I am constantly asked by parents about what words of wisdom they should pass on to their children in terms of financial life goals. Children rarely assume responsibility for their own finances until after their third-level education. That means usually starting with the first job and seizing control of their financial destiny.
It is at this time they need to set solid financial goals. To keep it simple, John Lowe of Money Doctors gives his top five goals for graduates and would-be adults:
1. Create a budget
This is not a scary exercise and can be a liberating pleasure knowing you can control your financial future. Budgeting isn't a one-time wonder but should be done every year: Regular reviews ensure you keep your finances in check and keep on track with your goals.
Before starting your budget, examine all your financial documents and commitments. You can even track your current spending habits on a daily basis with the free Money Doctor app (through App Store or Play Store) or Money Lover. Once you know how much is going out it is easy to work out how much you have leftover or not at the end of each month.
Exceeding expenditure means you have to cut costs, earn more or prioritise what's important. You might just have to forego that summer holiday next year. Once completed, you can then set long-term financial goals and review them at the end of each year. The main goal? Live within the budget guidelines you set for yourself.
2. Save up an emergency fund
You should have totally accessible cash account - a Rainy Day Fund (RDF) - for three very good reasons:
- Emergencies – your car engine blows up.
- Sudden loss of income – you are put on a 3 day week.
- Investment opportunity – buying an Aladdin’s lamp for half nothing.
A fully-funded emergency fund should be between 3 and 6 months of your net annual income. You should always have a certain minimum (c. €1,000) before you repay any debt and never use savings to regularly supplement debt repayments (you will eventually run out).
Also, a regular (monthly) saver account should be set up that could provide for holidays, Christmas presents, etc. Best is EBS saving between €100 & €1,000 per month for 12 months. Interest rate is 1.25% gross and you can only make onewithdrawal per annum but a good discipline.
3. Invest in yourself
Depending on your career and life goals, you could invest in yourself by going back to third level and get a new degree or finish one up, being entrepreneurial and starting your own business, or just getting a new job.
Other ways to invest in yourself include building skills (public speaking courses, start a sport - golf/tennis, play an instrument), joining networking groups (especially online) and doing something of a charitable nature with no expectation of any reward.
4. Build credit
We have not followed the US system of credit scoring yet but it is important we understand our credit.
Irish Credit Bureau (www.icb.ie) and the Central Credit Register (www.centralcreditregister.ie) records every financial transaction, so one missed payment and it’s there for 5 years, a judgment. If you build a solid foundation of paying your rent on time every month, keeping current accounts in order, regularly saving, you will give prospective creditors ample evidence of your financial ability and integrity.
5. Be financially responsible
Paying your bills on time, living within your means, and reducing debt should all be a top priority when handling your finances. If you are in a hole now and trying to climb out of debt from financial irresponsibility, just try to do better each month. As they say, the first thing you have to do when in a hole is to stop digging.
Financial responsibility affects every aspect of your life; if you are not taking care of your money, then chances are you are suffering in other areas such as your relationships and/or career. The ultimate goal to go for is making your finances a priority and getting them in order.