if your tax position makes it sensible to do so. Either way, what you are doing is creating opportunities for the future.
You will also begin to build an appreciation of the power of compound interest. Let’s say that you start saving £200 a month, and you achieve a return of 2% a year in interest. After 25 years your savings will have grown to the sum of £77,764.23 - not a bad result. However if you’d been able to obtain a 6% return, your savings would be worth £119,101.54, whilst at a return of 8.4% pa you would have accumulated £203,047.01 - quite a healthy nest egg. Why use a return of 8.4% per annum? Well, that’s the average annual return on the UK stock market, as measured by the FTSE 100 index, over the last 25 years.
As you learn more about money and investing, you start to become aware of opportunities for your cash that are not available to people with none. Whether it’s taking advantage of stock market movements, buying a property at a favourable price, or investing in a business or other asset, you are on the road to long-term wealth accumulation.
Once you become wealthy, you have the choice of what to do with your surplus funds. Will you buy the latest car, the latest fashion, and a swanky house? Will you turn into a greedy billionaire? Or will you use your acumen to help people less fortunate than you by giving back in some way? Or might there be room for both?
If you want to be known as someone who has never saved and can’t stop spending money as Sally tells us is her nature, then that is your choice. But cultivating a regular savings habit is, in my humble opinion, a much better way to live your life. And you have my assurance that saving money won’t make you a bad person. On the contrary, there is every likelihood that you will become the rounded, successful and generous person that is inside….… yes, every single one of us.
Andy Jervis CFP
Director of Woodgate Financial Planning