You wouldn’t necessarily know it, but financial institutions often employ consultants to ensure that their communications are written in plain English. "Our communications," they frequently boast, "are foolproof" but the reality is often far from that.
Take this example from a letter I was recently sent by one such company: "Current underwriting criteria must be applied to assess your occupation, which results in an amendment to the occupational classification from the Unemployed definition of disability to class 3, with the revised definition of disability."
Which, in a single sentence, goes a long way towards explaining why huge swathes of the population find personal finance confusing.
In fact, everything to do with money comes down to five basic concepts: saving, investment, borrowing, insurance and day-to-day money management. "Ah-ha," I am sure you are saying. "I know all about these subjects. I can skip the rest of this article."
Yes and no.
What follows is a quick refresher course on each of these topics, a simple explanation followed by key tips. Why should you bother to read it? Because these five subjects are essential to every financial product and every financial decision you will ever make.
In the first of 2 parts, I will tackle two - savings and investments.
Savings made simple
The idea of not spending some of your money now, so that you can use it later, is called "saving". Okay, okay, I know you know, but it has to be said.
Saving comes naturally to some people and is extremely difficult for others. Like any skill, the best way to learn it is to practice. I don’t suppose you will find a self-respecting personal finance pundit who would recommend anything other than saving part of any money you receive.
To what end? So that you have cash on hand for emergencies, sudden loss of income, major purchases and irregular expenses. You will also need savings if you want to buy property.
How big should your savings pot be? Opinions differ. I would say enough to support yourself and your dependents for between three and six months. Where should you keep your savings? Where you can get your hands on them quickly, for example a bank deposit account – a completely accessible demand account. Best demand account currently is 0.15% ( net 0.0975% after 35% DIRT tax ) from KBC Bank and Permanent TSB.
Investment made simple
Investments differ from savings in that they represent money you either don’t need in a hurry or, if you are a risk-taker, you don’t mind losing. All investment involves risk. This is because:
- either you are giving your money to someone else to make money for you, and so there is always the chance they will turn out to be crooks or idiots (or both)
- or you are buying something that may be worth less when you come to sell it.
However, there are lots of investments that aren’t really risky.
Normally, the more money you stand to make from the money you invest, the higher the risk.
You will often hear people describe investment as being a case of "risk versus reward". What they mean by this is how much risk they want to take for what sort of reward. The key things to remember about investment are that:
- You should diversify. In other words, don’t keep all your eggs in one basket but make sure you are spreading the risk by investing in different ways.
- Over the long term, the highest returns come from the stock market. Currently we are in a Bull Market – 2nd longest in its history, 10 years, which has grown since March 2009 over 200%! But when will the next "correction" come? For the Bull to become a Bear, the market has to drop 20%... The current global issues – China tariffs, Brexit, Presidents Trump and Kim Jong Un - still seem to be a "blip" rather than the beginning of the end. The market has grown over 9% since January this year….
- The majority of your money, say 70% for most people, should be in relatively low-risk investments, such as state savings, deposit accounts, pensions and bonds (a posh word for government and public company IOUs). Don’t be tempted by so-called alternative investments, such as racehorses, derivatives, CDs (Contracts for Difference), a map indicating the precise location of the Lost Ark of the Covenant etc. unless you can afford to tie up and even lose your cash. To move out of the comfort zone of guaranteed deposit accounts (remember the Deposit Protection Scheme guarantees every depositor up to €100,000 per person per institution while State Savings are considered sovereign debt and therefore even safer) to justify your decision to invest in alternative options such as stock market, commodities, absolute funds, property, art, even rock ‘n roll memorabilia, you would want to achieve at least 5% + to warrant the switch.
- The vast majority of investment vehicles, such as unit trusts, for instance, come with hefty fees and charges. That doesn’t mean they aren’t a good idea but don’t allow yourself to get ripped off.
Next week, I shall bring you on a journey that will simplify three more areas of personal finance – borrowings, insurance and money management. Read more then.