Save, save, save: it's not how much you earn that counts

As with many important life skills such as developing and maintaining successful relationships or having and raising children, money management is not taught at school. For many of us what follows is a consequence of personality, cultural background and habits formed early in life.

A sensible financial plan is to limit regular monthly expenditures to around 70 percent of net income, with the remaining 30 percent split between 20 percent into a savings account to cover one-off expenditures that occur during the year (such as car, holiday or insurance payments) and 10 percent invested into real assets (shares in companies, commodities, property).

The key message is that going over that ceiling of around 70 percent of net earnings, sooner or later we are likely to be financing our lifestyles with bank money rather than our own. Once we start paying interest rather than earning interest on some of the money we spend we’re on a slippery slope towards restricted future expenditure patterns.

Break bad habits

It’s been said that bad habits are easy to acquire and hard to live with, whereas good habits are the exact opposite. Spending what you have available is an easy habit to acquire and developing the habit of regular saving can be hard.

The reality is that whether net monthly income is €500, €5,000 or €15,000, most of us can find ways to spend this entire amount and more.

Back in the 1980s I remember a client who had recently graduated from university with debts of several thousand pounds. His explanation was that it was tough to live on two thousand a year as a student. As an articled clerk on sixteen thousand pounds a year, he was not able to reduce these debts and felt that the time to think about this would be when he became a fully qualified lawyer. When this time came, his income was thirty-four thousand per annum. However, by then he had a family and needed money to buy a family home.

The net result was that 10 years after graduating rather than reducing or clearing his student debts, he actually owed even more and had a mortgage loan on top.

Think to the future

Our lifestyle is usually only limited by our income. It is natural to want to live as well as we can afford, however, it is also true that no matter how much income we have, there will always be a limit to how much we can spend. Even Richard Branson is limited to one Caribbean island!

Knowing this constraint, we can then look more objectively at the difference restricting our spending to 90 percent of our earnings makes. An extra 10 percent doesn’t make a dramatic difference to our lifestyle, whereas saving 10 percent of our earnings can make a dramatic difference to our future choices.

If you remain unconvinced of the need to save regardless of how much or how little you earn, I would strongly recommend acquiring and reading a copy of George Clason’s The Richest Man in Babylon. This is a very short book which can be read in an evening and is available on the internet for around a fiver.

A central tenet of this book is that it is not how much you earn, it’s how much you retain that counts.