By: Bill Storie
When you are young, building your career and saving for the future might seem difficult, if not impossible, tasks. While the idea of long-term saving is high on most people’s list, the reality of living paycheque to paycheque causes long-term thinking to be short-lived. We’d like to save for our later years, but right now it just isn’t feasible.
In the forty to fifty age range, there are still many expenses we can’t reduce or eliminate. Our mortgage is still high compared to our income; our living expenses are high because we still have kids at home; we are at that age when our first car has seen better days, so a new and improved ve¬hicle seems the best option. We may even be paying for school or college fees for one or more children.
Perhaps more to the point, we are not yet at the peak earning period in our career.
We may have moved jobs in the last few years and have not yet settled in a more permanent ca¬reer-based job. We may still be serving a probationary period, not to see if we can keep the job, but to persuade management that we are in it for the long haul. As such we believe we are finally on the career ladder. In other words, our salary is fine but could be better. And in a few years, all things being equal, it will be – but not now.
Nonetheless, we do feel that our income is on the rise and while our expenses are on the high side, they are relatively stable. This al¬lows us to budget our cash inflows and outflows more accurately. We still may not have much extra income to invest at the end of the month, but we can start to see the light at the end of the tunnel. In fact, we can begin to foresee a surplus a few years ahead – leaving aside any unexpected and big-ticket items.
Assuming we are paying into our company pension fund each month, and simi¬larly so too is our employer on our behalf, our pension future is under control. Yet we might consider adding voluntary contributions to our company pension fund using the surplus at the end of the month today or at least in our near future. This is an excellent way to save that extra cash in a profes¬sionally managed, chosen mutual fund(s). Apart from the arithmetic of watching our savings grow month over month we also have that feel-good factor that finally we have a long-term savings plan.
This psychological boost to our everyday lifestyle can be a major life-changing event. It is now possible to not only save for our future but develop a determina¬tion to maintain this new routine. We can see a path ahead of us now.
As each year passes, we may see increased income through a cost of living salary increase or promo¬tion. The pleasure of being recognised by the company for a job well done, allied with more money, is a very satisfying accomplishment.
There soon comes a time when the voluntary contributions can either be increased or held steady while we seek other types of investment. We can now consider our own private investment portfolio where we invest in stocks or fixed income securities directly – in other words, not through a mutual fund. We may feel comfortable with making the decision ourselves, or by using a recognised broker to make the trades for us, or to advise for a fee.
This new savings routine may also coincide with the kids leaving home. We love them dearly of course, but they can be expensive. Even more so if they have left college and can’t find a job. That simply increases the stress on the household finances, not to mention the emotional impact on everyone.
Life at home can be stressful at the best of times, especially if money is tight. But if we are carrying extra baggage so to speak the tension increases mark¬edly. Small annoyances can become major fights, and while the cohesion of the family is fine, the con¬straints of financial pressure can cause serious infight¬ing. Regrettably, the lack of money causes friction in the best of families.
But if everyone is pulling their weight, especially if there are two earners in the family – spouse/life partner, then there may come a time when one income can be completely, or substantially, saved as soon as it comes in. This is obviously an envi¬able position to be in – but perhaps some of us just can’t quite get there at the moment, yet as time moves along the possibility of increasing the savings level can become a reality.
The important thing to remember, however, is that if that extra money at month-end is now a reality, the secret is not to spend it.
If that extra cash is too tempting to save and that world cruise is now possi¬ble, the splurge may indeed be too tempting to ignore.
There is nothing wrong of course in treating your¬self now and again, but don’t lose sight of your future, in particular your retirement years when the salary has stopped, and the only income comes from pensions and dividend or interest income from your investments.
There’s a common rule that says you should always pay yourself first, then take care of the bills. That does make some sense in some way, but only if you are slicing off that portion of your income into your long-term savings plan. If you are paying yourself first to buy the nicer things in life before paying the groceries, that is not what is meant by the rule.
Getting into a habit of taking about ten percent of your take-home pay “off the top” each month and immediately transferring it into a savings account at the bank or mutual funds or an investment portfolio is an excellent plan.
In other words, you ac¬custom yourself to living off the remaining funds month by month. There will inevita¬bly be the odd month or two each year when the top slice doesn’t work. That’s ok. Just get back on track the next month without fail. Don’t fall behind just be¬cause it feels good. Feeling good today might just result in you not feeling so sharp years from now.
Make small sacrifices today while you are in your high-earning years and be comforted by the fact that you will appreciate those sacrifices (which didn’t feel bad at all) in later life.
There’s no pleasure in finding out when you retire that you spent too much while you had the extra cash and ignored the basic principle of saving for your old age. Life expectancy has increased dramatically over the last few decades, so the possibility of life in retirement lasting fifteen or twenty or more years is a reasonable proposition. The trick is to make sure your money outlives your life – and perhaps leave a little bit for the kids by way of inheritance.
The objective is to live comfortably, but to make sure your cash flow(s) will last over the retirement years. Having to make a choice between grocer¬ies and prescriptions (far less health care) is a most unpleasant situation to find yourself in.
There are so many other factors to consider in your later years such as health, accommodation, transpor¬tation etc. Don’t make a lack of money one of them. Take care of yourself and take care of your money, starting today.
Don’t deny yourself the luxuries of life while still employed but be acutely aware of the years ahead when you won’t have that employment income. Now is the time to think about saving for your long-term future – but more to the point.
Just do it.