The Freedom Kit: Your guide to financial wellness in 6 easy moves

Achieving true financial wellness, however, demands more engagement in the fundamentals of financial literacy, the money maven says, which means greater control over finances and signposts the path to financial security.

Sensible personal finance is keeping an eye on daily outgoings and monthly income, to build towards future financial freedom. You want a stable income in retirement, and to be able to handle life’s setbacks, be it recession, illness, separation, losing a job, or a failed business.

Financial literacy implies more planned and proactive money management, often with targets for savings or debt control. It is similarly empowering, involving effective control of income, assets and debt. It’s also about maintaining a budget, putting savings to work, safeguarding against unforeseen challenges, and planning for long-term goals like college funds or retirement.

Budgeting basics

The ‘literate’ tends to create a budget aligned with specific financial goals; making the process of money management more real and tangible. The 50:30:20 rule is often applied; 50 per cent of income to necessities, like household bills and groceries, 30 per cent to discretionary spending, maybe a club membership or holidays, and 20 per cent to savings.

Ideally, at least 10 per cent of the savings allocation should go towards retirement income, in the form of a pension, and the other 10 per cent can be an emergency fund, or be saved to meet long-term financial goals.

The trick is to remember that even limited funds shouldn't be an obstacle to budgeting. Start small and start early, even if savings need to be capped at 8-10 per cent of income. Then aim to increase this by at least one per cent annually.

Having at least six to twelve months' worth of emergency funds, for food, housing, transport and living essentials is the minimum goal for readily accessible savings.

How to manage risk

Taking a proactive approach to finances means managing risk. Investing in insurance offers security. Policies help mitigate the impact of events, from job loss to serious illness, to the death of a key business partner that impacts business performance.

It is wise to take expert advice, as the vast array of policy options can be misunderstood. For example, term insurance often provides cover only until children become self-sufficient, as opposed to whole-of-life cover, which does what it says on the tin.

Similarly, mortgage protection may secure a home, in the event of a mortgage holder’s death, but it does not provide a cash income to the family. Some life insurance products also provide annual yields, and, there is a vast choice of investment products for longer-term goals, at various levels of risk, for lump sums or regular contributions, with different maturity dates too, depending on individual plans and requirements.

Smart borrowing: working out your debt-to-income ratio

Borrowing can help financial standing. It can facilitate savings elsewhere, for example, rental expenses versus paying a mortgage, and it also builds credit rating, if properly repaid. Financial literacy means the skills to manage debt and loan obligations, and sticking to a budget is a good way to avoid unpaid debt. Banks will ‘stress-test’ borrowers’ ability to repay a loan, especially concerning a mortgage, assessing if monthly repayments can still be made were interest rates to rise, or income diminish.

Financial wellness would suggest having a 25 to 30 per cent debt-to-income (DTI) ratio which is a benchmark when applying for a loan. It’s the portion of income needed for monthly debt obligations, and lenders look closely at it, to determine your ability to repay money borrowed.

Calculate your DTI by adding all monthly debt payments (like the mortgage, car loan and credit cards) and dividing the sum by your gross monthly income, before taxes and other deductions.

For example, if your income is €2,500 a month and you have €1,000 in debt repayments, your DTI is 40 per cent, and that is a red flag. Apart from anything, if interest rates creep up, you’re paying more on loans, and inflationary pressure will mean your disposable income is squeezed unmercifully. Knowing your DTI helps with a numerical goal to reduce debt or, better still, to become debt-free.

Investing for all incomes

Growing wealth will allow for investments. Financial literacy aims to keep the gap between income and spending as wide as possible, allowing capital for investments. Financial markets deliver better returns than bank deposits over time, especially with low-interest deposit accounts.

If you have a nest egg or inheritance, talk to an advisor about suitable investments. Options include investing in businesses and property via stock markets or life assurance companies. Compounding returns, where you reinvest the income from investments, will drive growth.

You can set your acceptable level of risk and investment horizon, and a good advisor will explain the different types of funds and securities to suit.

Managed funds spread the risk across different types of stocks and financial assets, and Exchange Traded Funds (ETFs) are a good low-risk option for beginners, on account of low entry-level costs and funds that offer a spread of investments.

Accumulating wealth – investing in ourselves

Apart from investments to drive wealth, our earnings, and the return we derive from different enterprises, will generally come down to the extent to which we invest in ourselves. Investing in your talent, studying, networking, and being the best at what you do, is the means to improve your income and demand for your skills. Bulk up your CV with different experiences, and constantly take on further learning and training, to make yourself an indispensable employee.

If it is an ambition, assess the potential to leave the PAYE world and set up your own business, or to freelance or work as a consultant? Make sure there is a market for your product or service and, ideally, sign up a couple of clients before leaving your job.

An accountant will advise on the sole trader versus company director approach, and the tax implications. Get a user-friendly software system to account for your income and expenditure daily, and suss out insurance, like professional indemnity cover.

Replacing employee benefits, like a pension, income protection, and death in service (life cover) is important for the self-employed too.

Controlling personal finances is empowering because it gives you choice

Mastering the fundamentals of financial literacy creates a roadmap to reach life goals, in a fixed timeframe. Money facilitates a clear vision of where you want to go in life, and a plan to get there. Understanding budgeting, saving, investing, risk and debt management is the foundation of good money habits that build a stable future. If you’re not confident in your understanding, take advice!

You wouldn’t sell your house without an estate agent, extract a tooth yourself, or take on a legal challenge alone; so, managing finances that need to last a lifetime needs professional advice. And, most financial advisors will talk to you, without any obligation. Controlling personal finances is empowering, because it gives you choice. It's not even a choice to be rich or reckless, but simply the choice to live the kind of life you want

About Carol Brick

Carol Brick is Managing Director of CWM Wealth Management and HerMoney. A qualified financial advisor, she specialises in the area of Asset and Wealth Management. See hermoney.ie or cwmwealthmanagement.ie for more details.

About HerMoney

HerMoney provides tailor-made financial solutions to self-employed professional women and service contractors all over Ireland. With offices in both Cork and Dublin, the business is a sister company to the long-established CWM Wealth Management.