Our priorities, goals and needs change constantly as we move through our lives. Lifestyle choices like holidays and cars dominate our thinking early on, then more serious imperatives like housing and childcare come along. After that, we have education, healthcare and all the things that go with growing families and expanding responsibilities. And all the while we’ve got to keep an eye on the long-term prize of a comfortable retirement.
Juggling these competing needs on a finite budget would stretch the capacity of even an inveterate optimist like Mr Micawber, but the experts agree that the secret lies in starting early, making a plan and sticking to it.
“The first piece of advice is to start as soon as possible,” says Dara O’Brien of KBC. “This is for two reasons: it helps create a good habit for the future and the earlier you start makes small amounts turn into large amounts over time. When you are trying to accumulate wealth for the future, it’s about the time you do it for rather than the time when you do it.”
In other words, the longer you have your money invested the more it will grow in value.
The other virtue in starting early is the mindset it helps foster. “You begin to see savings as not some sort of luxury but as part of the overall financial pie,” says O’Brien. “It should be an integral piece of pie and seen as important as your mortgage or rent. Your savings should be be divided into different slices. The short-term slice could be for college fees and bank of mum and dad stuff to help children out. The longer term is for pensions and so on.”
Investec retirement and financial planning manager Brian Kingston emphasises the need to draw up a budget. "It's easy to say you should do everything but you only have a limited amount of money," he says. "You need to put it down on paper. Short-term needs are most important. Longer-term needs like pensions can be put off a bit. Unfortunately, we are very good in Ireland at putting things on the long finger. If you started tomorrow and got a receipt for everything you spent money on for the next month you would be very surprised at what you'd find. People spend on things they don't even know about."
The purpose of the exercise is to show people how they spend their money. “If you turn it on its head, a couple aged 30 earning €75,000 a year which increases at 3 per cent per annum will earn €4.7 million by the time they are 65. That sounds a lot, but they have to buy a house and pay for everything during that time,” he adds. “That’s why budgeting is so important.”
Getting the basics right
Getting the basics right is essential, according to Davy financial planning director Brian Walsh. "We have come through a recession where people barely had enough to meet their day-to-day needs," he says. "Now people have to look at their needs. They need to have a rainy-day fund and a pension. Then they can look at the things they want to do like buy a new car and so on.
“The earlier you start thinking about these things the better,” he adds. “If you are in your 20s and saving, your chance of getting a deposit for a house is quite high. If you are only starting in your 30s you will struggle. A cash-flow statement will show you what’s coming in and what’s going out and allow you to plan where the spare cash goes. If you don’t plan for that, the money will find a home.”
Mercer head of financial planning Trevor Booth agrees it can be difficult to prioritise at an early stage. "That's a challenge everyone struggles with," he says. "You need to plan, set out your goals, what you want to achieve, and then set out a plan to reach those objectives. After that, you should prioritise those objectives."
The near-term goals get higher priorities – home purchase, children’s education, and so on. Longer-term goals get a lower priority. After that, it’s a question of deciding what sacrifices you have to make to reach those goals.
“You need to have a strategy for each priority,” Booth adds. “Making a start on each of them may mean starting small. The key starting point is a good budget plan.”
While starting your pension planning early is best, people should not be deterred if they have allowed it slip while they looked after other pressing needs. "The old cliché is that the second best time to start a pension is today," says Investec retirement and financial planning specialist Andrew Fahy. "It is important to get good independent advice on this. People unfortunately get bamboozled about the rules and products and the industry is at least partly to blame for this. It's a tax-efficient savings product, that's all they really are.
“If you are in your 40s or 50s, you still have 10, 15 or 20 years to go to retirement and there is still quite a lot that can be done. It is never too late to start. You have to have a sensible investment strategy though. It’s not fire and forget. It’s about having a plan, acting on it, and getting help to put it together. If somebody is saving for retirement outside of a pension structure, it’s bonkers.”