First, tackle your junk debt...then you can make progress

high earners’ or ‘We’re good savers’ or ‘We have significant amount of money in the bank’ or ‘We’ve accumulated large amounts of wealth,’ it tells me nothing about how much money they actually have.

You see, wealth, savings and earnings are all personal things. I have clients telling me they have accumulated large amounts of money and when I ask how much they’ll tell me they have €1,000. That is a large amount of money to them. But €1,000 is not a large amount of money to the person who answers the same question with ‘I have €12million in liquid assets.’

Your ‘loaded’ is another man’s broke and, guess what, that’s perfectly fine. Most people, when brought back to basics, back to their core wants and needs, will talk about spending time with the people they love.

Comparing yourself to others is a pointless exercise because all you can compare are the physical things. The things you can see. You have no idea if that person is actually happy. The fact that they’re driving a brand-spanking-new car tells you nothing of their happiness. In fact, the brand-new car is more likely a sign of Parkinson’s law than it is of true wealth or happiness.

The car finance industry, and specifically personal contract plans (PCPs), are an unregulated activity. We’ll talk more about PCPs later but for now – did you know that approximately 80 per cent of new cars are sold with some sort of loan on them? So next time you see a neighbour or friend or some bloke down the GAA club in a new car, don’t think to yourself, ‘I like the new car.’ Instead think, ‘I like the new loan,’ because you’re probably spot on with the latter observation.

Wealth is relative. Remember most of us could probably reach financial independence today if we sold everything we owned and moved to outer Mongolia and lived in a shack. But there are things, people and places we feel associated with and therefore something else drives us to keep going as we are.

RULE 2: SPEND LESS THAN YOU EARN

I DELIVER a programme in secondand third-level schools and colleges and when I tell a 16-yearold to ‘spend less than you earn’ I’m often met with the response ‘But that’s stupid, sir. How could you spend more than you earn?’ Yet I would suggest that within ten years that young man, who thinks I am stupid, will have a car loan, personal loan, credit card or some other form of crappy debt and will indeed be spending more than he earns.

Nobody sees borrowing money as paying for today by robbing from the future. They see it as ‘I need this now’ or, if they’re more honest, ‘I want this now.’ We live in a society where we have access to credit, and we like to avail of it. It is a treadmill and I would suggest that it is almost impossible, regardless of how much you earn, to create real wealth without first tackling your crappy debt. But spending less than you earn goes beyond just avoiding debt. It is also about creating wealth. It is about ensuring that some of what you earn today is allocated to the future.

RULE 3: THE ROCKS AND THE SAND

A COLLEGE lecturer started his lecture one day with a large glass container, some rocks and some sand. He then asked students to come up and attempt to fit the rocks and the sand into the container. Some students started by putting the sand into the container first, trying to squeeze the rocks in on top, but they wouldn’t fit.

The lecturer then asked everyone to sit down. He told the students to imagine that the rocks were mortgage repayments, car loans, groceries and other essentials. The sand, however, was things like socialising, takeaway coffees, dinners out and other discretionary items. As he spoke, the lecturer started placing the rocks in the glass container, followed by the sand. Not all the sand would fit in, but that was OK. Sand is discretionary spending. It will fill the gaps the rocks didn’t fill but you know when to stop, when the budget is full.

You see, the glass container represents your monthly budget, the total income you have for the month. The rocks and the sand are the things you need and the things you want to do in the month. Most people do the stuff they want to do first and then get hit during the month with bills and essentials. And then they find there’s no space left in their budget.

Doing it the other way around, with the rocks first, means you still have the same amount of money, but it also means you know when to stop. You know when all the money runs out. You won’t overrun the budget creating problems for the future.

When you start doing this, start simple, by just making the rocks the things that come out by direct debit; your loan repayments, for example, and other essentials like the electricity bill. But real financial planning, creating real wealth, comes when your rocks every month start to have headings like saving for back to school, Christmas, a holiday, changing the car in three years’ time, the kids’ college and even retirement.

Some of this stuff you can work out yourself. For example, most parents who have kids already in school know how much it costs to send their child back to school. If you don’t have a child in school, I would suggest you are probably surrounded by parents and teachers who would be more than willing to tell you all about it if you asked. Find out how much it will cost. Let’s say it is going to cost €400 and you will need that money in four months’ time. Then you need to create a ‘school rock’ of €100 per month. If you don’t, then in four months you will either be dipping into savings, if you have them, or like 11 per cent of primary school parents and 21 per cent of secondary school parents, according to a Barnardo’s survey, you will have to borrow to get your child back to school.

TOP TIP: If you do end up having to borrow for something like school, promise yourself this is the last time it’s going to happen. If you take the loan over 12 months, guess what, when the loan finishes it will be back to school time again and you won’t have been in a position to save anything because you were paying back a loan! Try and get the loan over six or even nine months and, when it is finished, diverting the loan repayments into savings specifically for back to school. You may not break the cycle next year, but each year reduce the term of the loan until eventually you do. This goes for everything that is cyclical like school or Christmas or holidays.

The costs of back to school, holidays and Christmas can be worked out relatively easily.

They are usually the amount of money you need divided by the number of months you have until they happen. But other things that need to become your rocks may require a little more calculation. How much should you put into your pension? How much should you be investing in the college fund? When you start to invest in the long term, the calculations become a little more complex, but they are not to

be feared. This is because it is not just a straight-line calculation – you can start to take advantage of compound interest, and take on a little more risk to get better returns.

But, needless to say, shortterm goals require short-term vehicles while long-term goals require long-term vehicles.

RULE 4: LIFE ISN’T FULL OF SURPRISES

PEOPLE often talk about the fact that they can’t budget or create spending rules because of the fact that every time they do life happens and the budget goes out the window. But actually when you start to talk to them about what ‘life’ did to them, most things are predictable and can therefore be budgeted for. Christmas costs money and happens every year. Plan for it. So too does back to school and going on holiday. These are the easy things to identify.

Other things that are identifiable as rocks are the car breaking down. Or the fact that the average household spends €120 per annum on repair or replacement of appliances.

Maintenance in the house is also something that you can, if you look, see coming. You don’t walk outside one day and realise the house needs to be painted. You can also prepare for situations: if you are of a certain age, expect to be invited to weddings. A little older? There’ll be christenings, communions, confirmations. It goes on.

These things are only a surprise if you have not planned for them, but with a little thought and preparation, they won’t become catastrophes.

RULE 5: PAY YOURSELF FIRST

BACK in the 1960s, Ireland followed the US and introduced Pay As You Earn, or PAYE. PAYE is literally that – you pay your taxes as you earn, at the source.

When we get paid, our taxes get taken out of our payslips straight away. When you look at your pay-slip usually the left-hand column describes how much you get paid and the right-hand column describes how much is being taken off you in taxes and other deductions.

The only way to take money out of the left-hand column and pay yourself first (before you pay your taxes) is through putting money into a pension. We will talk more about this later.

RULE 6: DON’T DO THIS FOR YOURSELF

IF you don’t think that taking money out regularly and putting it away is worth doing, think about this for a minute. The average person saves in excess of €300,000 during their working life, yet the average pension pot at retirement is about €100,000. How can the average person save over €300,000 yet their pension pots are one-third the size of that and nobody has €300,000+ to show for it?

That’s because we save this money for somebody else – the banks. Our average mortgage is about €200,000. The repayments on a €200,000 loan over 25 years at 3.5 per cent are €1,001 per month, so over 25 years you would make total repayments of €300,300 for the bank. In other words, you can save over €300,000 in your working life, if you save it for somebody else. The thing about the mortgage is we see it as other people’s money. It is one of our rocks because we see it as a commitment and would often go without to ensure it gets paid. It also happens regularly and automatically, which are all attributes we associate with being a good saver.

Interestingly, in a heterosexual couple, the woman is generally better with money. I don’t actually have figures or stats on same-sex relationships, but you could imagine one person will always be better with money than the other! The reason, it is believed, is that on average women are better with money than men because when it comes to the family finances women don’t see the ‘family’ money as ‘their’ money. Women believe the money belongs to the family and so they mind it better.

This is the same when it comes to saving over €300,000 for a bank during your working life. We do it because we see it as somebody else’s money and not ours and therefore we do it. If only we treated ourselves as well as we treat our banks. But this looking after others goes even deeper. Right now, fewer than 50 per cent of Irish working people are paying into pensions. Strip out public sector workers and that number drops to 1 in 3 people paying into a pension.

There may be lots of reasons for this but one I find really interesting is the idea that we don’t believe our older self to be us. There was some research carried out where brain activity was being measured. When the subject thought about themselves a certain part of their brain lit up. When they thought about somebody else a different part of the brain lit up. But when they thought about themselves 20, 30 or 40 years from now, the part of the brain used to think about other people lit up. In other words, our brain thinks that our future self is somebody else. Why would you decide not to go out this weekend, or go on holiday this year or change the car, because you want to put money away for somebody else to enjoy 30 years from now?

Perhaps you’re reading this and thinking, ‘Yeah but I’m not married so I don’t have “family” money. I get the whole saving for the bank thing but I have a mortgage so I have no option and I understand that I don’t think I am who I will be in 20+ years, but it is just not motivating enough to get me going.’ Maybe this will help you. If you have kids now or if some day you hope to, one thing is sure to happen and that is that you will get old and they will grow up. According to recent research carried out for Bank of Ireland by Red C, 51 per cent of 25–45-year-olds expect their parents to help them get on the property ladder. If you have two kids, one of them is going to expect help from you to get them on the property ladder. So don’t get your finances in order for yourself. Do it for future you, when you become Bank of Mam and Dad.

RULE 7: NEVER WIPE OUT YOUR SAVINGS

SAVINGS are hard got. We will discuss this later but while it’s difficult to build up a lump of cash for something big such as buying a house or even a holiday, there is nothing more demotivating than wiping it all out in one go. So many of our clients find that, usually three or four years after they have moved into their first home, they’re still making good money, were once really good at saving and now struggle to save.

Often this can be put down to the fact that they saved really hard to get their first house. They had their goal and they achieved it. Then

they used all their savings in one go to pay the deposit and for all the other things that come with buying a house. Their savings were gone; they were tight for cash and often they start to accumulate credit-card debt and overdrafts. The cycle starts. They had planned for the couch and the cooker and all that big stuff but nobody told them about the cost of the first supermarket shop, or the cost of toilet roll holders, or the fact that the car is going to break down six weeks after they move in.

But even if they haven’t accumulated debt they still haven’t got back on the savings wagon. Why? This is because it was so hard to do it in the first place. It took sacrifice and then even though they had the house, they had no bank balance to show for all that work. It can often feel like somebody else, i.e. the builder, got the benefit of your savings. You made all the sacrifice and somebody else got all the gain.

Often people find it difficult to motivate themselves again. My suggestions is, other than in exceptional circumstances, never spend more than half your savings. This means once you spend half there is still a reasonable amount to get you going again. Exceptional expenses include, for example, buying a house – but even then I would try to keep it that you are left with a decent pot after you pay for everything. If you need to spend more than half your savings then you don’t have enough savings and shouldn’t be spending the money anyway. RULE 8: DON’T SAVE YOUR CREDIT CARD DETAILS

WE’VE talked about consciousness. Saving your credit card details is one of the marketing departments’ strongest tools; it’s why ‘hic and click’ exists. If you don’t save your credit card details at least you have to get up from the computer or sofa to go get the card to type in the details.

I was explaining this during a seminar to a couple of hundred employees in a large multinational. When I saw a woman at the front frowning, I asked her what was wrong. She said, ‘Sure that’s silly – it’s too much hassle to go get the card, I prefer to save it.’ I asked her whether she saved it for all her sites, to which she replied, ‘Oh no, only the ones I use all the time.’ I think this proves my point. Put up some barriers during online shopping. Force yourself to get off the couch to buy that dress. RULE 9: THE 72-HOUR RULE

IF you are definitely going to buy, whether it’s online or in a physical shop, do yourself one last favour. Wait 72 hours. By waiting 72 hours all the marketing departments’ big guns fade away and the decision becomes much closer to what you actually want versus what the marketing departments want. If you don’t make an effort 72 hours later to either collect it or go back online, don’t just buy it the next time you come across it a month later. If it didn’t mean enough to you to go back 72 hours later, it’s not something you need and most likely isn’t even something you want. TOP TIP: Stick it in the online basket and come back 72 hours later. If you’re in a physical shop, ask them to hold it for a day or two. RULE 10: THINK OF MONEY IN TERMS OF TIME

WHEN I am in with students delivering these programmes, one of the things they seem to latch on to is the idea of treating money as time.

Imagine you’re paid €10 per hour. Imagine you see a lovely pair of shoes for €80 that you really want. Instead of thinking about the shoes as a lovely pair of shoes, or thinking of them as a quick tap of your card, or thinking of them as a €50, €10 and a €20 in notes, I want you to think of the shoes as an eight-hour shift at work. Think about getting up in the morning, dragging yourself out of bed, washing, dressing, feeding yourself before getting to work. Working all day and then getting yourself home again. Are the shoes worth that much of your time? Really?

In theory, money is limitless. It may not be easy, but we all have ways of making more money. What is not limitless is time. Thinking of items like shoes in terms of time instead of money changes your perspective. You can never get back the time spent at work. You can, however, get €80 back.

Working out how much you get paid per hour is easy. Don’t get too caught in the minute details. The easiest way is to look at your payslip. Look at the bottom right hand corner, where it says ‘net pay’ and divide it by the number of hours you worked during that pay period. This will give you your take-home pay per hour. For example, if your take-home pay is €800 and you worked 40 hours for that, it means you get paid €20 per hour after tax. Working this out once starts to put purchases in perspective. You start to appreciate your own time more.

This can get scary when you look at bigger stuff. I remember at one point figuring out for a guy who was earning €25,000 per annum that he had worked 18 months out of the last five years just to pay for his smoking habit. Imagine getting out of bed every day for 18 months to pay for smokes. Sometimes we also need to think about what value we add to other people, people like our bosses. An interesting exercise I used to do when I wasn’t working for myself was to look at the top left-hand corner of my payslip where the gross pay is and then see what my beforetax wages were. I would then divide this by the number of days I worked that month. This would give a rough idea of the cost I was to my boss, on a daily basis. I would think to myself driving home, ‘Did I add that much value to the business today?’ If not, I was costing the business money. When you are an income-generating asset of a business and you cost it money, the road is going to be short.

You can do this very easily for yourself. For the purposes of keeping this simple let’s ignore other benefits and things like payrelated social insurance (PRSI). Let’s say for every €10,000 of salary you have per year you cost the company about €40 per day. So, if you are on €20,000 a year, you cost the company about €80 per day. If you are on €50,000, you cost the company about €200 per day. So next time you’re making your way home from work, think to yourself: did I cost the business money today or did I make the business money today? GOLDEN RULE: GET BACK UP AGAIN

YOU’RE going to fail. In fact, if you do this right you are going to fail over and over and over again. The measure of the success or failure of this change you are about to bring to your finances is not how many times you fail but how many times you successfully start again.

Remember life happens, things go wrong. But things also go right: you get invited to a wedding, you become pregnant. When you’re not planning your money properly these things can be seen as a failure of your money management. But the more you get into this the more you find that the things that were once surprises are no longer surprises. Or maybe they are, like the pregnancy one, but you are now able to cope with them so much better.

I recently asked a good pal of mine, Shane, how he got on in his hurling match. He said, ‘We didn’t lose,’ and I said, ‘So you won,’ and he said, ‘There’s no win or lose – there’s only win or learn.’ He’s a genius, our Shane, but I suspect he robbed that from somewhere. But it does prove a point. The more times things go wrong, provided you get back up again, the more you will learn. Only you can fix your finances, only you can get the most out of your money and only you can decide the best way. .nHow to Be Good with Money by Eoin McGee. Published by Gill Books, €14.99, available now in bookshops and online.