herald

Monday 1 September 2014

10 steps to financial freedom

A FOOL and his money, as the saying goes, are soon parted, yet fools aren't the only ones afflicted in this way. Many intelligent people also find themselves with financial problems. This is because your IQ has absolutely nothing to do with how well you manage your money.

What is considerably more relevant is your attitude to the stuff and your timing. If you want to survive (and prosper) during the current economic recession you need to focus on your personal finances.

Remember, if you run a business, what holds for your personal finances, holds for your corporate finances, too.

Step 1: Get a plan

If you want to transform your finances, the first thing you need is a sound financial plan. Set short, medium and long-term goals. These might be 'pay off all my debts' or 'sort out my retirement'. You can't go forward until you know what you want to achieve.

Step 2: stop digging

You can't get out of a hole if you keep digging. If you have a financial problem -- such as debt -- then stop doing anything that might be making it worse.

Step 3: be patient

It is difficult to get rich quick, but very easy to do if you take it slowly. By the same token, you won't solve any financial problem by being in a hurry.

Step 4: work out a budget

Budgeting has nothing to do with self-denial -- it is simply about making a plan for how you will spend your money over a specific period. Start by working out your current position. Calculate your income and expenditure over a typical year (breaking it down month by month). Draw up a list of your assets and liabilities.

Step 5: waste will damage your wealth

For years, my children would roll their eyes when I went round the house switching off lights or complained when they were talking on the telephone for too long. Eventually, they were persuaded it was worthwhile when I offered them a percentage of any utility bill savings we could make. I reinforced the message by pointing out that everyone -- even Bill Gates -- only ever has a finite amount of income and that once you've spent it, you can't get it back. Now, more than ever, you need to cut out all waste.

Step 6 : shop well

No financial ill can befall anyone who shops carefully. Value for money means more than just the lowest price but can incorporate convenience, service, quality and speed of delivery. Don't be afraid to negotiate and rejoice in the fact that the silver lining to our country's woes is that there are some great deals to be had.

Step 7: cut your borrowing costs

There is a simple but effective formula for dealing with debt. If you can, consolidate all your debt into a single, less expensive loan and then pay it off as quickly as possible. If you can't, hustle all your lenders until they give you a better rate and always pay the most expensive debt off first. The rate of interest you pay makes a huge difference. Don't be complacent.

Step 8: aim for high returns, minimal risks

There are plenty of ways to make a high return on your investments without taking undue risk. The first secret is not to consider what the market is doing and the second is not to chop and change your mind. Over the medium to long-term the stock market has always produced greater profits than anything else. Investors who split their money between shares and bonds and achieve average returns do better than almost everyone else. Check out Exchange Traded Funds (ETFs) as the low cost way to invest. Don't, by the way, waste money on unnecessary management fees.

Step 9: Get protected at the right price

Review all your insurance. Have you got the cover you actually need? Could you switch providers and save? It is possible to make huge savings by reviewing your insurance (and other financial products) on a regular basis. For instance do you realise if you have quit smoking over 12 months, you could be entitled to a 50pc reduction in your life cover premiums?

Step 10 : be optimistic

The economy is cyclical. Everyone is talking gloom, gloom, gloom now but in due course it will become boom, boom, boom again and when it does, the canny will make a fortune. If you are entrepreneurial the recession is your friend. The costs of starting and running a business are lower in real terms than they have been for over a decade. Suppliers, desperate for sales, are offering great deals and if you are happy to buy second-hand equipment there are amazing bargains to be had. Rents are down, professional advisers are charging less and, crucially, there are plenty of skilled employees looking for work.

John Lowe is author of The Money Doctor 2013: Make Your Money Go Further (Gill & Macmillan, €14.50) and is MD of Providence Finance Services in Stillorgan. Email jlowe@moneydoctor.ie

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