By Shahrukh Irfan CA, CTA, Module Leader – PG programmes, The University of Law Business School
Want to retire with a million quid without having to earn more? With a little self-discipline you can set yourself up for financial freedom.
Money can’t buy happiness, but neither can poverty (Leo Rosten)
Generally, when we talk about wealth management, we think about millions and billions. Subconsciously not only do we equate wealth with money, but we equate wealth with a lot of money. Nothing can be farther from the truth as wealth is not just about money. There are studies that have shown that once your income reaches a certain level ($75,000 in the US) then the additional happiness we derive from further income is greatly diminished. So, to be happy, we don’t need to earn millions. We need just enough money that allows us to enjoy our lives, have wonderful experiences and generally be happy.
It is not how much money you make, but how much money you keep (Robert Kiyosaki)
The basic principle of wealth management is that we need to be able to save and then invest those savings wisely. So, the first question is how do we save? Saving is simply the difference between our income and expense. Usually, it is not easy to increase one’s income (at least in the short run) but we have relatively more control over our expenditures. If we can reduce our expenditure, we can increase our savings. Simple, right? We will elaborate on the idea of ‘expense control’ which can help you increase your savings without the unpleasantness of cutting expenses.
To spend, or not to spend, that is the question?
Let us consider a simple example. Say you are 25 years old and each day at the office, your lunch costs you £10, coffee from Starbucks is £4 and each week you dine out spending £30. If you go to office 45 weeks a year and you do this for twenty years, then by the time you are 45 you would have spent £2,250 on lunch during the year (£45,000 by the time you are 45). Here is the fun part … If instead, you invested this £2,250 in a FTSE 100 tracker fund (FTSE 100 has yielded approximately 7.75% returns since its start in 1984 according to IG) each year, then by the time you are 45, you will have £100,157 just by bringing lunch from home.
Continuing with this example, stopping coffee from Starbucks will save £40,062 and not eating out will save £69,442, meaning a total saving of £209,661 with virtually little to no effort. And we are not considering the Uber rides, drinks at the bar, and Netflix, Disney plus and Sky subscriptions among other expenses which can be easily reduced.
Many will argue that it is impossible to never incur these expenses and they are right. However, the point is not to stop spending on these altogether but just to pick which expenses yield the most happiness/satisfaction to you and then spending on those while reducing spending on other activities. So, if you like your Starbucks, then you can choose this expense and reduce spending on less important expenses. Even if you halve your expenditure on these items, you will still be able to save £104,830. If you make all these savings until you retire (until the age of 65) you will have saved £1,142,626. Yes, you read it right … £1,142,626
A bit of self-discipline goes a long way towards building your wealth. Many of us think that in order to get rich, we need to earn big but the reality is that we can build our wealth by exercising self-control when spending. Ask yourself a simple question, ‘do I “have to” spend on this item’?
Nothing is certain but death and taxes! (Benjamin Franklin)
If you think that rather than cutting expenditure, you will earn more to enhance your savings then be prepared to earn a lot more. Reason? Taxation. Let’s say you are a basic UK rate taxpayer (i.e. your marginal tax rate is 20%). If you want to increase your income to save £4,710 per annum (the equivalent of coffee, lunch and dining out per our example) then you don’t need to increase your income by only £4,710, you will need to increase your income by £7,056 (because of 20% income tax and 13.25% class 1 primary NIC). If you are a higher rate taxpayer (i.e. your marginal tax rate is 40%) then you will need to earn £8,300. So, you can clearly see it is much easier to increase savings by controlling expenditure rather than trying to increase income (it will be ideal though if you can control expenditure and increase income simultaneously).
Some may say, well I don’t drink Starbucks, I work from home, and I don’t go to fancy restaurants. I am careful with my spending yet I am unable to save. So how does this article help me? The answer is simple. You can ‘save tomorrow’. This means that next year, when your salary increases (or you get a bonus at the end of the year), start saving that increase. Do not let your current expenses increase with increasing income. This is not difficult to do as your expenditure is already set at your current income and the increment can straight away go to your savings pot. Even if you are unable to save the entire increment, try to save some of it. Start small and soon your growing wealth will encourage you to save more.
