Finances – Expenditure – money going out – part 2 of 2
In last week’s article, I introduced you to the Financial Hierarchy of Needs and I covered Basic Necessities and Safety & Security. It’s important to get these things sorted before addressing higher needs. This article looks at the remaining four expenditure types which include Accumulating Assets, Enhancing your Life, Financial Independence and ultimately, your Legacy.
One important thing to mention is that this model can apply to anyone – yes, including you – regardless of your level of wealth. The great thing is that it can help give your finances some perspective, and enable you to prioritise accordingly.
Once you have necessities and protection covered, it’s time to consider accumulating assets or growing your wealth.
In the UK, as in many other countries, we are a nation of homeowners and aspirant homeowners. In order to buy a house in the first place, most people will need a mortgage, and a significant deposit to even beconsidered for one. Saving for a deposit may be a common medium-term aim for many younger people today, with the average age of 30 for first-time buyers.
Furthermore, as a parent or grandparent, you may be called upon to help younger relatives get onto the property ladder.
Older people are more likely to own their house – the latest statistics show 76% of over 55s are homeowners. We could see a reduction of this in future as current homeowners may ultimately need to sell into order to finance the costs of care later in life. As an aside, Equity release is an alternative solution which allows the homeowner to maintain ownership while freeing up some capital – it’s a kind of reverse mortgage – but it doesn’t come cheap.
Ironically another way of increasing our overall assets or wealth is by paying down debt. This includes mortgages, personal or car loans or credit cards. Although, we hear often about the central base rates (e.g. the one set by the Bank of England), sadly not all effective interest rates are equal. Often the borrowing rates far exceed those we could hope to earn from saving or investing the same money.
The general advice is to pay off the debts with the highest interest rates first or even better consolidating them into one source at a lower rate e.g. add to mortgage or low interest credit card.
Often, after all the bills have been paid, saving for something in the future can seem like a fantasy.
According to The Money Charity, in Q4 2016, households saved a record low average of 3.3% of their post-tax income, compared to 6.5% the year before. This is Money reports the average savings held per family stands at £3,134, the lowest level since summer 2015 (£3,116). This statistic masks the huge disparity between the lowest income families (£95), and the highest income (£62,885).
Some people may be put off saving as they think it has to be big and they don’t have much spare money, and so ultimately end up saving nothing. The best thing about saving is that it can start small – the most important thing is to get started.
A great tip for saving is little and often – this has three advantages
– You are less likely to ‘miss’ small amounts
– It helps create a savings habit
– The impact of compound interest over time can be phenomenal
Here are a couple of simple ideas to assist:
– 1p saving challenge – cash
– Moneybox app – digital
There are various ways to save and I don’t plan to cover this in detail today, but money taken at source e.g. direct from your employer or via a standing order, can be useful. This then boils down to one decision versus being faced with a decision (and temptation) each month, which can sometimes be easier to avoid.
I also think it can be useful to link it to something that’s meaningful. This could include important life goals such as a wedding, a holiday, a house deposit, a training course or future financial security. It could also be time to start planning for your retirement. It’s about doing something positive for your future self.
As I mentioned above, having a specific goal can certainly help give you focus. This could include saving up enable you to do the things that bring joy into your life, like enjoying family activities and entertaining friends. Its also nice to enjoy a few luxuries, whatever these may mean to you. This could be anything from travel or buying a vacation home, to enjoying hobbies and drinking a nicer bottle of wine.
To get you thinking more about this, I have identified examples of different expenses that may fit into this ‘nice to have’ category. I’ve grouped these under the headings of leisure, entertainment and luxuries. This is not intended to be exhaustive.
- Gym membership, exercise classes, other sporting fixtures etc.
- Sporting equipment – whilst this often be hired or borrowed, its sometimes preferable to have your own.
- Other social club membership – bowls / golf etc
- Personal services – haircuts, massages etc.
- Restaurant meals
- TV subscription
- Cinema / theatre trips
- Social activities
- Going out
- Nice wines or spirits
- Clothes – quantity and quality
- Jewellery – including watches
- Enhanced quality food
As we are all unique, there are unlimited things that could fit into this category. The important thing about this level is enhancing your life. If something brings you joy or improves the quality of your life in some way, that is wonderful. If you are doing something to ‘keep up with the Jones’ then, maybe you should question this.
This is one that many aspire to, but it can be a hard one to attain. It ultimately means not having to worry about money.
Financial independence could signify different things to different people:
- – It could mean you are able to live on income from pensions, investments or passive income such as dividends, royalties and rental income
- – It could also signify a new-found independence, something associated with empowering women who were previously financially dependent on a partner
Whilst this often relates to the retirement phase of life, it could also mean the freedom to work how, when and where you like.
You can leave a legacy by making a difference in someone else’s life. e.g. making charitable donations to a cause you believe in, or helping your children or grandchildren to fund their education, buy a house or start a business.
I’ve mentioned before that it’s not possible to address the higher levels of the hierarchy without first addressing the lower levels. Of course, this isn’t strictly true. Anyone can make donations to charity or pass on some money to a loved one in need, or who they believe will benefit. Indeed, those with the lowest incomes often given away the highest proportion of it.
However, from a financial planning perspective, it makes more sense to ensure your own needs are taken care of first. From an ageing perspective, for example, we won’t know for sure if we will have saved enough for our pensions, or whether something we consider a nice to have (pamper) could develop into a necessity (nursing).
Congratulations for sticking with me until the end! The component parts and %s will be particular to our individual circumstances, but I hope you can appreciate the different types of expenditure and how this can assist in how we prioritise and plan, for today as well as for tomorrow.
Thank you for reading. For more interesting articles, visit my blog at www.agelifebalance.com to learn more.