Whether you think you know everything or very little, if you can’t give me the numbers to the following 5 areas, then you had better get working on finding out what the answers are.
And the first number is one that you would think everyone would know but you really would be surprised how many people don’t: 1. Your Monthly Income I asked a client of mine last week, what her annual salary was? And she looked back at me with a blank expression on her face. She admitted to me that she hasn’t opened a payslip in 2 years. She could tell me by looking up her bank statements what was lodged into her account each month but had no idea how that figure came about. She had no idea about how much tax she pays each month and by not looking at her payslip she couldn’t tell me how much was going into her pension – and when we looked at her payslip, nothing in fact was going into her pension, ZERO. She had assumed that something was going in and she was with her present employer for the past 4 years and by not taking notice of her payslip and what she was being paid or what was going into her pension (nothing in her case) she missed out on FREE MONEY from her employer who would have put c. €37,444 into her pension had she instructed them to and had she joined the company scheme. Just take a little bit more notice of what your gross and net income is. Familiarise yourself with your payslip – are you receiving the correct tax credits, what is your monthly cut off point are all questions you need to get the answers to and if you don’t know, ask your employer or better still ask them to get a presentation carried out for you and everyone else who mightn’t know either and I can tell you that will be probably 99% of the workforce. Income tax, prsi, usc probably account for the biggest % that is taken from your monthly pay cheque so get familiar with it and make sure you are not paying any more than you need to. 2. Net Worth So, what are you worth right now? If you subtracted everything you have that has any monetary value from the total amount you owe, what number would that be? Would it be a positive number of a negative one? Knowing what your net worth is, isn’t just for wealthy people, everybody should know what their number is. This exercise provides a great snapshot at a point in your life as to what your financial balance sheet looks like. If it’s positive then great but how positive should it be? You know what my formulae for working out what it should be, is: Your age x gross annual salary / 10 If you are below this number or you are starting from a negative position then fine, no issues, now you have a number that you can aspire to. Diagnose or get someone to do it for you where you are going wrong and then create a plan that will get you into a positive number. And having that formulae is a great tool to benchmark your progress against each year, you can create a timeline that in 5 years’ time your net worth should be X and if I do the following i.e. investment more, pay down debt, get a second source of income, increase your main source of income etc. that you will achieve that number. 3. Monthly Outgoings This is one that very few people know and their guess is that whatever they earn is the amount they spend! You have got to get a grip on your monthly expenses. And if you don’t know what it is, then please write down what you spend your money on for 1 month in a diary, an excel spreadsheet or better still on My|Money’s spending planner. This is a great exercise it really is, a pain I know but at the end of the month it will give you great clarity as to where your money is going each month. And what this exercise is all about is awareness, because only when you know what you are up against can you put a plan in place to improve your monthly cash flow. It really is like losing weight – what is the first thing you do when you want to lose weight? You weight yourself – that is your starting point, your anchor number that you can measure your progress against. The same thing applies with your monthly cash flow, step on the scales by knowing how much you spend each month and what you are spending it on. 4. Your debt to income ratio While your net worth looks at how much more or less you have when you look at your assets and liabilities, your debt to income ratio is the one that will tell you how much of your monthly income is going towards servicing monthly debt. Any idea what your number is? Your starting point is to figure out how much you are paying each month on your mortgage, car loan, visa, personal loan and so on. Divide the sum total of theses repayments against your net monthly income and that is your debt to income ratio number. And you don’t want it to be any more than 30%, you really don’t. I carried out this exercise with someone recently and their debt to income ratio number was 40.27% - it shocked her that for every €100 she earned, €40 was going to repay debt and €22 of that was only going towards servicing interest payments. So, we did something about it and with a bit of rescheduling of debt repayments/getting lower interest rates and using some of her existing savings to pay down debt, her number is now 26.25%. 5. Your investment returns You might know the amount you have on deposit, but knowing what interest rate you are earning is another thing. I want you to actually know two numbers here and they are (a) the interest rate and (b) the amount of interest you will earn in 12 months. Are you making the most and best use of your money? Could it be earning more elsewhere? Again, I met someone recently and when I asked them how much they have on deposit, the answer was €40,000. Good start, next question, what interest rate is this amount earning? Mmmm not quite sure, 2% I think (the rate was in fact…….wait for it……….0.05%) So, how much interest did you earn last year? Again not quite sure, about €200 I think. The amount of interest he earned was ZERO, in fact it was costing him money to have it on deposit when you factor in DIRT and inflation. Whilst that was bad enough, it was the opportunity he was losing on by not investing in better yielding accounts. Again it was all about awareness, he found out his number investment return number each year was -€38 and he made it become +€708. It’s easy to get overwhelmed when it comes to money, I get that. People also lack the time, energy and interest in getting to know numbers, terms and conditions of accounts etc. But if you do take the time out and get to know just a few important numbers and how they can impact your financial life, you will realise that people who are in control of their financial life are those who are in the know.
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September 2015
Liam CrokeManaging Director of Harmonics Financial Categories |